EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS

1. EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS TAXBEN ConferenceCEPSBrussels, 27 November 2006Macroeconomics of the EU tax systems under EMU Discussion Marco Buti, European Commission

2. Main messages from the papers • Stabilisation via fiscal policy in the EU • Discretionary fiscal policy. Small spending multipliers falling over time, larger and more persistent for tax cuts (Bénassy-Quére and Cimadomo) • Automatic stabilisers. Smoothing effect in case of demand shocks, ambiguous but small effect in case of supply shocks (Kotilainen) • Fiscal spillovers • Small and falling. Uncertain sign. Composition matters (Bénassy-Quére and Cimadomo, Bénassy-Quére, Moeser). • Interaction between SGP and Lisbon • Complementarity vs. substitution between fiscal dscipline and reforms depends on which reform is considered (tax vs. welfare, labour or product market). (Alho) • EU-level coordination of structural reforms? Yes if “myopia” does not prevail (Alho). 2

3. Some questions • Alho • Couldn't the SGP raise the need to use supply-side policies given that myopic government have less degrees of freedom for demand management via fiscal policy? • Not clear why product market reform would drive FDI away • Bénassy-Quére • Fiscal spillovers crucially depend on CB reaction. Do we know enough to make predictions? Can different perceptions of potential growth matter? • Kotilainen • Effects of tax progressivity depend upon parameter values. • With unionised labour markets, tax progressivity may lead to steeper supply function: potentially perverse impact on stabilisation. • Bénassy-Quére and Cimadomo • What explains falling multipliers? Only explanation mentioned is growing role of financial markets. Role for SGP? Debt levels? Why is the fall stronger for tax cuts? Was something happening on the supply side as well? • Fiscal spillovers Should we not expect more likely negative spillovers in the case tax cuts than spending rises? • Moeser • Intuition for reverse sign DE vs. FR? Is the sign of spillovers relevant when magnitude is so small? 3

4. Some (backward-looking) considerations on EU surveillance • Stabilisation via fiscal policy in the EU • SGP philosophy: let automatic stabilisers work freely • Consistent with weak and falling effectiveness of discretionary fiscal policy • Consistent with stabilising impact of automatic stabilisers • Fiscal spillovers • SGP philosophy: “soft” coordination but within a rules-based framework to keep deficits under control • Consistent with small fiscal spillovers • Consistent with the need to preserve fiscal discipline in view of ageing • Interaction between SGP and Lisbon • Revised SGP: new provisions to take structural reforms into account, but only if a series of conditions are met • Lisbon: structural reform coordination via an agency (EU institutions) rather than left to inter-governmental talks 4

5. Some (forward-looking) considerations on EU surveillance • A changing economic and policy environment? • New SGP: less “short-terminism” • Lisbon: priority on growth and employment-enhancing structural reforms • Relative frequency of supply shocks may increase in the future • Uneasy adjustment within the euro area • A need to reconsider policy response? • Fiscal policy: • Do welfare state reforms modify the working of automatic stabilisers? • Should philosophy on discretionary fiscal policy be adapted (correcting “structural” competitiveness developments)? • Structural reforms: • Should the welfare state be more oriented towards tackling supply shocks? • Political economy • Complementarity or substitutability between Lisbon and Maastricht? 5