The contribution of taxes to fiscal consolidation in the euro area

The consequences of the financial and economic crisis are deeply reflected in Member Statesí government revenues. Having implemented a wide range of stimulus measures over the period 2008-10, Member States have clearly shifted focus towards much-needed consolidation of public finances. While experience from successful consolidations suggests that fiscal adjustment should primarily come from the expenditure side of the budget, (7) some Member States could consider raising tax revenues ñ alongside expenditure control ñ to consolidate public finances. This is particularly relevant for countries that show unsustainable budgetary situations but, at the same time, have room for potential tax revenue rises. Research shows that revenue-based consolidation is more likely to be successful when the initial tax-to-GDP ratio is low. The focus in this section is on possible permanent increases in tax revenues to safeguard fiscal sustainability, rather than on addressing short-term consolidation needs through temporary tax hikes. When economically justified, the need to increase tax revenues might be addressed first by improving tax compliance and administration rather than by discretionary tax hikes. Where tax compliance is already high and/or revenue-raising needs cannot be met by enhancing tax compliance alone, raising the efficiency of taxation through base-broadening measures such as reviewing tax breaks and reduced VAT rates should be considered. As a last option, lifting tax rates or introducing new taxes might be unavoidable in some cases. This should, however, be done with a view to minimising possible detrimental effects on growth. Against this background, this section subjects euro-area Member States to horizontal quantitative screening ó against common criteria and indicators ó to identify scope for tax policy measures in the area of fiscal consolidation. The methodology used here is presented in more detail in the European Commissionís latest report on tax reforms in EU Member States.