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Public finances and taxation

Maintaining healthy public finances

Healthy public finances contribute to macroeconomic stability and support monetary policy in maintaining stable prices at low interest rates. Both effects are conducive to private investment and savings. By reducing public debt and the interest burden, this also creates room for a reduction in distortionary taxes and an increase in productive public spending.

The economic and financial crisis badly weakened public finances in EU countries. Significant efforts in recent years and an improved economic outlook are bearing fruit and Member States have succeeded in reducing deficits and stabilising debt levels.

To ensure healthy public finances, particular attention should be given to:

  • how taxation is designed and collected to make it more efficient
  • where expenditure is focused and prioritising productive investment in government
  • improving the countries' fiscal governance to allow growth-enhancing policies.

Fiscal policy should seek to strike an adequate balance between tackling historically-high debt levels and supporting economic growth. EU countries coordinate their economic policies through the European Semester

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Smart taxation

A country's tax system affects its government revenues but also has broader economic and societal implications. The question how to effectively address these different dimensions is at the fore of policy discussions in the EU and its member countries.

Taxes can do more than just fund public services: they can also support growth, employment, investment, economic competitiveness and social fairness.

Key factors in improving the efficiency of tax systems:

  • Lower the tax burden on labour, which is relatively high in the EU. Reducing this burden, particularly for specific groups such as low-income earners would have positive consequences for many EU member countries. Lower labour taxes need to be compensated by increases in other sources of revenue taxes that are less detrimental to growth, such as taxes on consumption, recurrent taxes on immovable property, and environmental taxes or by a reduction in public spending.
  • Broaden the tax base. A tax system founded on broader tax bases and lower rates is generally more efficient than a system characterised by narrow bases and higher rates.
  • Fight tax evasion. Boosting transparency, cooperation and exchange of information among countries is vital.

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