Mr. Nigel Nagarajan:

It is a pleasure to be here to talk to the joint committee about the annual growth survey, AGS, for 2013. As members are aware, the AGS was released in November last year and intended to launch what is called the European semester for economic policy co-ordination which runs from January to June this year. The aim of the process is to ensure member states better align their budgetary and economic policies with the Stability and Growth Pact and the Europe 2020 strategy. The AGS is the basis for building a common understanding of the priorities for action at national and EU level as the European Union seeks to return to a path of sustainable growth and job creation. The motivation behind the exercise is twofold: first, to provide policy guidance for member states to help them to achieve the shared objectives; and, second, to help strengthen the co-ordination of economic policies at national level and also across member states in view of the fact that there are significant spillovers across the different levels and hence the potential for efficiency gains to be made through the better co-ordination of policies.

I will not speak at great length about the process, but the intention is for the AGS to feed into national economic and budgetary decisions which member states will set out in stability and convergence programmes under the Stability and Growth Pact and national reform programmes under the Europe 2020 strategy in April. These programmes will form the basis for the European Commission's proposals for country specific recommendations which are due to issue in May. As the Vice Chairman mentioned, the treatment of member states operating under programmes is somewhat different from that applied in the case of other member states. In the case of Ireland which is operating under a programme, the only country specific recommendation is that it implement its programme. Alongside the AGS, the Commission also publishes an alert mechanism report, AMR, which deals with macroeconomic imbalances and forms part of the new macroeconomic imbalances procedure. The AMR provides an initial reading of member states' economic policies against a scoreboard of 11 indicators which are intended to focus on developments in competitiveness, indebtedness, asset prices, adjustment and links with the financial sector. Again, however, countries which are operating under EU-IMF programmes are excluded from the country specific aspects of the report. It does not, therefore, really apply to Ireland.

Having dealt with the process, I will try to focus the remainder of my remarks on the key policy messages contained in the AGS and explain how the Commission views these messages. The AGS contains five key policy priorities which the Commission has identified as important for the European Union. These are the same policy priorities that were identified in the previous AGS exercise carried out in 2012. They were endorsed by the Finance Ministers at the ECOFIN meeting in February. The five priorities to which I refer are: pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the economy; promoting growth and competitiveness for today and tomorrow; tackling unemployment and the social consequences of the crisis; and modernising public administration. I will briefly discuss each of these priorities.

In the context of pursuing differentiated, growth-friendly fiscal consolidation, I will, first, explain what these two terms actually mean. The term "differentiated" refers to the fact that member states have different degrees of what is called "fiscal space", which is really room for fiscal manoeuvre. The path of adjustment must, therefore, be adapted to reflect the various circumstances applying in member states. Some of the more vulnerable member states with very high levels of debt and deficits and, as a result, very high sovereign risk premiums face a more urgent need for fiscal consolidation than countries with lower debt and deficit levels and sovereign risk premiums. In member states with greater room for fiscal manoeuvre the so-called automatic stabilisers can be allowed to play their role in cushioning the impact of shocks. This is in line with the Stability and Growth Pact. The main aspect to bear in mind in this regard is that all member states are required to ensure their fiscal policies are sustainable. However, the differentiated approach means the adjustment path must be appropriate to meet the circumstances of each country.

The second aspect of fiscal consolidation is the fact that it must be "growth-friendly" in nature. What does that term mean? We are aware that in the short term there is a negative impact on growth of fiscal consolidation. However, the cost in this regard must be balanced against that which would obtain if fiscal consolidation was not pursued and the public finances were not placed on a sustainable path. Elevated sovereign risk premiums also act as a drag on growth and reduce the likelihood that businesses and households will be able to access finance at reasonable rates. This is because a sovereign's financing conditions can spillover into those of households and businesses. To minimise the negative impact of fiscal consolidation on growth, member states must give real consideration to the question of how they should go about pursuing such consolidation. This means making choices. There are two such choices which are important, namely, that which relates to the balance between expenditure and revenue measures on the adjustment path and that which relates to the particular revenue and expenditure measures that will be employed.

In the context of the balance between expenditure and revenue, there is quite an amount of evidence to the effect that expenditure-based consolidations are more likely to be successful than those which are more revenue-based. In terms of the growth impact, a fiscal consolidation mainly achieved through a reduction in expenditure is more likely to be growth supportive in the long term than one that is based on raising tax revenues. That is the first consideration. The second relates to the choice of individual measures to be implemented on both the spending and revenue sides. A key policy decision in this regard relates to the mix between reductions in current and capital spending, particularly as the multiplier is likely to be different for each of these.

More generally, the Commission has recommended that member states attempt to be selective in where spending cuts are envisaged to try to preserve future growth potential and essential social safety nets. In particular, it considers that investments in education, research, innovation and energy projects should be prioritised and strengthened, where possible. With regard to taxation, there is scope to adapt tax bases less detrimental to growth and job creation and to make tax systems more efficient, competitive and fairer. Again, there is considerable evidence to suggest taxes on labour are more detrimental to growth than other types of taxes such as those related to consumption or the environment.

Member states should try to increase taxation more by broadening the tax base rather than by raising individual tax rates per se.

The second priority is restoring lending to the economy. One of the key developments since the start of the crisis has been the fragmentation of financial systems along national borders and retrenchment of financial activities into domestic financial markets. This has resulted in limited or costly access to finance for many businesses and households which, in turn, can act as a major obstacle to recovery. As a consequence, the improvement in financial conditions we have seen in Europe since the most acute phase of the crisis has not yet fully translated into improved conditions for borrowing for households and firms. In particular, access to credit for small and medium enterprises, SMEs, is particularly problematic if access to credit is limited because they can play a potentially large role in employment creation during recovery.

A key recommendation made in the annual growth survey, AGS, is for member states to explore options for SMEs to tap what are called non-traditional, non-bank sources of finance. This includes initiatives such as promoting business to business lending but also providing more possibilities for SMEs to issue corporate bonds, as well as facilitating access to venture capital by SMEs. In addition, a very important initiative at European Union level is the late payments directive. This is important in terms of reducing payment delays on the part of public authorities to SMEs which can help a good deal in dealing with the cash flow position of SMEs. I should also mention that the provision of an extra €10 billion for the European Investment Bank will enable it to provide an additional €60 billion in additional finance in the next three to four years which, in turn, is expected to unlock approximately three times that amount from other providers of finance.

The third priority is promoting growth and competitiveness for today and tomorrow. In that respect, the alert mechanism report I mentioned shows that there are some positive developments in terms of price and non-price competitiveness that are contributing positively to improving external imbalances, although with some time lags. In particular, those members states under the most intense market pressure have undertaken significant reforms and regained a good deal of competitiveness, but there is still more that needs to be done across a wide range of member states. In this area some key priorities are driving innovation, new technologies and raising levels of public and private research and development investment, raising the performance of education and training systems and overall skill levels, improving the business environment further and tapping the potential of the green economy.

The fourth policy priority is tackling unemployment and the social consequences of the crisis. We have seen that the length of unemployment periods has increased a good deal, in part because of the restructuring of economies and the difficulties in finding jobs. There is now a risk which we have identified of unemployment becoming increasingly structural in nature. We then see a growing number of people withdraw from the labour market. In turn, there are clear indications that risks of poverty and social exclusion are increasing in many member states. In spite of the high levels of unemployment, there is also evidence of skills bottlenecks and mismatches, with certain regions and sectors lacking employees able to fit their needs. Increasing participation in the labour market and improving skill levels and facilitating mobility remain urgent priorities. Also, further efforts to improve the resilience of the labour market and invest in human capital are essential to help companies to recruit and adapt and to allow more people to remain active and take up opportunities. The social partners also have a key role to play alongside public authorities.

The recommendations the Commission is making in this area include limiting the tax burden on labour, notably for the low paid, as part of the broader efforts to shift the tax burden away from labour that I mentioned, and also continuing to modernise labour markets by simplifying employment legislation and developing flexible working arrangements. At the same time, member states should do more to fight unemployment and improve employability and support access to jobs and a return to work, including by boosting public employment services and stepping up active labour market measures such as skills upgrading and individualised job seeking assistance; reducing early school leaving and facilitating the transition from school to work; developing and implementing the youth guarantee scheme, whereby every young person under the age of 25 years would receive an offer of employment, continued education and an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed. In addition to these measures, additional efforts are needed to ensure the effectiveness of social protection systems in countering the effects of the crisis to promote social inclusion and prevent poverty.

The final policy priority under the AGS is modernising public administration. During the years many member states have undertaken measures to increase the efficiency of their public administration. Such reforms have been particularly far-reaching in countries in financial distress. Examples include reorganising local and central government; the rationalisation of the public sector pay system and the governance of state-owned enterprises; the reform of public procurement processes; regular comprehensive expenditure reviews; and the promotion of efficiency measures across the public sector. Recommendations in this area include improving the efficiency of the tax collection and health care systems, reducing delays in making payments and strengthening the role of public employment systems. In addition, the Commission has also placed emphasis on areas such as making full use of public procurement opportunities in support of market competition and improving the quality, independence and efficiency of judicial systems.

The guidance provided in the annual growth survey is intended to help member states to design appropriate policies to help us exit from the crisis and lay the foundations for smart, sustainable and inclusive growth across the European Union. The Commission is committed to working closely with national authorities, including national parliaments, to help to create a shared sense of ownership of this process.