The finance ministers of the EU Member States and central bank governors gathered at an informal meeting in Berlin on 20/21 April 2007. Chaired by Peer Steinbrück, the Minister of Finance of the Federal Republic of Germany, participants exchanged views about various aspects of sustainable public finances, the reverse-charge model as an instrument for combating VAT fraud and issues relating to financial markets.
“Financing the Future”
Discussion of the first priority topic focussed on the means to secure the bases for future-oriented public finances given the challenges posed by globalisation and demographic change. In particular, participants discussed ideas on how to:
- Build Social Bridges to improve employability and to strengthen social inclusion, consistent with fiscal sustainability
- Increase the efficiency of public spending
- Ensure growth-enhancing and stable revenues in the future
The first, provisional outcome of the discussion is as follows:
Building Social Bridges by Investing in Human Capital
As part of the discussion launched with a keynote speech given by Professor Dennis Snower, the President of the Kiel Institute for the World Economy, Ministers underlined the need to address the socio-economic challenges stemming from demographic trends and structural change. They emphasised that the only kind of successful policy is one that combines improvements to the flexibility of individuals and security within society. In order to ensure that people can fully benefit from globalisation, they must, in particular, be able to acquire the skills required by modern working life. To support this, Ministers said more Social Bridges towards better employability, higher labour market participation and social inclusion must be built. A key element of this approach is lifelong investment in human capital.
The concept of building Social Bridges by increasing human capital is particularly well suited to ensuring that structural change is aligned with fiscal sustainability. Improving the skills of the workforce enhances employability and social inclusion. With regard to fiscal policy, improved labour market integration produces what can be described as a twofold benefit as the revenue base is extended and social spending can be lowered. With a view to efficiency, effectiveness and fair burden-sharing, synergies between the different policy measures should be fully exploited and responsibility shared between individuals, firms and policy-makers. Given the limited public resources, Ministers stressed their vital interest in effective and efficient policies to strengthen human capital and in a more in-depth exchange of national experiences from a fiscal policy perspective.
Efficiency and Effectiveness of Public Spending
One of the most pressing challenges facing the EU Member States is to increase the efficiency of public spending. In view of the scale of the public sector in Europe, Ministers see an urgent need to optimise public sector activities and to achieve better outcomes with limited public funds. An efficient use of budgetary resources contributes to meeting the obligations under the Stability and Growth Pact, and aids Member States in tackling the challenges posed by globalisation and ageing. As a result, fiscal policy can also contribute to the process of better fulfilling citizen’s justified demands for improved transparency and quality in public governance.
Comparisons of efficiency in important spending areas reveal significant differences across Member States. Outcomes can be improved in many cases. Against this background, the Ministers were agreed that there is potential for rationalisation both within the public sector itself as well as in the division of tasks between public sector and private service providers. This can be achieved by reinforcing incentives for efficient administrative procedures, by modernising management practices, or through a greater decentralisation of service provision. Public services must hold their own both when compared with other administrations (benchmarking) and in competition with the private sector. The Member States have developed various strategies to improve spending efficiency, which include measures ranging from reforming individual areas of responsibility to overarching changes to existing rules, institutions and budgetary procedures.
Public budgets should be assessed on the basis of outcomes and not just evaluated according to the amount of money spent. The Ministers viewed the use of performance information in the budget process as an important tool for decision-making in order to move the focus away from spending towards actual achievements. However, national experiences also show that performance information alone does not increase the efficiency of public sector measures. In order for performance information to function as an effective budget management tool, it must satisfy, among other things, requirements for simplicity, clarity, transparency and political applicability.
Ministers agreed to intensify the exchange of experiences in this field and revisit this topic at their June meeting on the basis of the updated analyses of the EU Commission and Economic Policy Committee.
Efficiency on the Revenue Side
The structures of national public revenue are closely tied to each Member States’ policy goals concerning equity and efficiency. As a basic principle, equitable and efficient revenue structures should, however, avoid distortions, encourage risk-taking and entrepreneurship, and create work incentives. For example, tax systems should be fair and simple in design, and minimize the risk of tax fraud by relying on a broad tax base. A future-proof tax mix could give further weight to indirect taxation. A more substantial role could be played in particular by taxes internalizing external effects and taxes that are not dependent on earnings. The importance of the quality and efficiency of public revenue structures was also stressed during the discussion. Ministers agreed these issues must be pursued further; in particular, they suggested an exchange of information regarding current and planned tax reform concepts.
There are various ways to enhance the efficiency of public expenditures and revenues. There is no single blueprint for improving public sector efficiency. Member States have adopted different approaches to reform including structural and institutional reform measures. Ministers agreed that cross-country comparisons and the exchange of best practices, for example, on budgetary institutions, can be very useful in order to develop national strategies towards improving efficiency in the Member States.
In summary, the Ministers welcomed the discussion about the quality of public finances. They acknowledged that further work is necessary in this field and that experience from national concepts should be used and best practices exchanged as a part of this work.
Reverse-Charge Mechanism
Finance Ministers discussed the so-called reverse-charge mechanism under which, for the purposes of effectively combating VAT fraud, the tax debt for domestic transactions over a threshold of €5,000 is generally shifted from the company providing the service to the recipient company. Discussion focussed on whether this mechanism may have an impact on the internal market and states that do not wish to introduce this model. During the discussion, it became clear that in the shape of Germany and Austria, there are two Member States with a strong interest in creating a basis within European law to apply this mechanism without it having to be adopted in the same way in all Member States. The importance of effective anti-VAT fraud measures was uniformly accepted. The Ministers requested the European Commission to analyse the impact of the reverse-charge mechanism on the internal market. The Commission promised to deliver the analysis by the end of 2007 at the latest. At the request of many Member States, the Commission will also investigate the possibility for interested EU countries to test the reverse-charge mechanism for a limited period. Ministers agreed to return to this topic at their June meeting.
Review of the IMF’s Spring Meeting
Dr Thomas Mirow, State Secretary at the Federal Ministry of Finance, reported on the G7 finance ministers meeting and the spring meeting of the IMF in Washington held on 13/14 April 2007. With regard to the current debate regarding the reform of the IMF, the consensus was that the EU should continue to participate in a coordinated and active manner.
Financial Market Stability
Ministers and central bank governors exchanged their views on the current state of financial markets. It became clear from their contributions to the debate that the current situation is favourable. The dominant view was that positive forecasts for developments in the real economy are reflected in financial market trends. Participants did not view temporary turmoil on the financial markets as corrections meriting cause for concern. Potentially heightened sensitivity among investors was not deemed to be negative either. It was agreed that vigilance remains advisable given the continuing risks associated with global imbalances and the potential problems caused by new, complex financial market instruments.
Hedge Funds
Ministers and central bank governors discussed the role of hedge funds in financial markets. Participants agreed that this form of investment generally has a positive impact on the efficiency and stability of financial markets and provides a valuable contribution to the functioning of the markets as a consequence. At the same time, it was also emphasised that in view of investor protection and potential systemic and operational risks, a voluntary commitment from the hedge fund industry itself regarding risk management, appropriate transparency and good corporate governance, could provide a desirable contribution to reinforcing market discipline and an expansion of an indirect regulatory approach as a consequence. It was agreed that the topic would be revisited as early as the next ECOFIN meeting on 8 May 2007.
Precautions to Secure Financial Market Stability
Following up on the previous Informal held in Helsinki in September 2006, the participants were informed about ongoing work to discuss possible precautions to deal with a theoretical trans-national financial market crisis. Participants agreed that growing financial market integration created new challenges for national and European actors and that clear rules were important. Work on this matter will be continued. The Ministers and central bank governors agreed to debate the recommendations resulting from this work under the Portuguese presidency in the second half of 2007.
