New European Union members urged to cut taxes

May 27, 2004

Free Market Foundation

The European Union’s new Central and Eastern European members need to cut taxes and do more to attract foreign investment, according to an economic report by the Organisation for Economic Co-operation and Development.

The report says the four largest new European Union economies the Czech Republic, Hungary, Poland and Slovakia need to cut labour taxes and do everything possible to encourage foreign investors if they are to follow Ireland’s example and catch up with existing EU members in terms of per-capita wealth.

To bridge the economic gap with average EU levels of gross domestic product per capita, the Czech Republic, Hungary, Poland and Slovakia need to raise their employment rates, currently among the lowest in the OECD:

Poland employs just 50.5 percent of its labour force, putting it near the bottom of a range for all OECD countries that bottoms at 46.3 percent and peaks at 84.1 percent.

To bring more people into work, the report said, these countries will have to cut unemployment benefits and taxes on labour.

The OECD also said that the growth gap between the United States and the euro zone will widen this year as the world economy experiences a “strong and sustainable” recovery:

The body now expects the U.S. economy to grow at a rate of 4.7 percent this year, up from its forecast last November of 4.2 percent and the fastest U.S. growth rate in five years.

But the OECD cut its growth forecast for the 12 countries using the euro to 1.6 percent this year from an earlier forecast of 1.8 percent.

The biggest surprise for the think tank has been the strength of the Japanese economy; it raised its 2004 growth forecast for Japan to 3 percent from 1.8 percent in November.

Source: Marc Champion, New EU States Are Urged to Cut Taxes, Wall Street Journal, May 12, 2004 and OECD Economic Outlook No. 75, May 2004.

For WSJ text http://online.wsj.com/article/0,,SB108427574370407954-search,00.html?collection=autowire%

For OECD study http://www.oecd.org/document/18/0,2340,en_2649_201185_20347538_1_1_1_1,00.html

For more on International Institutions and Growth http://www.ncpa.org/iss/int/

FMF Policy Bulletin\18 May 2004