A coordinated Community strategy for rekindling growth and overcoming a structural crisis cannot disregard the weight and structure of statutory charges*1, through which the equivalent of 40% of Community GDP is channelled.
Between 1970 and 1991 statutory charges rose in the Community from 34% to 40% of GDP. Over the same period they remained stable in the United States, at slightly below 30%. In Japan statutory charges have increased appreciably since 1980 but in 1991 stood at 31% of GDP, i.e. the same level as in the United States and a quarter lower than the average level recorded in the European Community.
Within the European Community there are variations between Member States. In a number of countries the overall level of statutory charges is close to or in excess of 45% of GDP. Such is the case in Denmark, the Netherlands, Belgium and France. The United Kingdom, by contrast, has stabilized its statutory charges since 1980 at a level that is markedly lower than the Community average (see table 1).
The growing significance of statutory charges raises the question of whether such an increase, which is part the result of the slowdown in economic growth over the last 20 years compared with the previous period, is not itself becoming a cause of that slowdown in growth. This explains the determination of governments in most Member States to stabilize or reduce statutory charges as a proportion of GDP. But such policies for stabilizing statutory charges presuppose a long-term effort to control public expenditure and have frequently run foul of the priority need to reduce excessive public deficits.
It is also on account of their structure that statutory charges have an impact on growth, competitiveness and employment. For a firm, this structure partly determines recruitment and investment decisions because it alters the costs of the factors of production (labour, capital, energy, other scarce resources). Particularly where demand is hesitant, statutory charges which immediately increase production costs are felt more keenly than those imposed on products sold or on profits.
An analysis must therefore be made of whether the structures of the tax systems, which vary very widely from one Member State to another, could not gradually be adapted to make them less prejudicial to labour. This would involve reducing non-wage labour costs, i.e. the statutory charges (taxes and social security contributions of employers and employees) imposed on labour. To be more effective, this reduction in the statutory charges which are pushing up the cost of labour would have to be coordinated with active employment policies. It could form part of efforts to rekindle growth by restoring confidence (revival of demand), by stepping up investment - particularly non-physical investment (training, research) - and by improving the use of equipment through a rearrangement of working hours.
In order to maintain a high level of social protection and to meet the need to reduce budget deficits, the easing of statutory charges, which would amount to 1%-2% of GDP, would largely be offset by a rise in other charges. These would consist particularly of charges on scarce natural resources and on energy - in order to reinforce environmental protection - and, where appropriate, of taxes on consumption and investment income.
Both for alleviating the charges on labour and for offsetting that through other tax bases, each Member State would adopt measures that would be appropriate to its own situation and consistent with the smooth functioning of the single market.
Most Member States refer to this topic in their contributions. They advocate a reduction in social security contributions, which would be achieved in various ways but particularly by concentrating those reductions on unskilled jobs. The suggestions put forward for offsetting the loss of revenue include the possibility of taxing polluting activities or products, energy or scarce natural resources, and promoting private insurance schemes. The possible introduction of "green taxes" is not viewed uniformly, however, since some Member States have reservations about the impact of such taxes on international competitiveness.
(a)Charges on labour Charges directly imposed on labour are equivalent to 23.5% of Community GDP, i.e. more than half the figure for statutory charges as a whole. Since 1970 these charges on labour have increased in the Community by 40% in real terms,twice as rapidly as in the United States (see table 2).
In a number of Member States charges on labour are equivalent to more than 25% and, in some cases, almost 30% of GDP (the Netherlands, Belgium, Denmark, Germany and France).
In the United Kingdom charges on labour have stabilized since 1980 at a level appreciably lower than the Community average and comparable with the current level in Japan.
If these tax and social security charges are expressed as a proportion not of GDP but of total labour costs, they account on average for more than 40% of overall labour costs in the Community. This level is much higher than in Japan (20%) and the United States (30%).
(b) Diversity of charges
In some Member States, the charges on labour consist primarily of income tax, with social security contributions playing only a minor or very minor role: such is the case in Denmark, the United Kingdom and Ireland (see table 3).
Other Member States, by contrast, have very high social security contributions and a relatively low level of income tax. This is particularly the case in France and Greece.
Finally, on average in the Community, two thirds of compulsory social security contributions are borne by employers and one third by employees. In some Member States, however, such as Belgium and France, the employers' share is higher, accounting for some three quarters of total social security contributions; in the Netherlands, by contrast, employers' social security contributions account for less than half of total social security contributions.
(c) Impact on employment
The high level of non-wage labour costs is prejudicial to employment, exerting a dissuasive influence: it encourages the substitution of capital for labour and promotes the parallel economy; it particularly affects employment in SMEs; finally, it leads to relocation of investment or activities.
Faced with inadequate demand, firms attempt first and foremost to reduce their costs by laying off workers, labour being the adjustment variable. The rise in unemployment pushes up contributions and reduces the number of contributors; labour costs increase, and so forth; a kind of vicious circle is established. A firm which, by laying off workers, reduces its own costs also passes on the cost of unemployment to other firms in industries which cannot lay off workers as easily, and they too see their situation deteriorate.
Highly labour-intensive firms, whose labour costs and social security budgets are relatively high, are then in turn compelled to lay off workers, to relocate or to resort to the underground economy, either directly or through subcontracting.
The size of the underground economy varies from country to country and according to the methods used to estimate it but is probably equivalent to between 5% and over 20% of GNP. If the real figure were 10%, this would represent a loss of the order of 5% of GDP in statutory charges. In terms of jobs, the loss is even greater since, to the extent that these activities are carried out by those falsely registered as unemployed, they are an obstacle to bringing down unemployment.
A reduction in the charges on labour, accompanied by tighter controls against fraud, would be likely, if not to reincorporate some of those activities into the normal economy, at least to slow their growth.
(d) Special case of SMEs
Although 70% of private sector jobs are created in SMEs, it is these firms which are worst affected by administrative complexity and the high level of charges on labour: firstly, it would seem that, in the case of small firms, it is the high level of charges rather than net wages that triggers a psychological reaction against the idea of recruiting labour; secondly, however justified they may be, controls, forms and checks have to be multiplied by the number of administrative departments involved and are viewed as an additional labour cost. This extra burden seems all the more onerous when it has to be borne by someone not familiar with such matters and when it relates to only a small number of jobs.
Several types of tax measure could, therefore, assist SMEs:
(a) Objective
In order to help maintain employment and create new jobs without reducing wage levels, therefore, steps must be taken to reduce non-wage costs, particularly for less skilled labour. Unemployment is particularly high among unskilled workers. Furthermore, in most Member States non-wage costs bear relatively more heavily on those in low-paid employment.
The Member States should set themselves the target of reducing non-wage labour costs by an amount equivalent to 1%-2% of GDP; this figure could vary according to the tax structures in the Member States.
(b) Implementation
The objective being to reduce labour costs, the reduction could differ from one Member State to another depending on the extent to which it is applied to employers' social security contributions and/or to employees' social security contributions and/or to taxes levied directly on wages.Social security contributions themselves are sometimes divided up according to the various objectives involved: family, health, old age, unemployment. In these cases, the reduction could relate primarily to contributions which finance expenditure normally pertaining to national solidarity: family allowances, the minimum old age pension, serious illnesses, or long-term unemployment. In the case of schemes in which the benefits are more directly related to the contributions (e.g. retirement pensions), it is for each Member State to determine the respective proportions of compulsory and voluntary contributions to be paid under insurance schemes or savings arrangements.
Furthermore, the reduction of statutory charges on labour should apply as a priority to the lowest earnings. This would make it possible to limit the budgetary cost of the measure per job saved or created while responding to the scale of unemployment among the least skilled workers.
The flexibility of work should also be encouraged
Experience in some Member States suggests that more flexible organization of work would stimulate job creation. The promotion of more flexible working arrangements could be backed up by reductions in the statutory charges currently imposed on such arrangements.
With regard to services, whether market services or otherwise, which are in contact with the public, an adjustment of working time accompanied by tax incentives would make it possible to increase employment, use equipment more intensively (longer opening hours), and meet a demand (more practical opening hours, longer free time).
The reductions could also be specially targeted on the creation of new jobs and the recruitment of young people.
But it is clear that if measures to bring down statutory charges substantially are to be effective, they must be simple. While it may appear desirable to make certain tax advantages conditional upon the taking of action consistent with the objectives of active employment policies, it is important to avoid schemes which cannot work well because of their complexity.
(c) Effect on employment
The results of several econometric models (see annexed table) confirm that reductions in social security charges offset by an increase in other charges produce a significant positive effect on employment. The most favourable results are observed when the reduction in employers' social security contributions is targeted on categories of workers with a low level of skills and if a tax on CO2 /energy is introduced rather than VAT being increased. On a favourable hypothesis, these models show that if employers' social security contributions are reduced by 1% of GDP, the unemployment rate falls by 2.5% over four years.
In view of the need to keep budget deficits as small as possible, compensatory measures should be introduced to offset the reductions in statutory charges designed to reduce labour costs.
The reduction in social security contributions could be partly financed by the contributions of persons for which jobs had been created, by the reduction in unemployment benefits resulting from an increase in employment, and by tighter control of public expenditure to make it more efficient.
But in most cases, compensatory measures in the form of taxation will be necessary to ensure the tax neutrality of the reductions made. From the various possibilities, measures should be chosen which do not have an adverse effect on the competitiveness of Community industry.
Of course, a detailed study should be made of the effects and the combination of these different possibilities.
(a) Environmental taxes
Environmental taxes, charged for example on the use of limited natural resources and energy, may be envisaged.
The CO2/energy tax proposed by the Commission in 1992 could raise an amount of revenue equivalent to some 1% of GDP. In all these cases, predictability and tax neutrality should be assured so as not to handicap industries exposed to international competition, and appropriate tax incentives should be studied.
An increase in excise duties on energy products may also form part of a policy of environmental protection enjoying fairly broad popular support. One option to be considered in connection with the introduction of a CO2/energy tax is to broaden the existing excise duties on mineral oils and other energy products, which are also responsable for pollution.
According to various studies, carried out both by the Commission departments and in a number of Member States, a transfer of social security charges worth some 1% of GDP to a CO2/energy tax in the region of USD 10 a barrel would have beneficial effects not only on the environment but also on the use of CO2.
(b) Taxes on consumption
An increase in excise duties on tobacco and alcohol provides a source of additional budget revenue and a means of preventing widespread social problems, and can help the social security budgets to make savings (by reducing the need to treat cancer and alcoholism).
Since VAT has very little influence on international competitiveness (it can be deducted on exportation) the idea of a social VAT has been mooted. It is considered in some quarters that VAT could be raised to offset the reduction in social security charges. In theory, the increase in VAT accompanied by a reduction in social security charges could enhance business competitiveness in the Community. Moreover, the system of minimum rates in force in the Community authorizes Member States to raise their rates of VAT. Nevertheless, any increase in VAT and therefore in prices is bound to inhibit consumption and may have economic drawbacks. The question therefore deserves thorough examination in each case. In addition, within the Community, it would be necessary to ensure that disorderly increases in VAT, in particular in the countries where the standard rate of VAT is already high, did not create distortions of competition or call into question the approximation of rates carried out for the entry into force of the single market. For, if the approximation of rates embarked upon in recent years in the Community were to be abandoned, the establishment in 1997 of the definitive VAT arrangements (payment of VAT in the country of origin) would be threatened.
(c) Other taxes
Of the other possibilities, it is necessary to mention measures concerning the taxation of capital.
Without standing in the way of investment, this would mean altering the structure of statutory charges on the different factors of production (labour, capital, scarce natural resources) so as to favour employment instead of discouraging it.
A tax on the income from financial capital which the Commission has been advocating since 1989 would also have the advantage of making it more attractive to channel savings into productive investment and the creation of businesses.
A substantial reduction in non-wage labour costs (between 1 and 2 percentage points of GDP), particularly for the least-skilled workers, would play a key part in effectively combating unemployment and promoting job creation.
This easing of the burden of statutory charges, which would be introduced as part of active employment policies, would have to be offset by tax measures so as not to swell budget deficits.
Given the diversity of tax systems (taxes and social security contributions) in the European Union, it is impossible to identify a single method for shifting some of the statutory charges on labour onto other factors of production or onto consumption. However, possible compensatory tax measures include environmental taxes (taxation of CO2 and excise duties on energy), excise duties on consumer products that are damaging to health, taxation of interest income applicable to all Community residents and, where appropriate and subject to certain conditions, an increase in VAT.
In order to ensure that these changes to the structures of statutory charges lead to a coordinated recovery of the European economies, the Member States must be aware of the importance of joint consultations and cooperation in this field.
Table 4:
GENERAL HYPOTHESIS: Reduction in employers' social security contributions with compensation via other statutory charges