Composition of revenue and tax systems: The structure of revenues can impact long-term growth,
mostly by affecting the allocation of labour and capital. While there is some evidence that
consumption taxes create fewer disincentives for growth than direct taxes, the detailed structure of
such taxes need to be carefully considered. Valenduc (2005) explains these challenges for assessing
the quality of tax revenue systems and focuses particularly on the choice of indicators which he
applies in an analysis of the Belgian tax system. In addition to minimising distortions from tax systems
for economic growth, the Member States of the European Union also face important challenges in
maintaining robust tax bases. Firstly, aging will reduce the labour tax base. Secondly, the increased
mobility for labour and capital that globalisation is bringing could complicate their reliability as tax
basis. And thirdly, the desire to shift taxation away from labour “to make work pay” requires finding
alternative tax basis. The paper by the European Commission (2007) reviews the recent trends in
taxation in the European Union and discusses several ways in light of these rising challenges.
Case studies on improving the quality of public finances: The last section is devoted to detailed
country studies. The examples of the Czech Republic, Finland, Germany, Italy, Malta, Poland,
Portugal, Spain and the United Kingdom summarise expenditure trends and review reforms in the
public sector with the aim of improving the efficiency of spending and strengthening fiscal
institutions. The emphasis of policies reflects the country-specific circumstances, for example fiscal
consolidation in the Czech Republic through an expenditure and revenue-based approach; the
introduction of spending limits for a whole electoral period in Finland; a three-pronged approach
(structural reforms, tax cuts and consolidation) to foster growth in Germany; budgetary institutional
reforms in Italy to raise public sector productivity; the reduction of the government sector and public
employment in Malta; rebalancing fiscal positions in Poland and Portugal largely from the expenditure
side, while at the same time raising efficiency; in Spain shifting spending to those items with the
largest impact on medium and long-term potential growth; and the implementation of a new public
spending framework for improving the quality and cost-effectiveness of public services in the United
Kingdom.
The way forward
The objective of raising the quality of public finances remains pertinent. The re-launched Lisbon
Strategy from 2005 provides a foundation for future work,^2 which was recently reiterated by the
ECOFIN Council in its meeting on 9 October 2007. It specifically gave the Commission and the EPC
a mandate to continue its work in this area as the Council conclusions included the following
statement: “It invites the EPC and the Commission to step up their efforts to improve the analysis,
methodology and measurement of the quality of public finances, including the efficiency and
effectiveness of public expenditure and revenue structures, as well as of major public sector reforms.
Ministers also re-iterated their June 2007 request for Member States to step up efforts in the provision
and subsequent analysis of COFOG, level II data (...).” Following this mandate, the Working Group is
aiming to make quality of public finances operational as part of the Lisbon strategy and against the
background of strengthening the coordination and surveillance of fiscal and economic policies. Based
on a comprehensive conceptual framework, work is envisaged to continue on the efficiency and
effectiveness of specific expenditure categories, the efficiency of revenue systems and the role of
fiscal governance. The Working Group will also continue, together with the Commission, to conduct
cross-country studies and exchange country experiences in the various dimensions of quality of public
finances and their macroeconomic links to growth.
(^2) Integrated Guideline No. 3 of the re-launched Lisbon Strategy states: "To promote a growth- and employment-
orientated and efficient allocation of resources, Member States should, without prejudice to guidelines on
economic stability and sustainability, re-direct the composition of public expenditure towards growth-enhancing
categories in line with the Lisbon strategy, adapt tax structures to strengthen growth potential, ensure that
mechanisms are in place to assess the relationship between public spending and the achievement of policy
objectives, and ensure the overall coherence of reform packages."