Lower taxes would cripple Europe’s growth

Raise’m up. Europe’s impoverished governments must increase public investment by up to 3% of ir collective GDP annually in coming years. Yet some politicians still think y can promise voters lower taxes. Since more debt and spending cuts won’t be enough to fund economy’s future needs, fewer fiscal revenues now can mean slower growth later. Governments must choose between political expediency and economic realities. latter suggest that higher taxes will be needed.

Political leers in European Union and UK face a daunting task. y must invest in green transition, boost defence spending to deal with new threats and help renovate telecom or railro infrastructure. That’s before y turn to business of boosting spending on healthcare to look after an ageing population.

numbers are scary. Implementing European Commission’s “Green Deal” will necessitate investments of some 600 billion euros a year until 2030. If governments fund about half that amount, with or half coming from private investors, that will be about 1.7% of region’s GDP. In UK, a good yardstick is opposition Labour Party’s pledge to spend an extra 28 billion pounds a year on green transition. It has since rowed back on promise, but it provides a rough idea of British economy’s environmental needs – about 1% of GDP.

EU and UK also need to keep investing more in ir military. Europe’s NATO members only reached last year goal of spending 2% of GDP a year on defence y h originally agreed on in 2006. But that was only catching up with years of declining military spending. Some experts estimate that preparing for future threats means investing in defence anor 1% of GDP, equivalent of more than 240 billion euros a year when including UK.

Infrastructure spending will d to bill. Upgring telecommunication networks alone would cost public purse some 20 billion euros a year if governments fund just half of programme outlined by Brussels. In UK, future governments will have to increase spending on essential works by at least 10 billion pounds a year, according to a National Infrastructure Commission report.

In all, se new investments would amount to 2.7% of EU and UK’s combined GDP, according to Breakingviews calculations. That’s not counting need to invest in education and training, to help workers deal with ongoing technological changes, and increasing resources needed by healthcare sector to cope with an ageing population. To meet all new public investment needs, 3% of GDP looks like a conservative estimate.

Governments have only three ways to finance this. y can borrow more. But some, such as France and Italy, alrey pay more in interest and principal repayments than on primary education or domestic security. Italy’s government gross debt should amount to 143% of country’s GDP this year, according to International Monetary Fund. France’s is at 110%, and UK’s at 106%. With yields on government bonds at multi-dece highs, more borrowing would test market confidence. Germany is only major European power that could afford that path, with debt at only 64% of GDP after years of fiscal restraint and declining public investment. But it does not want to do so for deeply ingrained political reasons.

Spending cuts could also in ory help free up resources. French Finance Minister Bruno Le Maire sounded almost heroic last month when he announced 20 billion euros of savings for next year – but that’s just 0.7% of France’s GDP.

That leaves taxes. Governments here are faced with an unprecedented situation. y have never been so destitute while facing such financing needs. As private wealth accumulated in last few deces, governments became poorer. According to Paris School of Economics’ World Inequality Report, in rich countries, government’s share of national wealth – sum of all financial and non-financial assets, minus debt – has declined to nearly nothing. European governments held between 20% and 30% of ir nations’ wealth in 1980s. y only own 2% now. Most of fall of government wealth has been due to rise in debt.

Yet politicians like UK Prime Minister Rishi Sunak, French President Emmanuel Macron and German three-party coalition led by Chancellor Olaf Scholz have pledged, or are still pledging, not to raise taxes. problem is that tax burden is alrey high. According to Organisation for Economic Co-operation and Development, it has increased in member countries by a little less than 2 percentage points, to 34% of GDP, in two deces ended in 2022. Over same period, it rose by around 4 percentage points of GDP in UK, to 35%, and in France, where it tops 46%.

Any rise will have to happen within a major redistribution effort, with higher taxes on richest financing subsidies for poorest. green transition, for example, requires governments to help lower-income families switch to electric cars or heat pumps. Energy bills will also have to be subsidised. In corporate world, companies will need incentives to invest in climate-friendly technologies. Meanwhile, public finances will be affected by phase-out of significant receipts from fossil fuel taxes.

fiscal mix of future will vary from country to country. Wealth taxes that include financial assets will be difficult to implement because y would need an international agreement to prevent capital flight. Taxing rich will, however, be crucial for governments to be able to show that burden will be fairly shared. An overhaul of inheritance taxes, which in most of Europe wealthiest can escape through multiple loopholes, would be an important step. And a serious implementation of international agreement on  minimum rate for corporate taxes would bring in more than 115 billion euros in EU and UK in new tax revenue, according to EU Tax Observatory.

European governments are faced with a simple choice. easiest way out of quandary would be to cut public investment plans, as Labour did in Britain. But lower public investment will harm economy in future. Businesses need solid energy grids, good transport infrastructure, fast and reliable networks, and well-trained and healthy workers. Failing to invest today will mean lower growth in long term.