By Sakari Suoninen
HELSINKI, Dec 11 (Reuters) - Cutting the value-added tax (VAT) across all European Union countries is a bad idea and would do little to stimulate economies, Finland's Finance Minister said on Thursday.
"It is a terrible idea. It's impact on demand is very questionable -- cutting VAT by 1 or 2 percentage points would not do much to reduce prices or impact buying decisions," Jyrki Katainen told Reuters in an interview.
Leaders of the 27-nation bloc want to agree at a two-day summit starting Thursday on a 200-billion euro ($260-billion) stimulus package to wrench the bloc out of recession.
EU nations have backed most of the stimulus package proposed by the European Commission last month, although Germany has come under pressure to increase its national contribution and does not want to copy Britain in cutting VAT.
Katainen said other stimulus measures are needed in Europe, singling out income tax cuts and infrastructure projects as examples.
"It is important many countries take stimulus measures, but of course there are countries in the EU which cannot afford to stimulate," Katainen said, referring to those that had large public sector deficits even in good times.
"They should not spend too much now to endanger their financial health when the crisis passes ... no one is obligated to destroy their economy in order to stimulate, but the countries which can afford it should do something."
Finland has earlier announced stimulus measures including income tax cuts, and Katainen said these will amount to about 2.5 percent of GDP.
The extra government spending and weaker economic activity will mean a budget deficit of around 2.5 billion euros in 2009, but Finland's finances are still set to be among the strongest in Europe thanks to strong surpluses in recent years that have helped knock down national debt.
Katainen said that in the rush by countries to spend and stoke their economies, EU members should still focus on sticking to the stability pact, which limits deficits to 3 percent of gross domestic product (GDP).
"The stability pact is more important than an economic stimulus, it is important to stick to it for credibility," Katainen said.
FUNDING CRUCIAL
Katainen said the biggest problem facing the economy now is the lack of funding available for firms.
"In this situation, I am most worried about companies' difficulties getting funding: That is the sickness that has to be healed, and the stimulus is treating the symptoms."
EU and individual governments have to work hard to make public funding for banks attractive to ease the situation.
"Banks have not wanted to get the stigma of getting aid. Also, the Commission's first proposal, which they are now changing, said banks getting aid could not increase lending."
"I understand that banks should not use aid to get market share, but on the other hand it is the smallest worry here."
FURTHER ECB RATE CUTS
Katainen said central banks across the world had done good work in trying to ease the impact of the financial crisis, but added he felt the European Central Bank (ECB) could continue to cut interest rates to stimulate the euro zone economy.
"Central banks have done what they can do, they have provided liquidity and they can lower rates, which they could still continue."
"I would not be terribly surprised if the ECB would lower rates further next year," Katainen said. "There is still room in monetary policy." (Reporting by Sakari Suoninen; Editing by Andy Bruce)