On the occasion of the “Fiscal Policy Challenges in Europe” conference on 22 March 2007 in the Federal Ministry of Finance, Berlin
Joaquin Almunia, Ladies and gentlemen,
I, too, wish to extend my warmest welcome to you today to the Federal Ministry of Finance for this joint conference together with the Centre of European Economic Research as part of our presidency of the EU.
Current economic development
It is certainly a fortuitous time to be holding the EU presidency, for there is little doubt that the economic and fiscal policy stars are currently aligned in our favour. It is not without a certain amount of pride that I mention that Germany was once again able to live up to its economic responsibility in 2006 for a stronger European Union. And all the signs are good that we will be able to repeat this in 2007 and 2008.
This situation is as surprising as it is welcome, particularly given the gloom and doom of recent years, a period characterised at both national and EU level by tight budgets and heated policy debates. But there is a positive side to everything. These heated discussions not only helped raise public awareness of the need for prompt consolidation, they also led to important reforms of the Stability and Growth Pact in March 2005.
Reformed Stability and Growth Pact
The reformed Pact is now more rational in economic terms. It now also offers more flexibility in that it allows for specific, national concerns to be taken into account. The 3% deficit threshold is no longer the sole determinant of what the "right" fiscal policy is, i.e. a fiscal policy which serves to promote both stability and growth. And this is the right approach given the complexity of today’s fiscal policy reality.
In addition to the undisputedly necessary checks it contains on public indebtedness, the reformed Pact now also encompasses the equally important question of promoting jobs and growth. Ultimately, it is not called the Stability and Growth Pact for nothing.
And the German government's two-pronged financial policy approach also subscribes to the empirically proven logic that only a fiscal policy which seeks to marry structural consolidation with the promotion of jobs and growth can be successful in the long-term. This is why our reform of business taxation will prove just as vital as the government’s €25 billion growth programme at the beginning of last year did, and the increase in VAT is currently doing.
Reviewing the structure of the public budgets
However, creating the financial leeway for much-needed investment in the future requires more than “just” consolidation. Public budgets must be assessed with respect to their structure, above all in the interests of enhancing their effects on productivity and innovation.
And we have to put more effort into ensuring that government spending achieves the best possible effect, the best possible outcome. We have to know how we spend our citizens’ limited tax money, and how effective this spending is.
In other words, a course of long-term successful consolidation means not just using economic good times to reduce the deficit in the short-run, but doing what is necessary to ensure that these good times remain over the long-run. And just when is the right time to push on with necessary structural reforms and consolidate our public budgets if not now?
We must see to it that such an economic and fiscal policy approach – and its objective of ensuring the financeability of the future – becomes more engrained at both national and European level. It is for this reason that Germany's presidency of the European Council is according a pre-eminent role to the quality of public finances.
We need to reflect what we are doing here today at EU level; we need to intensify our exchange of experience and identify specific concepts for improvement. We must detail our specifications for budgetary policies built on quality. We must ensure that the political course we embark upon and the decisions we make each day are focused on making our public funds sustainable and ensuring their viability into the future. It is with these goals in mind that I intend, together with my ECOFIN colleagues, to draw up a quality agenda for European and national fiscal policy.
Elements of a quality agenda
Quality begins in the mind
“Fiscal policy quality” also begins in the mind. As such, we have to redefine our overall understanding of fiscal policy and what it does. The widely held view that the people behind fiscal and budgetary policy are responsible for guarding and counting the pennies while the various other ministries can work through their shopping list and dispense good deeds leads us, some would say has already led us, into a dead end.
It is only when our common overall responsibility is shared in all policy areas that we can make the urgently needed move from financing the past and present to financing the future, to budgets which are sustainable and which stand the tests of globalisation. Our common overall responsibility is to define that which is important and that which is less important, and to defend this order against other desires.
There is no doubt in my mind that it is only by having a comprehensive reform concept for fiscal, economic, education and social policy that we can arrive at a better quality of public finances, a family policy which looks to the future, an education policy which fits the world we live in, a labour market policy which reflects modern conditions, and viable social security systems.
And let me add another, often overlooked, aspect. An intelligent, all-inclusive policy approach enhances not only growth, but also social inclusion. Many people, both young and old, look upon the challenges of demographic change and globalisation with trepidation and fear. Often, because they feel that they are not up to the new challenges, often because of a lack of education, or outdated skills.
We have to enhance our capacity to react in a flexible manner to those challenges which are already apparent today. The path of isolation and weaker competition is not an alternative. Policy must seek to help people and markets adapt to changing conditions. It cannot try to prevent structural change. This would only lead in the long-run to the loss of valuable jobs, with none created in return.
We have to bring our citizens with us and empower them. In other words, policy has to build social bridges. It must invest more in promoting a society’s human capital over a person's entire lifetime. This is good for more growth, more inclusion, more prosperity for all, and it helps restrict the centrifugal forces threatening to tear society in opposite directions.
Quality also always means efficiency
As I have already mentioned, simply transferring funds without taking efficiency concerns into account is not enough. We have to take care not to judge the quality of public finances on input alone.
The greatest mistake, and one which we all too often make, is to take as the sole measure for the success of a given policy the fact that a sufficient amount of money has been set aside for it in the budget. This is input-based thinking. Too often, we neglect to ask what we have achieved with this money. We do not engage in output-based thinking.
Let’s look at a highly topical example, education. International comparisons suggest that there is much room for improvement in Germany. Despite spending relatively more on education than many countries, Germany still has quite a high number of people falling into the risk group, i.e. schoolchildren who do not meet the minimum requirements.
What we also have in Germany is a strong correlation between social background and education, and this is something that I, both as a social politician and as minister of finance, simply cannot accept. What I mean is that good, or even better, policy-making does not automatically mean more money must be spent. The idea that “you have to spend a lot to help a lot” was too often a maxim for policy making in the past.
Institutional reforms can enhance quality
In order to enhance the quality of fiscal policy, we also need institutional reforms. But let me swiftly follow that up by cautioning against blind faith in regulations. Regulations cannot free us from our responsibility to first set clear priorities and goals, and then to pursue these priorities and goals. Nevertheless, there is no doubt that regulations can be important in increasing transparency and control, identifying glitches along the way and maintaining discipline.
National restrictions on debt
I have already mentioned the successful reform of the Stability and Growth Pact. Now we have to ask whether we have also done our homework in Germany.
One of the problems is the lack of consistency of our constitution’s Article 115 with the provisions of the Stability and Growth Pact. Whereas the latter, as you know, aims to secure a long-term or structurally balanced budget, Article 115 allows for funds to be borrowed up to an amount equal to investment. Many of the constitutions of the regional states contain similar provisions.
Given an understanding of fiscal policy as policy for growth, it is essential to define just what is meant by investment, for not all investments are also growth-enhancing. Although I would have no trouble listing further “weaknesses” of Article 115 as it currently stands, I don’t think our timeframe today would allow this.
Let me just say that, viewed overall, I certainly have considerable doubts as to whether our national provisions on indebtedness are not outdated. The possibility of reform should perhaps be given more consideration, especially in light of our pursuit of a structurally balanced budget. Given Germany’s federal structure, this would mean including the regional states as well as central government, a fact which does not exactly make such an undertaking easier.
Nevertheless, I certainly view the question of just how exactly to make the checks on indebtedness more effective with an open mind. Is it better to rewrite Article 115, or do we introduce provisions similar to the check on borrowing in place in Switzerland? I also find the proposals submitted be the Council of Experts in its annual report quite interesting, as they provide for a combination of both of these alternatives.
Modernising the system of budgets
To carry on in a similar vein, we must also ask whether the current design of our budget system with its focus on revenue and expenditure in the single-entry, cameral style is still relevant today. For such a system offers those making policy limited information only on the future effects and outcome of decisions made today.
Although it is true that the current detailed structure separated into titles makes it easy to see how much has been appropriated for a specific purpose – the input approach – it is very often difficult to ascertain which overarching goal this expenditure serves.
It is against this background that we are currently discussing reforms to our system of budgeting and accounting. A project group within my ministry will develop the relevant options and, by the end of this legislative period at the latest, draw up a concept on modernising our budgeting and accounting systems. We are not the only country to be having this discussion. Many EU member states are already experienced in the use of results-based budget systems. We shall be looking at these experiences within the framework of our work in the EU on the quality of public funds.
Both the UK and France have reformed their budgetary procedures and introduced output indicators. We will also take experiences from these countries into account in our deliberations on reform in Germany.
It is probably a bit too early to make specific statements on a concept for modernising the budgetary system in Germany. What we can say, however, is that any system of budgeting and accounting which wishes to remain viable into the future will have to meet the following specifications:
Ladies and gentlemen,
I imagine you have quite enough to mull over by now. All that remains is for me to wish you a successful and productive conference. Thank you.