Council opinion

of 9 March 2004

on the updated Stability Programme of Spain, 2003 to 2007

(2004/C 68/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission, after consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 9 March 2004 the Council examined Spain's updated stability programme, which covers the period 2003 to 2007. The updated programme largely complies with the data requirements of the revised "code of conduct on the content and format of stability and convergence programmes". However, the update was submitted six weeks after the deadline set in the code of conduct without any apparent justification.

The budgetary strategy underlying the update, essentially unchanged from the previous programme, aims at maintaining sound public finances defined by a budgetary position of close-to-balance or in surplus. To this end, the programme envisages keeping the ratios of revenue and non-interest expenditure-to-GDP constant throughout the programme period, at 40 % and 37,4 % respectively, while allowing for an increase in the GDP share of capital expenditure and a corresponding decrease in the current expenditure share. The resulting primary surpluses are consistent with a balance or surplus on the overall balance and a steady decline in the debt ratio, which is envisaged to fall from 51,8 % of GDP in 2003 to 43,8 % in 2007.

The update projects real GDP growth to recover from an estimated 2,3 % in 2003 to 3 % for 2004 onwards. Employment is expected to strengthen from 1,8 % in 2003 to slightly above 2 % on average over the programme period. Inflation measured by the private consumption deflator is projected to decline from 3,2 % in 2003 to 2,7 % in 2004 and to stabilise at 2,4 % thereafter. On the basis of currently available information, the macroeconomic scenario underlying the update seems realistic. In particular, the rate of growth of the economy in the medium term is broadly in line with the prevailing estimate of potential growth.

After the surplus estimated for 2003, the update retains an objective of balance for 2004 and small, though increasing, surpluses (0,1 %, 0,2 % and 0,3 % of GDP for 2005, 2006 and 2007, respectively) for the rest of the years in line with previous projections. In cyclically-adjusted terms, based on Commission services' calculations, the surplus declines by half a percentage point to 0,1 % of GDP in 2004. This reflects the better than expected result estimated for 2003 and the maintenance of the previous year's balanced-budget target. For the remaining programme period, the cyclically-adjusted budget balance improves by 0,2 percentage points to a surplus of 0,3 % of GDP in 2007.

The budgetary targets presented in the programme are consistent with a position of close-to-balance or in surplus in each year of the projection. The risks can be considered broadly balanced: in fact, the targets, especially the balanced budget for 2004, appear cautious and may be overachieved giving a margin against less positive developments in the economy. Therefore, the budgetary stance can be considered sufficient to ensure the maintenance of the SGP's close-to-balance or in surplus objective throughout the programme period. For the same reasons, it also provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold.

On the basis of current policies, as reflected in the situation of public finances and its medium-term evolution shown in the programme as well as the long-term projections for age-related expenditure provided in the programme, Spain seems relatively well placed to cope with the budgetary costs of ageing populations. However, given the risks surrounding such long-term projections of expenditure and the large increase of pension expenditure projected in the very long term, current policies need to be supplemented by measures to prevent the emergence of unsustainable trends, in particular a comprehensive reform of the pension system in line with the recommendations of the multi-partisan agreement "Pacto de Toledo".

The economic policies as reflected in the updated programme are largely consistent with the recommendations of the Broad Economic Policy Guidelines, specifically those with budgetary implications. However, concerning the recommendations to address the challenge of ensuring the long-term sustainability of public finances in the face of population ageing, although a number of positive measures have recently been adopted, no steps to implement a major pension reform have been taken.

(1) OJ L 209, 2.8.1997.