Reuters logo
9 years ago
UPDATE 1-EU executive to propose VAT cuts to boost economy
November 25, 2008 / 8:10 AM / 9 years ago

UPDATE 1-EU executive to propose VAT cuts to boost economy

5 Min Read

(repeats story transmitted on Nov 24)

(Adds details)

By Darren Ennis

BRUSSELS, Nov 24 (Reuters) - The European Commission will propose on Wednesday measures to stimulate the recession-hit European economy including value-added tax cuts and a call for lower ECB interest rates, a draft document showed on Monday.

The draft proposal, seen by Reuters, did not specify the size of the stimulus plan, which Germany said last week could be worth some one percent of the European Union's gross domestic product (GDP), or 130 billion euros ($164 billion).

The final size of the programme, aimed at helping the EU limit the fall-out from the financial crisis, will be decided on Wednesday after consultations with national governments by Commission President Jose Manuel Barroso. It will then be discussed at an EU summit on Dec 11-12.

The paper attempts to bridge differences of opinion between bloc leaders on how to kickstart the European economy, EU sources said.

"Barroso is currently engaged in shuttle diplomacy between the various capitals to try and reach a consensus before Wednesday on the burden-sharing," one EU source told Reuters.

"It is not just the big states whom he has to satisfy. The smaller and eastern states for example say they cannot afford to pay one percent of GDP. So it will not be as simple as just saying one percent of GDP," the source said.

Barroso is expected to face flak with socialists within his Commission such as industry chief Guenter Verheugen arguing for more, while others such as Monetary Commissioner Joaquim Almunia are seen arguing the package goes too far, the source said.

"In the end it will be up to the member states to decide. They called for an ambitious plan and Barroso is merely doing what was asked of him," another source said.

The package is not a definitive set of actions that all EU members should apply, but rather a toolbox from which they can choose measures that best suit their national situation.

Such an approach is likely to make it easier for the EU executive arm to marry different needs and the already announced plans of some of the bloc's 27 members.

Britain on Monday announced a 2.5 percent point cut in its value added tax to 15 percent in a 12.5-billion-pound move aimed at kickstarting the economy. But both Germany and France ruled out copying the British plan.

The Commission draft proposal, which lists many possible actions which EU members can take to boost sagging growth, notes the possiblity of value added tax cuts to quickly provide a fiscal stimulus to consumption.

It also says the Commission would come up with a proposal to reduce VAT rates on environmentally-friendly products and call on EU leaders to agree at a summit in March to accept reduced rates of VAT for labour-intensive services.

The draft also suggests other tax cuts.

"Lower taxes on labour, particularly when targetted on low wage earners, can have a positive impact on employment and help the most vulnerable in our society," the draft said.

The Commission proposal said however that the fiscal measures should be accompanied by structural reforms, tailored to the needs of individual EU members, that would boost demand and the resilience of the economy in the longer term.

The fiscal stimulus is likely to boost budget deficits in several EU countries like France, Britain, Ireland, Italy, Greece or Portugal well beyond the EU ceiling of 3 percent of GDP. The Commission will therefore ask for commitment to bring finances back in order when better times.

"They should spell out measures that will reverse fiscal deterioration," the draft said.

It said that apart from the fiscal stimulus, there was room for the European Central Bank to further cut interest rates. The ECB has signalled it may cut rates on Dec 4 and markets expect a reduction of 50 to 75 basis points to 2.5-2.75 percent.

"Emerging evidence of lower inflationary pressures in the face of slumping demand provides for scope for further reduction in the interest rates," said the draft.

"Member States should use the major financial support provided to the banking sector to encourage a return to normal lending activities and to ensure that central interest rate cuts are passed on to borrowers," it said.

Reporting by Darren Ennis; Writing by Jan Strupczewski; Editing by Angus MacSwan

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below