Government optimism leads to missed budget targets
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Over-egging the pudding? The European Commission says government over-optimism leads to missed budget targets. (Photo: Valentina Pop)
By Benjamin Fox
EU governments are too optimistic about their economic prospects and their ability to control public spending, leading to them continually missing their budget targets, a European Commission paper has argued.
In its annual “Report on Public Finances” published on Wednesday (17 December), the EU executive says that governments tend to aim to high when it comes to forecasting their budgets and economic growth rates.
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On average, their growth projections are 0.6 percent higher than the final figure, while governments who promise to cut their deficit by 0.2 percent of GDP, typically tend to increase their gap between revenue and spending by the same amount, according to the Commission report.
The Commission argues that the gap is caused by governments being better at meeting revenue targets than reining in over-spending. It adds that large EU countries, and those with large deficits, tend to be the worst offenders in submitting budget plans that they fail to carry out.
France and Italy, the second and third largest economies in the eurozone, are considered to be the worst offenders in failing to keep to their deficit and debt targets.
Under the EU’s revamped economic governance regime, governments are required to submit their tax and spending plans over a three year period to Brussels for Commission approval.
Meanwhile, the report concedes that the EU’s expected economic recovery has not “lived up to the expectations that existed earlier in the year”, adding that “the risk of persistent low growth, close to zero inflation and high unemployment has become a primary concern”.
Economic growth across the EU has been steadily revised down over the course of 2014 and is now expected to be 1.3 percent of GDP.
The prognosis is scarcely better for 2015, during which the EU economy is forecast to grow by 1.5 percent and by 1.1 percent across the eurozone.
A lack of business confidence, resulting in low levels of investment and consumer demand, together with the fallout from the EU’s ongoing trade sanctions battle with Russia, have been the main causes of the EU’s economic stagnation.
However, despite a very fragile recovery in 2014, the Commission report states that government austerity efforts are “bearing fruit” and have resulted in most EU governments reducing their budget deficits.
The average deficit across the 28-member bloc is expected to be within the 3 percent limit in its stability and growth pact in 2014 for the first time since 2008, the first year of the financial crisis.
However, national debt burdens continue to rise. The average debt pile across the eurozone, of which Lithuania will become the 19th member in January, is projected to reach 95 percent in 2015.
