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Wednesday, October 16, 2013

'Budget Deadline Day' in Europe

As you may have noticed, yesterday saw numerous governments across Europe unveiling their latest budgets for the coming year. Rather than just being a coincidence, this is down to the fact that yesterday was the deadline for eurozone governments to submit their budget plans to the European Commission – 'Budget Deadline Day', if you will.

As part of the ‘Six-pack’ set of rules, eurozone governments must have their budgets endorsed by the Commission, although the ability to actually force changes to the budget plans is limited for those countries which are not missing their targets already (except for significant peer pressure).

As with football’s transfer deadline day, there were some frantic negotiations, albeit without the minute to minute media coverage. Below, we take a look at the budgets of the Italian, Irish and Portuguese governments.

Italy yesterday unveiled its new ‘Stability Law’ – the budget guidelines for 2014-16. There’s some encouraging stuff in there, notably a package of tax cuts for businesses and workers worth €10.6bn over three years (of which €2.5bn to be cut in 2014). Nothing massive, but it's a start. The money to cover for these cuts is due to come from a number of public spending cuts. However, the draft budget will now have to be adopted by the Italian parliament, and some of the measures may change.

Prime Minister Enrico Letta has confirmed Italy aims to bring its deficit down to 2.5% of GDP by the end of next year. That said, the problem for Italy remains its weak growth – which in turn threatens its fiscal targets. Last week, for instance, the Italian government had to adopt a set of urgent measures to find a further €1.6bn and make sure the deficit stays below 3% of GDP this year. Unlike other countries, the budget may hold less importance for Italy’s economic future with the focus now on much needed political reform and improvement in the business environment.

Debate over the Irish budget has been going on for some time, and the government managed to secure a lower level of headline cuts than expected ahead of time - €2.5bn compared to €3.1bn. However, the budget remains controversial with the Irish Independent running the front page headline, "Unkindest cuts", because they fall on pensions, healthcare and unemployment benefits for young people.

For the most part, although this budget was about tinkering around the edges rather than making the huge cuts we have seen before, the government focused on adjusting lesser known taxes to reap numerous small savings. Interestingly, the government also committed to reducing tax evasion and tackling the view of the country as a ‘corporate tax haven’. It will be key to see if this impacts the number of multinationals locating in Ireland and if it has any knock-on impact on economic growth.

Of the three, this is probably the most concerning budget. Following a difficult summer for Portugal, politically at least, the government has once again been forced to find a further €3.2bn in cuts. However, the government has once again taken the same approach by heaping the cuts of public sector workers pay (up to 12% in parts) and on pensions. Action on these areas is needed. However, it has also been repeatedly struck down by the Constitutional Court. This might be setting the scene for another showdown.

This has evoked concerns from within the Commission, and it will be interesting to see whether a full endorsement is forthcoming. Portugal also confirmed it will miss this year’s deficit target and the continuing push to ease next year’s target suggests little confidence that it will meet that one either. The good news is that Portugal’s borrowing costs remain well below their peak, and some market access once it exits its bailout next year seems likely. That said, unless it can get a hold of the public sector reform needed, some additional aid still looks likely.

Overall then, a bit of a mixed bag. Few marquee measures, but some positive moves in terms of focusing cuts on spending rather than tax hikes.


Rik said...

1. A point clearly underlighted in this respect is that basically it shows another one of the structural problems in the set up of the EU: One Policy Fits Nobody Really Well' summarised.
Economic policies are still mainly national so should have some room to react on local circumstances. In order however to keep the South from doing more irresponsible things that jeopardizes the rest the rules are very strict. Forcing countries into a straightjacket that not gives the optimal economic outcome (next to a lot of political problems at home).
And parts with lower growth (or more shrinking) gives overall lower growth as well.
And like in Holland now they have to make cuts that will erode their electoral base. Simply to give a good example to the South iso making economic sense.

2. They still use mainly the hockeystick prognosis/target systems. Which have appeared to be very inaccurate in the present situation at best. Basically they are simply total crap.
A good guess why is probably the both consumers and subsequently business feel not at ease. And because the crisis took simply too long and a lot of the earlier end is in sight messages were BS has taken much more a 'see first before acting' pov. Before much more relevant players consumers as well as business basically assumed more or less that a recovery would come in say 1 or 2 year. They do that much less now.
You cannot assume that that the main players who determineGDP ad GDP growth react similar now than they did before. As it has been shown clearly they simply do not so in this crisis.

jon livesey said...

One of the things that struck me about the Irish budget was the sheer pettiness of some of the cuts. For example, abolishing the E800 bereavement payment to family members, or the cut to benefits for under 25s.

What this said to me is that Ireland tightened the big screws long ago, and now they are down to tightening small screws. In other words, they are in the realm of diminishing returns.

What happens in Ireland now is hard to predict, but keeping the corporation tax low suggest that Irish workers can look forward to working for foreign owned companies in an economy that provides less and less social support.

Unknown said...
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Unknown said...

The European Commission tends to control the actions of all the governments of the countries being part of the European Union. Not surprisingly the budgets of Italy, Ireland and Portugal are in close sight. These have been the key underperformers seeking financial support during the crisis. But not only government expences need to be financed. A lot of people are in despair seeking a run away from the problems. Taking out loan online can provide a short term solution. And bigger scale solution would be creating work places inside the countries cutting unemployment rate and providing funding sources for the budget. But it seems like no one cares?

Unknown said...
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Assia said...

It's not good for economy