European countries cutting taxes

In order to join the euro currency bloc, member countries have had to reduce government spending sharply. Consequently, deficits have shrunk and the Organisation for Economic
Co-operation and Development forecasts the euro area's fiscal balances will break even in 2003.

Such improvements have made tax cuts possible – and politicians in over-taxed countries are suddenly competing in a round of historic cuts.

  • Germany – with tax receipts at 44.6 percent of gross domestic product last year – got the ball rolling by passing landmark tax reforms last month.

  • That prompted France's government – which took in 50.4 percent of gross domestic product (GDP) last year – to announce the deepest cuts since World War II, thereby lopping off the equivalent of R115 billion from the annual tax burden during the three years beginning in 2001.

  • Not to be outdone, Italy – with a tax bite equal to 46.4 percent of GDP – in recent days has promised to move ahead with a plan that would match the German reform.

  • Belgium's finance minister this week proposed reducing income taxes across the board.

    Taken together, these and other initiatives in the euro zone would reduce the area's tax burden by the equivalent of about R382 billion next year. Smaller nations, such as Ireland and the Netherlands, cut taxes earlier in the 1990s.

    To be sure, the overall tax burden will still far exceed that of the U.S. or Japan – both of which extract 31.1 percent of GDP in the form of tax receipts.

    Source: Christopher Rhoads and David Woodruff, Europe Plays Catch-Up With Tax Cuts, Wall Street Journal, August 31, 2000.

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    RSA Note:
    South Africa’s government expenditure as a percentage of GDP has been reducing steadily from a high of 36.0 percent in 1985. Although the trend is laudable, this figure is high when compared with that of South Korea, which remained at around 20 percent of GDP for the 20 years of its most rapid growth. South Africa’s government expenditure needs to decline to not more than 25 percent of GDP to bring about accelerated long-term growth.

    Eustace Davie, Director, FMF.
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