BRUSSELS: The combined budget deficit of the eurozone’s member governments narrowed again in 2014, but their combined debts continued to rise as low rates of inflation and weak economic growth damped tax revenues.
The European Union’s statistics agency said Tuesday the eurozone’s budget deficit fell to 2.4% of economic output from 2.9% in 2013, but that additional borrowing pushed government debt up to 91.9% of gross domestic product from 90.9% in 2013.
The continued decline in budget deficits will be viewed by eurozone policy makers as evidence that the austerity policies pursued in response to the currency area’s government debt and banking crisis has worked.
In an interview with The Wall Street Journal, Luxembourg’s finance minister said 2014 had yielded “quite encouraging results” for the eurozone’s efforts to halt the postcrisis rise in government debts.
The deficit was lower than last year, so it’s all going in the right direction,” said Pierre Gramegna.
However, the weakness of eurozone economic growth and the low levels of inflation that persisted throughout 2014 made it difficult for governments to boost their tax revenues. As a share of economic output, they were steady at 46.6% of GDP, while spending fell to 49% of GDP from 49.4%.
If you have 2% to 3% inflation, your revenues go up,” said Mr. Gramegna. “In many countries, revenues are flat. That makes it difficult to make additional savings. A better situation will allow countries to do more. I’m optimistic on that.”
With prices starting to fall in December, the European Central Bank in January announced a program of more than €1 trillion ($1.074 trillion) of mostly government bond purchases known as quantitative easing, which it hopes will return inflation to its target of just under 2% in 2017.
Within the eurozone there were large differences between the financial positions of member governments. While Greece’s government managed to slash its budget deficit to 3.5% of GDP from 12.3% in 2013, its debts rose further to 177.1% of GDP from 175% in 2013, by far the highest in the currency area.
By contrast, Germany’s government debt fell to 74.7% of GDP from 77.1% in 2013, having run a budget surplus for the third straight year.