EUROPEAN COMMISSION

Brussels, 16.11.2015

COM(2015) 800 final

COMMUNICATION FROM THE COMMISSION

2016 DRAFT BUDGETARY PLANS: OVERALL ASSESSMENT

Table of Contents

1. Introduction

2. Fiscal adjustment in the euro area according to national plans

3. Overview of individual Draft Budgetary Plans

1. Introduction

EU legislation foresees that euro area Member States submit Draft Budgetary Plans (DBPs) for the following year to the Commission by 15 October with the aim of improving coordination of national fiscal policies in the Economic and Monetary Union 1 . These plans summarise the draft budgets that governments submit to national parliaments. On each plan, the Commission provides an Opinion, assessing whether it is compliant with the country's obligations under the Stability and Growth Pact (SGP). The Commission is also required to provide an overall assessment of the budgetary situation and prospects for the euro area as a whole. The latter assessment is provided in the present Communication.

Sixteen euro area Member States sent their 2016 DBPs to the Commission by 15 October, in line with the provisions of the so-called Two-Pack. Greece and Cyprus, the remaining euro area countries under a macroeconomic adjustment programme, are not obliged to submit a plan, as the programmes already provide for close fiscal monitoring. Spain already submitted its DBP in September and the Commission adopted its Opinion on 12 October.

Portugal did not submit a plan as required by the legislation. This has not happened before and should not be repeated. Even a no-policy change DBP, which is considered acceptable in case of elections, provides valuable and transparent information on underlying budgetary trends, which facilitates a collective examination of the overall fiscal stance in the euro area and ensures equal treatment across Member States.

While respecting Member States' budgetary autonomy, the Commission's Opinions provide objective policy advice, in particular for national governments and parliaments, to facilitate the assessment of the draft budgets' compliance with EU fiscal rules. The Two-Pack provides for a comprehensive toolbox to treat economic and budgetary policy as a matter of common concern, as intended by the Treaty.

In addition, in July 2015, the Council invited the Eurogroup to monitor and coordinate euro area Member States' fiscal policies and the aggregate fiscal stance for the euro area to ensure a growth-friendly and differentiated fiscal policy 2 . The Council recommended that euro area Member States, without prejudice to the fulfilment of the requirements of the SGP, "coordinate fiscal policies to ensure that the aggregate euro area fiscal stance is in line with sustainability risks and cyclical conditions". This recommendation is an anchor for the Commission's assessment.

The objective of this Communication is twofold. Firstly, it provides an aggregate picture of budgetary policy at euro area level, building on a horizontal assessment of the DBPs. This exercise mirrors the horizontal assessment of Stability Programmes that takes place in the spring, but with a focus on the forthcoming year rather than on medium-term fiscal plans. Secondly, it provides an overview of the DBPs at country level, explaining the Commission's approach in assessing them, specifically, for compliance with the requirements of the SGP. The assessment is differentiated according to whether a Member States is in the preventive or the corrective arm of the SGP and it also takes into account the SGP requirements in relation to the level and dynamics of government debt.

2. Fiscal adjustment in the euro area according to national plans

Overall findings

The recovery from the economic and financial crisis is gradually gaining momentum in the euro area. According to the macroeconomic assumptions provided in the DBPs, GDP will grow by 1.7% in 2015 in the sixteen Member States concerned (EA-16), slightly above the 1.4% expected at the time of the Stability Programmes (SPs) in April 2015 (Table 1). For 2016, the growth outlook is broadly unchanged from the spring, with GDP growth forecast at 1.9% in the EA-16 versus 1.8% projected in the SPs. With the recovery forecast to gain pace, the difference between actual and potential output is narrowing. According to the plans, the output gap in the EA-16 is projected to be -1½% of potential GDP in 2015 and to narrow further to -¾% in 2016, having been as large as -2½% in 2013. This trend is evident in the vast majority of Member States, though not without differences across countries. The inflation outlook remains subdued, broadly unchanged since spring. According to the DBPs, the rate of inflation will be 0.4% in 2015 and is projected to increase to 1.1% in 2016 (unchanged from the SPs).

The aggregate headline budget deficit is planned to continue to narrow this year and next. In the EA-16, the deficit is forecast to be 1.9% of GDP in 2015, down from 2.4% last year 3 . In 2016, the aggregate deficit ratio is planned to decline only slightly, to 1.7% of GDP. This is in contrast to the 0.4 percentage point reduction in 2016 projected in the SPs. Together with the marginally upgraded macroeconomic outlook, this suggests that the smaller reduction in the deficit may be driven by a lower fiscal effort (see hereafter). However, an increase in expenditures related to the refugee crisis is likely to be a contributory component in a few Member States.

A continuing pause in consolidation as measured by the change in the aggregate structural balance is confirmed in the DBPs over 2015-16. This is broadly in line with the projections for the entire 2015-16 period included in the spring SPs (the structural balance was at that time planned to remain unchanged both in 2015 and in 2016). The SPs had themselves mirrored the position in Member States' DBPs in autumn of last year, which indicated a halt to consolidation in 2014 continuing into 2015. According to the DBPs, the structural balance is now planned to improve in 2015 (¼% of GDP), to be followed, however, by a ¼% of GDP deterioration next year 4 . The pause in fiscal consolidation takes place against the background of a gradually improving but still fragile economic outlook and narrowing output gap. Together with the fact that only six Member States (and only one amongst the largest economies) plan to be at or above their medium-term budgetary objectives at the start of 2016 5 , this points to the planned structural adjustment in 2016 falling short of the requirements of the SGP. However, the aggregate adjustment should only be viewed as illustrative in this respect, as it fails to capture the important differences across Member States vis-à-vis the requirements of the SGP, which are the subject of the Commission's country-specific assessments.

After peaking in 2014 at 92% of GDP, the aggregate debt ratio is planned to slightly decrease both in 2015 and in 2016, broadly in line with the projections underpinning the SPs. This is driven by nominal GDP growth and negative stock-flow adjustment (meaning that factors other than the government deficit are planned to reduce debt) 6 . At 89% of GDP in 2016, the aggregate ratio masks a wide range of national figures. The debt ratios in individual Member States vary from 131% of GDP in Italy to just below 10% of GDP in Estonia. Data for Greece, Cyprus and Portugal, three Member States with high debt levels, are not included. 

Table 1: Overview of economic and budgetary aggregates (EA-16) for 2015-16

Impact of refugee crisis

In a number of cases the DBPs mention the budgetary impact of the exceptional inflow of refugees (Austria, Belgium, Germany and Italy). While the DBPs represented an obvious vehicle for submitting specific information on the possible refugee-related budgetary costs, the very nature of this unusual event 7 and the fact that DPBs are limited to euro area Member States implies other Member States may submit their information through different documents. This is also necessary as the situation continues to evolve on the ground.

The flexibility embedded in the SGP allows for accommodating exceptional spending linked to unusual events outside the control of the government, both under the preventive and the corrective arm of the Pact. The preventive arm of the Pact explicitly envisages that temporary deviations with respect to the required fiscal adjustment towards the medium-term budgetary objective (MTO) can be allowed ex ante and could, in any case, be left out of consideration ex post based on outturn data, provided that they result from i) an unusual event, ii) outside the control of the Member State, iii) with a major impact on the financial position of the general government and iv) not endangering fiscal sustainability in the medium term. The corrective arm envisages a similar provision with regard to opening an EDP, when defining as exceptional an excessive deficit that results "from an unusual event outside the control of the Member State concerned and with a major impact on the financial position of general government", provided that the deficit remains close to 3% of GDP. Unexpected costs related to the refugee inflows can also be taken into account in the assessment of 'effective action' when assessing compliance with the EDP recommendation.

It should be stressed that the adjustment requirements under the SGP, in both the preventive and the corrective arms, are set in terms of change in the structural balance. Therefore, the corresponding allowances under the 'unusual event' provisions should (only) reflect the extent to which such events affect the annual change in the structural balance, compared to that which would have been otherwise observed in the absence of the event itself. The Commission will thus in principle use these provisions of the SGP when assessing (ex post) the temporary deviation from the requirements for 2015 and 2016 due to the additional costs in each of these two years resulting from the exceptional inflow of refugees compared to the previous year. Where relevant, the Commission opinions on the DBPs include factual statements on how the assessment of compliance could be impacted if we were to correct for the refugee costs.

The Commission will make a final assessment on a case by case basis, including on the eligible amounts, on the basis of observed data as provided by the authorities of the concerned Member States. The budgetary costs related to refugee inflows will not be considered as one-offs, as the additional expenditure is not necessarily temporary and non-recurrent. They should also be directly linked to, and the immediate consequence of, the refugee inflows (e.g. sheltering and administrative costs, local reception, transports, etc.) and be net of any targeted contribution from relevant EU-funds (and in general from the EU budget).

Composition of fiscal adjustment

The DBPs envisage only limited changes in the composition of public finances in 2015-16 for the euro area as a whole (Table A5.5 and Graphs A5.1a-b of Annex 5). The ratio of government expenditure to GDP is planned to recede by 0.6 percentage points in 2016. However, this seemingly large reduction is mostly due to the cyclical conditions. In fact, the expenditure ratio corrected for the effect of the economic cycle depicts a reduction of just ¼ percentage points. This reduction is outweighed by planned tax cuts, as evidenced by the stronger decline in the cyclically adjusted revenue ratio (-½ percentage points in 2016). In this respect, Members States' plans to reduce expenditure as a share of potential output have, in the aggregate, to a large extent failed to materialise over the last few years. The Commission's autumn 2015 forecast (henceforth the 'Commission's forecast') confirms the small reduction in the structural expenditure ratio and the larger one in the structural revenue ratio foreseen in the DBPs. The broadly unitary tax elasticity implied by both the DBPs and the Commission's forecast indicates that the reductions in revenues are driven by government measures (Table A5.6 of Annex 5).

Examining the growth-friendly nature of the aggregate expenditure plans set out in the DBPs, the planned adjustment is not expected to damage medium-term growth prospects, though there may be scope for more growth-friendly choices in reducing spending. Most expenditure categories are planned to fall as a percentage of output. The largest declines are affecting compensation of employees, social benefits and government purchases of goods and services (Graph A5.2 of Annex 5). Moreover, Member States are benefitting from large savings on interest expenditure (as discussed in more detail in the next section). As the most productive expenditures are not primarily impacted, the planned adjustment is not expected to damage medium-term growth prospects, though there may be scope for more growth-friendly choices in reducing spending. In particular, capital expenditure is also planned to recede. The Commission's forecast is broadly in line with the DBPs, confirming the largest reductions in social benefits and public wages, but foresees a smaller fall in government purchases of goods and services. The Commission's forecast also projects a slightly larger role for falls in interest expenditure than set out in the DBPs.

Measures presented in the DBPs would only have a moderate effect on the tax composition for the aggregate EA-16 in 2015. Indeed, all three main categories (indirect taxes, direct taxes and social contributions) are expected to recede as a share of GDP, without however altering their relative weights significantly. On the revenue side, the Commission's forecasts are aligned with the DBPs (Graph A5.3 of Annex 5).

Nonetheless, the DBPs show a clear awareness in euro area Member States of the benefits of reducing the tax burden on labour and many Member States are planning or implementing a variety of concrete measures (Table 2). While many measures are relatively modest compared to the size of the challenge faced, some Member States' DBPs include ambitious packages of labour tax reductions that are likely to have a significant positive impact on growth and employment. The most sizable reforms are introduced in those Member States that currently have relatively high labour taxes compared to the EU average such as Austria, Belgium and France. At the same time, some Member States that have relatively low labour taxes introduce relevant measures as well. Measures are generally well targeted, focussing on those groups for which high labour taxation presents the greatest employment obstacles. In practice, this usually implies the reduction of taxes at low-income levels, with several Member States increasing the tax free allowance while some reduce rates or shift brackets to reduce the tax burden on low-income earners. Some Member States reduce taxation for middle-income earners as well while the few tax increases that are included in the DBPs pertain to higher-income earners. Most DBPs do not provide detail on the financing of labour tax reductions. In at least some cases, the full or permanent financing does not appear to be fully ensured.

Commission's autumn 2015 forecast and DBPs

Regarding the overall economic and fiscal outlook, the picture emerging from the sixteen DBPs is broadly confirmed by the Commission's forecast, which also points to a continued albeit moderate economic recovery amid more challenging global conditions. The Commission's forecast projects that real GDP growth will stand at 1.6% in 2015 and strengthen further to 1.8% in 2016. Domestic demand is currently supported by a conjuncture of low oil prices, a still relatively low euro exchange rate, accommodative monetary policy and a broadly neutral fiscal stance. At the same time, the underlying dynamics of domestic demand remain slow. Global economic conditions have weakened, notably in China and some other emerging market economies, and world trade has slowed down sharply. Moreover, a number of developments could result in lower growth than expected by the Commission, such as a further deterioration of world trade, larger-than-expected spillovers from the slowdown in emerging economies, or contagion via financial markets.

The improving economic conditions are also reflected in a continuing narrowing in the difference between actual and potential output in the Commission's forecast. The negative output gap of 2¼% of potential GDP in 2014, is expected to contract to 1¾ % this year and 1% in 2016.

The pick-up in growth prospects is not reflected in price developments, as the inflation outlook remains muted at the aggregate level. The Commission's forecast projects HICP inflation of just 0.1% this year, with a forecast pick-up to 1% in 2016, reflecting a gradually closing output gap and a very accommodative monetary stance. Notwithstanding non-negligible differences across Member States, interest rates are assumed to stay at historically low levels in 2016. At the same time, the large excess of saving over investment is expected to persist in 2016, with the external balance of the euro area forecast in surplus by 3.6% of GDP, only marginally below its size in 2015 (3.7% of GDP). This external surplus, one of the world's largest in value terms, is only partly due to the effect of the lower euro exchange rate and low commodity prices. It also points to a lack of domestic demand and indicates that the recovery is to a large extent dependent on external factors.

The aggregate headline deficit is expected to decline from 2.0% of GDP in 2015 to 1.7% of GDP in 2016, with the structural balance remaining unchanged this year and slightly deteriorating in 2016. That said, the lack of improvement in the structural balance in 2015 anticipated by the Commission incorporates a projected decrease in interest expenditure, reflecting the fact that sovereign bond yields have fallen sharply since end-2013 and reached historically lows in the first half of 2015. As a result of lower interest rates, total interest payments by euro area Member States have decreased over the last few years as large amounts of debt have been rolled over since the fall in interest rates (Annex 4).

At the aggregate level, the structural primary balance is thus estimated to deteriorate by ½% of GDP in 2015. Similarly, the Commission expects that the slight structural worsening in 2016 will be more pronounced (-¼ of GDP) when assessed on the basis of the primary balance. The windfall gains arising from such historically low levels of interest rates on government debt provide an opportunity to Member States primarily to consolidate public finances and – depending on their specific situation – invest in infrastructure and reform their economies 11 .

While the aggregate picture for the deficit in the euro area broadly coincides between the DPBs and the Commission's forecast, differences between individual DBPs' and the Commission's deficit forecast can be relatively large, for reasons varying from one country to another. In the majority of countries, the Commission forecasts the deficit to be higher compared to the respective DBPs, with the largest such differentials seen in Spain, Belgium and Slovakia (Table A5.1 and Graph A5.4 of Annex 5). The remaining positive forecast differentials are all within a 0.3 percentage point range, while the Commission's forecast is for a lower deficit figure in Germany, Estonia and Finland.

The Commission forecasts slightly higher aggregate debt than projected by Member States. While the aggregate debt ratio remains at a very high level, the Commission expects it to decline both this year and next, reaching 90% of GDP in 2016. However, it should also be recognised that a large portion of the debt reduction in the euro area is being driven by Germany. When Germany is excluded from the calculations, the aggregate debt ratio forecast by the Commission only stabilises in 2016 at 100% of GDP. Here again, differences between the DBPs and the Commission's forecast can be larger at Member State level, for reasons varying from one country to another. The larger differentials relate to Spain and Ireland (Table A5.3 and Graph A5.5 of Annex 5). In most cases, the forecast differentials range between zero and 1% of GDP.

The aggregate euro area debt ratio cannot be assessed in terms of compliance with the debt requirements of the SGP as the Member States of which it is comprised have a differing status vis-à-vis the SGP 12 . However, eight euro area Member States that submitted DBPs are subject to the debt reduction benchmark. According to the Commission's forecast, six of these eight are expected to be compliant with it.

Assessment of fiscal adjustment in the euro area

Regarding the size of structural budgetary adjustment, the Commission's forecast confirms the continuation of a broadly neutral fiscal stance in 2016 in the euro area, following the virtual halt to fiscal consolidation that has occurred since 2014. This is confirmed by an alternative measurement of the discretionary fiscal effort, which shows a slight deterioration in the fiscal position in both 2015 and 2016.

In terms of the appropriate stance at the aggregate level, the orientation of the fiscal position in 2015-16 should be assessed against the twin objectives of long-term sustainability of public finances and short-term macroeconomic stabilisation. Long-term sustainability requires that public debt is put and maintained on a sustainable path, taking into account the current level of debt and projected future ageing-related expenditures 13 . Macroeconomic stabilisation could be expressed in terms of closing the output gap at an appropriate pace in the short to medium term while, in the current situation, also ensuring a rotation from external to domestic sources of growth. The macroeconomic policy tools available to deliver this objective are constrained in the current monetary policy context, where nominal interest rates are already almost at the zero limit alongside very low inflation, placing further emphasis upon the importance of fiscal policy. Assessing the aggregate euro area fiscal stance against sustainability risks and cyclical conditions suggests a need to reduce further the still high debt ratio, without hampering the economic recovery and while avoiding pro-cyclical policies. In this regard, preliminary Commission calculations indicate that some moderate consolidation in 2016, as required in the country-specific recommendations and suggested by sustainability indicators, would be consistent with a reduction of the output gap. By contrast, a fiscal stance that would aim at closing the output gap at a faster pace may be at the expense of improving sustainability and prove incompatible with compliance with the requirements under the SGP.

Balancing these two objectives, the largely neutral aggregate euro area fiscal stance expected for next year appears broadly appropriate, when also taking into account the historically low interest rates and the high external surplus, which would indicate the need for some degree of demand support. At the same time, because of their non-permanent nature, savings from low interest payments could represent a risk if used to permanently increase government spending or cut taxes.

Concerns regarding sustainability are confirmed by the slight deterioration projected for the euro area structural balance in the Commission's forecast for 2016, which may fall short of the average adjustments required of euro area Member States under the SGP 14 . Moreover, this is being driven by a very small or even negative adjustment on the part of Member States that are facing sustainability concerns, notwithstanding a still insufficient orientation in other Member States towards making use of the available fiscal space.

3. Overview of individual Draft Budgetary Plans

The Commission's Opinions on the Draft Budgetary Plans focus on compliance with the SGP and recommendations issued on this basis. For Member States in Excessive Deficit Procedure (EDP), the Commission's Opinions take stock of progress in correcting the excessive deficits, with respect to both headline and structural deficit targets. For Member States in the preventive arm of the Pact, the Commission's Opinions assess adherence to, or progress towards, the medium-term budgetary objectives (MTOs) as well as compliance with the debt rule, to see whether the plan is in line with the SGP and the fiscal country-specific recommendations (CSRs) addressed to Member States by the Council in July.

All non-programme euro area Member States, with the exception of Portugal, submitted their DBPs by 15 October. Portugal's non-submission of a no-policy change DBP is not in line with the Two-Pack and the Commission urges Portugal to submit a full DBP as soon as possible. Spain already submitted its DBP in September and the Commission adopted its Opinion on 12 October.

No DBP was found to be in "particularly serious non-compliance" as referred to in Article 7(2) of Regulation (EU) No 473/2013. Still, several of the submitted plans give rise to concerns.

Tables 2a and 2b summarise the assessments of individual countries' DBPs as per the Commission's Opinions adopted on 16 November together with the assessment of progress with reforms relating to fiscal governance. These assessments are based on Commission's autumn 2015 forecast. In order to facilitate comparison, the assessment of the plans is summarised in three broad categories, which have different meanings depending on whether a Member State is in EDP or not:

Compliant: According to the Commission's forecast, there is no need to adapt the budgetary plans within the national budgetary procedure to ensure compliance with the SGP rules.

Broadly compliant: The Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP based on the following reasoning:

For Member States in EDP: while the Commission's forecast projects that the headline deficit target will be achieved, there is a noticeable shortfall in fiscal effort compared to the recommended value that puts at risk compliance with the EDP recommendation.

For Member States under the preventive arm of the SGP: according to the Commission's forecast, the DBP may result in some deviation from the MTO or the adjustment path towards it, but the shortfall relative to the requirement would not represent a significant deviation from the required adjustment. These Member States are assessed to comply with the debt reduction benchmark where applicable.

Risk of non-compliance: According to the Commission's forecast, the DBP is not expected to ensure compliance with the SGP requirements. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP based on the following reasoning:

For Member States in EDP: the Commission's forecast for 2016, if confirmed ex post, could lead to the stepping up of the EDP as neither the recommended fiscal effort nor the recommended headline deficit target is forecast to be achieved.

For Member States under the preventive arm of the SGP: the Commission's forecast projects a significant deviation from the MTO or the required adjustment path towards the MTO in 2016 and/or non-compliance with the debt reduction benchmark where applicable.

Following the Commission Communication on "Making the best use of the flexibility within the existing rules of the Stability and Growth Pact" of 13 January 2015, Italy and Finland have in their DBP 15 requested flexibility deviation from the recommended adjustment path towards the MTO on the basis of the structural reform and the investment clause. It should be noted that granting flexibility at this stage would take place outside the normal European Semester cycle and depart from the process envisaged in the Communication on flexibility within the SGP. In any case, in the absence of a sufficient safety margin to the 3% of GDP deficit reference value, Finland is currently assessed as not eligible for the requested temporary deviation in 2016. Regarding Italy, it appears that the eligibility criteria for the investment clause could be met on the basis of the Commission's forecast. The Commission will take this into account in the context of the assessment of the next Stability Programme. Particular attention will be paid to whether a deviation from the adjustment path is being effectively used for the purposes of increasing investments and to the plans to resume the adjustment path towards the MTO. The Commission will also assess whether progress with the structural reform agenda is in line with the Council recommendations.

Furthermore, in a number of cases (Austria, Belgium, Germany and Italy) the DBPs mention the budgetary impact of the exceptional inflow of refugees. As outlined above, the flexibility embedded in the SGP allows accommodating the incremental (from one year to the next) exceptional spending linked to unusual events outside the control of the government (such as the extra costs due to exceptional increase in refugee inflows), both under the preventive and the corrective arm of the Pact. The Commission will make a final assessment, including on the eligible amounts, on the basis of observed data as provided by the authorities of the concerned Member States, when assessing (ex post) the temporary deviation from the requirements for 2015 and 2016.

Moreover, the Commission has preliminarily assessed the degree of overall compliance with the fiscal governance reforms outlined in the 2015 CSRs. The assessment of the DBPs is summarised in five broad categories. These are:

No progress: The Member State has neither announced nor adopted any measures to address the relevant CSR.

Limited progress: The Member State has announced some measures to address the relevant CSR, but these measures appear insufficient and/or their adoption/implementation is at risk.

Some progress: The Member State has announced or adopted measures to address the relevant CSR. These measures are promising, but not all of them have been implemented yet and implementation is not certain in all cases.

Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a long way in addressing the relevant CSR.

Fully addressed: The Member State has adopted and implemented measures that address the relevant CSR appropriately.

A comprehensive assessment of progress made with the implementation of the 2015 CSRs will be made in the 2016 Country Reports and in the context of the 2016 CSRs to be adopted by the Commission in May.

 
Table 2a: Overview of individual Commission Opinions on the Draft Budgetary Plans – Member States currently under the preventive arm of the SGP

* The report under Art. 126 (3) TFEU of 27 February 2015 concluded that the debt criterion should be considered as complied with at that time.

** In case the current estimate of the budgetary impact of the exceptional inflow of refugees would be excluded from the assessment, the projected deviation from the recommended adjustment path would no longer be significant.

*** As the notified deficit for 2014 and the planned deficit and debt for 2015 were above the Treaty reference values, the Commission issued a report under Art. 126 (3) TFEU on 16 November 2015, concluding that both the deficit and the debt criterion should be considered as complied with.

Table 2b: Overview of individual Commission opinions on the Draft Budgetary Plans – Member States currently under the corrective arm of the SGP

* The country is currently under the corrective arm, but could move to the preventive arm from 2016 if a timely and sustainable correction is achieved.

** The Commission adopted an Opinion on Spain's DBP on 12 October. Portugal did not submit a DBP for 2016 by 15 October.

(1)

     As set out in Regulation (EU) No 473/2013 on common provisions for monitoring and assessing Draft Budgetary Plans and ensuring the correction of excessive deficits of the Member States in the euro area. It is one of the two Regulations in the so-called Two-Pack which entered into force in May 2013.

(2)

     Council Recommendation of 14 July 2015 on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro (OJ C 272, 18.8.2015, p. 100).

(3)

     When referring to Member States' plans, data for 2014 are based on the figures included in the DBPs and thus may not incorporate the revisions made by Eurostat as part of the autumn 2015 EDP notification.

(4)

     The deterioration in the structural budgetary position in 2016 at the aggregate level is confirmed by using an alternative measurement of discretionary fiscal effort, also known as the DFE, which suggests a slightly negative adjustment according to the DBPs versus ¼% of GDP projected at the time of the SPs (Table A5.7 of Annex 5). The DFE is an alternative indicator of the fiscal stance developed for analytical purposes and is separate from the indicators used to assess compliance under the SGP. It consists of a 'bottom-up' approach on the revenue side and an essentially 'top-down' approach on the expenditure side. For further information, see part III of "Report on Public Finances in EMU 2013", European Economy, 4, 2013.

(5)

   Germany, Estonia, Lithuania, Luxembourg, the Netherlands and Austria. Moreover, two Member States are expected to remain in Excessive Deficit Procedure next year, namely Spain and France.

(6)

     The planned reduction of the aggregate debt ratio is much smaller when excluding Germany from the aggregate (-0.7 versus -2.5 percentage points over 2015-16 taken together).

(7)

     Finland also provided information regarding the projected costs associated with the increased number of refugees in 2015 in a letter putting forward the other relevant factors to be considered in the context of their report under Art. 126 (3) TFEU.

(8)

      http://www.consilium.europa.eu/en/meetings/eurogroup/2014/07/07/ .

(9)

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/144872.pdf .

(10)

      http://www.consilium.europa.eu/en/press/press-releases/2015/09/12-eurogroup-statement-structural-reform/ .

(11)

     These principles were affirmed by the Eurogroup on 5 October 2015: http://www.consilium.europa.eu/en/meetings/eurogroup/2015/10/05/ .

(12)

     Member States' debt requirements under the SGP differ depending on whether they are in the corrective or preventive arm and whether their debt ratio is above or below 60% of GDP.

(13)

     The Commission's S1 sustainability indicator, which shows the total effort required over 2016-21 so as to bring debt to 60% of GDP by 2030, taking into account contingent liabilities related to ageing, points to an adjustment of approximately ¼% of GDP in 2016 and subsequent years.

(14)

     The calculation of an aggregate adjustment requirement for the euro area is complicated by a number of factors, most notably the treatment of over-achievers and assumptions regarding the targeting of a headline or structural adjustment for Member States under the corrective arm. However, in light of a required minimum structural improvement of 0.5% of GDP as a benchmark under the corrective arm and a similar benchmark adjustment under the preventive arm, the slight deterioration projected by the Commission for the euro area would most certainly fall short of an aggregate requirement.

(15)

     Finland formally requested flexibility as part of its updated Stability Programme, submitted on 28 September 2015 together with its DBP.

EUROPEAN COMMISSION

Brussels, 16.11.2015

COM(2015) 800 final

ANNEXES

to the

COMMUNICATION FROM THE COMMISSION

2016 Draft Budgetary Plans : Overall Assessment

ANNEX 1: Country-specific assessment of DBPs

Member States under the preventive arm of the SGP

Plans compliant with the country's obligations

The Commission is of the opinion that the Draft Budgetary Plan of Germany, which is currently under the preventive arm of the Stability and Growth Pact and subject to the debt rule, is compliant with the provisions of the Stability and Growth Pact. Germany's favourable budgetary situation should also provide scope to further increase public investment in infrastructure, education and research as recommended by the Council in the context of the European Semester, as well as to cover additional expenditure that may result from the strong inflow of asylum seekers but could not yet be fully factored into the budget plans. The Commission is also of the opinion that Germany has made limited progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Estonia, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact.

The Commission is of the opinion that the Draft Budgetary Plan of Luxembourg, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact. The Commission is also of the opinion that Luxembourg has made limited progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of the Netherlands, which is currently under the preventive arm and subject to the (transitional) debt rule, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to rigorously implement the 2016 budget. The Commission is also of the opinion that the Netherlands has made some progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and invites the authorities to make further progress.

After taking into account the additional information provided by the Slovak authorities, the Commission is of the opinion that the Draft Budgetary Plan of Slovakia, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to implement the 2016 budget rigorously. The Commission is also of the opinion that Slovakia has made limited progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to accelerate progress.

Plans broadly compliant

The Commission is of the opinion that the Draft Budgetary Plan of Belgium, which is currently under the preventive arm and subject to the (transitional) debt rule, is broadly compliant with the provisions of the Stability and Growth Pact. In particular, according to the Commission 2015 autumn forecast, there is a risk of some deviation from the required adjustment towards the MTO. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Belgium has made some progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance (including the pension system, the fiscal framework and the tax system) and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Latvia, which is currently under the preventive arm, is broadly compliant with the provisions of the Stability and Growth Pact. In particular, according to the Commission 2015 autumn forecast, there is a risk of some deviation from the required adjustment towards the MTO. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP.

The Commission is of the opinion that the Draft Budgetary Plan of Malta, which is currently under the preventive arm and subject to the debt rule, is broadly compliant with the provisions of the Stability and Growth Pact. In particular, according to the Commission 2015 autumn forecast, there is a risk of some deviation from the required adjustment towards the MTO. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Malta has made some progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Finland, which is currently under the preventive arm, is broadly compliant with the provisions of the Stability and Growth Pact. In particular, there is a risk of some deviation from the required adjustment towards the MTO in 2015 and 2016. The Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Finland has made limited progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to accelerate progress.

Plans at risk of non-compliance

The Commission is of the opinion that the Draft Budgetary Plan of Italy, which is currently under the preventive arm and subject to the transitional debt rule, is at risk of non-compliance with the provisions of the Stability and Growth Pact. In particular, according the Commission 2015 autumn forecast there is a risk of significant deviation from the required adjustment path towards the MTO in 2016. The Commission will continue to closely monitor Italy's compliance with the obligations under the SGP, notably in connection with the assessment of the next Stability Programme. In the context of the 'overall assessment' of a possible deviation from the adjustment path towards the MTO, the Commission will take into account the above considerations on Italy's possible eligibility for flexibility under the SGP. Particular attention will be paid to whether a deviation from the adjustment path is being effectively used for the purposes of increasing investments; to the existence of credible plans for the resumption of the adjustment path towards the MTO; and to progress with the structural reform agenda, taking into account the Council recommendations. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Italy has made some progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Lithuania, which is currently under the preventive arm, is at risk of non-compliance with the provisions of the Stability and Growth Pact. According to the Commission 2015 autumn forecast, the required adjustment towards the MTO is not projected to be delivered and a significant deviation from the MTO is to be expected in 2016. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the Stability and Growth Pact. The Commission is also of the opinion that Lithuania has made limited progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Austria, which is currently under the preventive arm and subject to the (transitional) debt rule is at risk of non-compliance with the provisions of the Stability and Growth Pact. In fact, the Commission autumn forecast point to a risk of significant deviation from the MTO in 2016. However, in case the current estimate of the budgetary impact of the exceptional inflow of refugees was excluded from the assessment, the projected deviation would no longer be significant. The Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Austria has made limited progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and thus invites the authorities to accelerate progress.

Member States under the corrective arm of the SGP

Plans broadly compliant

The Commission is of the opinion that the Draft Budgetary Plan of Ireland, which is currently under the corrective arm and could become subject to the preventive arm from 2016 in case a timely and a sustainable correction of the excessive deficit is achieved, is broadly compliant with the provisions of the Stability and Growth Pact. In particular, according to the Commission forecast, there is a risk of some deviation from the expenditure benchmark in 2016. Moreover, the Commission notes that the extra government spending announced for the last three months of 2015 comes at a time when the Irish economy is already growing at exceptionally strong rates. The Commission therefore recalls earlier guidance as provided in the Council Recommendation under the Excessive Deficit Procedure of 7 December 2010 and in the context of the European Semester to use windfalls to accelerate debt reduction and invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Ireland has made some progress with regard to the Country Specific Recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of France, which is currently under the corrective arm, is broadly compliant based on the headline deficit target although the fiscal effort is projected to fall significantly short of the recommended level, according to all metrics. The budgetary strategy is based on the better-than-expected deficit outcome in 2014 and improving cyclical conditions, which puts at risk compliance with the Council recommendation of 10 March 2015. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that France has made some progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Slovenia, which is currently under the corrective arm and could become subject to the preventive arm from 2016 in case a timely and sustainable correction of the excessive deficit is achieved, is broadly compliant with the provisions of the Stability and Growth Pact. In particular, there is a risk of some, but close to significant, deviation from the adjustment path towards the MTO in 2016. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the SGP. The Commission is also of the opinion that Slovenia has made some progress with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and invites the authorities to make further progress.

Plans at risk of non-compliance

The Commission is of the opinion that the Draft Budgetary Plan of Spain, which is currently under the corrective arm, is at risk of non-compliance with the provisions of the Stability and Growth Pact. The improvement in the headline budgetary deficit planned in the Draft Budgetary Plan towards correction of the excessive deficit in 2016, the deadline set in the 2013 EDP recommendation, mainly relies on revived nominal GDP growth, with somewhat optimistic underlying growth assumptions in 2016; expenditure restraint also plays a role but some of the planned savings are not yet underpinned by specified measures. The fiscal effort is projected to fall significantly short of the recommended level, according to all metrics. Based on the ad-hoc Commission forecast, Spain is not expected to ensure compliance with the budgetary headline targets set in the 2013 EDP recommendation. The Commission therefore invites the authorities to strictly execute the 2015 budget and take the necessary measures within the national budgetary process to ensure that the 2016 budget will be compliant with the Stability and Growth Pact. In light of the compliance risks highlighted above and the fact that the Draft Budgetary Plan does not include up-to-date and fully specified measures for regional governments, the national authorities are invited to submit an updated Draft Budgetary Plan including fully specified regional measures, as soon as possible. The Commission is also of the opinion that Spain has made some progress towards compliance with regard to the country-specific recommendations issued by the Council in the context of the 2015 European Semester relating to fiscal governance and invites the authorities to make further progress.

ANNEX 2: The methodology and assumptions underpinning the Commission's autumn 2015 forecast

According to Article 7(4) of Regulation (EU) No 473/2013, "the methodology and assumptions of the most recent economic forecasts of the Commission services for each Member State, including estimates of the impact of aggregated budgetary measures on economic growth, shall be annexed to the overall assessment". The assumptions underlying the Commission's autumn 2015 forecast, which is produced independently by Commission staff, are explained in the forecast document itself 1 .

Budgetary data up to 2014 are based on data notified by Member States to the Commission before 1 October 2015 and validated by Eurostat on 21 October. Eurostat has withdrawn the reservation on the quality of the government deficit data reported by Portugal, which had been expressed in Eurostat's news release in April 2015, due to uncertainties on the statistical impact of the recapitalization of Novo Banco in 2014. Eurostat has made no amendments to the data reported by Member States during the autumn 2015 notification round. Eurostat has expressed a reservation on the quality of the data reported by Austria in relation to an insufficient adherence to the accrual rules of recording of expenditure and revenue as required in ESA 2010.

For the forecast, measures in support of financial stability have been recorded in line with the Eurostat Decision of 15 July 2009 2 . Unless reported otherwise by the Member State concerned, capital injections known in sufficient detail have been included in the forecast as financial transactions, i.e. increasing the debt, but not the deficit. State guarantees on bank liabilities and deposits are not included as government expenditure, unless there is evidence that they have been called on at the time the forecast was finalised. Note, however, that loans granted to banks by the government, or by other entities classified in the government sector, usually add to government debt.

For 2016, budgets adopted or presented to national parliaments and all other measures known in sufficient detail are taken into consideration. In particular, all the information included in the DBPs submitted by mid-October is reflected in this forecast. For 2017, the 'no-policy change' assumption used in the forecasts implies the extrapolation of revenue and expenditure trends and the inclusion of measures that are known in sufficient detail. 

European aggregates for general government debt in the forecast years 2015-17 are published on a non-consolidated basis (i.e. not corrected for intergovernmental loans). To ensure consistency in the time series, historical data are also published on the same basis. For 2014, this implies a debt-to-GDP ratio in the euro area which is 2.4 percentage points higher than the consolidated general government debt ratio published by Eurostat in its news release 186/2015 of 21 October 2015 3 . General government debt projections for individual Member States in 2015-17 include the impact of guarantees to the EFSF 4 , bilateral loans to other Member States, and the participation in the capital of the ESM as planned on the cut-off date of the forecast.

According to the Commission's autumn 2015 forecast, the aggregate budgetary measures in the DBPs for 2016 increase the aggregate deficit by around 0.1% of GDP. Expenditure savings are estimated at 0.2% of GDP, while revenue measures, in the aggregate, have a deficit-increasing effect of around 0.3% of GDP. Overall, the mechanical impact on growth in the short-term would be only marginal (less than 0.1 percentage point).

It is important to be prudent in interpreting this estimate:

Not acting on fiscal imbalances could heighten financial-asset fragility and lead to higher spreads and lending rates, with a negative impact on growth.

The Regulation aims at evaluating the effect of the measures taken in the DBPs. So measures taken and having entered into force before the DBP are not included in the assessment (even if they can affect the forecast).

Measures taken with effect in 2016 can also compensate for existing measures having a one-off impact in 2015 and for the trend increase in expenditure. At the EA-16 aggregate level, the Commission evaluates one-offs in 2015 at 0.0% of GDP and the trend increase in expenditures (as measured by the change in the cyclically-adjusted expenditure ratio) in absence of policy measures at 0% of GDP.

ANNEX 3: Sensitivity analysis

According to Article 7 of Regulation (EU) No 473/2013, "the overall assessment shall include sensitivity analyses that provide an indication of the risks to public finance sustainability in the event of adverse economic, financial or budgetary developments". This Annex therefore presents a sensitivity analysis of public debt developments to possible macroeconomic shocks (to growth, interest rates and the government primary balance), relying on results from stochastic debt projections 5 . The analysis allows gauging the possible impact on public debt dynamics of downside and upside risks to nominal GDP growth, the effects of positive/negative developments on financial markets, translating into lower/higher borrowing costs for governments, and fiscal shocks affecting the government budgetary position. The baseline scenarios to which the shocks are applied are the macro-fiscal projections contained in the Commission's autumn forecast and Member States' DBPs.

With stochastic projections the uncertainty in future macroeconomic conditions is featured in the analysis of public debt dynamics around a 'central' debt projection scenario, which corresponds respectively to the Commission's autumn 2015 forecast scenario and the DBPs' forecast scenario in the two panels of the graph below, reporting results for the EA-16 (in both cases the usual no-fiscal policy change assumption is made beyond the forecast horizon) 6 . Shocks are applied to the macroeconomic conditions (short-term and long-term interest rates on government bonds; growth rate; government primary balance) assumed in the central scenario to obtain the 'cone' (distribution) of possible debt paths presented in the graph below. The cone corresponds to a wide set of possible underlying macroeconomic conditions, with as many as 2000 shocks simulated on growth, interest rates and the primary balance. The size and correlation of the shocks reflect the variables' historical behaviour 7 . This implies that the methodology does not capture real-time uncertainty, which at the present juncture may be higher especially for the output gap. The resulting fan charts in the graph below therefore provide probabilistic information on debt dynamics for the EA-16, taking into account the possible occurrence of shocks to growth, interest rates and the primary balance of a magnitude and correlation mirroring those observed in the past.

The fan charts report the projected debt path under the central scenario (around which macroeconomic shocks are applied) as a dashed line, and the debt projection trajectory that divides into two halves the whole set of possible trajectories obtained by applying the shocks (the median) as a solid black line at the centre of the cone. The cone itself covers 80% of all possible debt paths obtained by simulating the 2000 shocks to growth, interest rates and the primary balance (as the lower and upper lines delimiting the cone represent respectively the 10th and the 90th percentiles of the distribution), thus excluding from the shaded area simulated debt paths (20% of the whole) that result from more extreme (less likely) shocks, or 'tail events'. The differently shaded areas within the cone represent different portions of the overall distribution of possible debt paths. The dark blue area (delimited by the 40th and 60th percentiles) includes the 20% of all possible debt paths that are closer to the central scenario.

Graph A3.1: Fan charts from stochastic public debt projections around the Commission's forecast scenario and the Draft Budgetary Plans' (DBP) forecast scenario

Source: Commission's autumn 2015 forecast, 2016 Draft Budgetary Plans and Commission services calculations.

For both the Commission and the DBP forecast scenario, the fan charts highlight a probability of around 50% of a worse than forecasted debt-to-GDP ratio for the EA-16 in 2016, due to the occurrence of adverse macroeconomic shocks 8 . Accounting for both downside and upside risks to the government primary balance, growth and financial market conditions in the two scenarios leads to a EA-16 debt in 2016 lying between 87% and 94-95% of GDP with an 80% probability (as the cone represents 80% of all possible simulated debt paths). Lower and upper bounds of the debt ratio interval in 2016 would be slightly higher for the Commission scenario compared to the DBP scenario, due to a small difference between the respective central forecasts to which shocks apply (a debt ratio above 91% in the Commission scenario versus 90.4% in the DBP scenario).

Beyond 2016, the horizon of the current DBPs, simulation results show that the difference in projected debt ratios under shocks between the Commission and the DBP scenarios remains limited. At the end of the projection horizon considered in the fan charts (2020), there would be a 50% probability of a debt ratio higher than 84% and 85% of GDP in the DBP and Commission scenarios respectively. This small difference is mainly due to the structural primary balance kept constant at a slightly higher last forecasted surplus in the DBP scenario compared to the Commission scenario.

Note that since the size and correlation of the shocks reflect the variables' historical behaviour, the methodology does not capture real-time uncertainty, such as may exist in particular for assessing the output gap. Bearing in mind the past experience of significant revisions of output gap estimates, often in the direction of lower potential output than thought in real time, this suggests an additional source of risks on future debt paths that is not reflected in the previous analysis.

ANNEX 4: The current low interest rate environment

Recent developments

Euro area sovereign bond yields have fallen sharply since end-2013 and reached historical lows in the first half of 2015, before increasing somewhat during the summer months. However, yields still remain well below their long-term averages, with 10-year rates currently ranging from 0.51% to 1.64% for the four largest Member States in the euro area 9 .

As a result of lower interest rates, total interest payments by the general government have also decreased over the last few years. For the EA-16 as a whole, interest expenditure fell from 2.9% of GDP in 2012 to 2.3% in 2015, and is expected to remain unchanged this year, according to this year's vintage of DBPs. The largest declines in interest expenditure over 2012-16 can be seen in Ireland (-1.1% of GDP), Italy (-1.0%), Belgium (-0.9%) and Germany (-0.8%) whereas only Slovenia (0.9% of GDP) has seen its interest expenditure increase over the same period, against the background of a sharp increase in general government debt. The Commission's autumn 2015 forecast is broadly in line with Member States' expectations, with the largest differentials for 2016 amounting to 0.1% of GDP.

The steep decline in interest rates and the subsequent decrease in interest payments were to a large extent not anticipated by Member States. Examining the successive vintages of Stability Programmes and the current vintage of DBPs sheds more light on the (unexpected) savings from the current low interest rate environment. At the aggregate EA-16 level, the 2013 vintage of Stability Programmes had projected interest expenditure to increase by 0.1% of GDP over 2012-16. By contrast, the 2014 and 2015 vintages, in gradually integrating the fall in interest rates, had projected interest expenditure to decline over that period, by 0.2% and 0.7% of GDP, respectively. The latter projection is also confirmed by the DBPs. While factors such as debt dynamics, the maturity profile of debt and statistical reclassifications (e.g. the switchover to the ESA 2010 standard of national accounts) may have played a role, it is likely that the successive revisions in interest expenditure projections primarily reflect the unexpected decline in interest rates.

Consequences for public finances

The gradual fall in interest expenditure has gone along with a much smaller improvement in the medium-term budgetary position as measured by the structural primary balance. The 2013 SPs had projected the EA-16 structural primary balance to improve by 1¾% of GDP over 2012-16 (Graph A4.1). The improvement as derived from the DBPs is actually expected to be ¼% of GDP. This suggests that, in the aggregate, the planned reduction of the structural primary deficit has to a large extent not materialised. In turn, this has outweighed the lower-than-expected interest paid by Member States over the same period.

Graph A4.1: Changes in structural (primary) balance and in interest expenditure over 2012-16, government plans

Note: The graph shows the cumulative changes in the structural primary balance, in interest expenditure and in the structural balance over 2012-16 in the EA-16, as derived from the 2013, 2014 and 2015 vintages of Stability Programmes (SP13, SP14 and SP15, respectively) and this year's vintage of Draft Budgetary Plans (DBP16).

Source: Member States' programmes/plans and Commission services calculations.

The smaller improvement in the aggregate (primary) structural balance has taken place in the broader context of a protracted period of low inflation and low output growth, which has in turn impacted upon public finances. The fall in interest rates is related to very low nominal GDP growth in the last few years. The latter has affected headline balances negatively through various channels, leading to a fall in revenues much larger than the fall (if any) in primary expenditures. This might not have been fully captured by the standard adjustment of headline balances for the effect of the cycle due, for example, to an abnormal response of revenues to economic growth or to some stickiness in the response of expenditures to price developments. In addition, low nominal GDP growth has had a direct effect on the stock of public debt as a share of GDP. Overall, worse-than-expected primary balances together with a likely higher-than-expected snow-ball effect, which measures the combined impact of interest expenditure and economic growth on the change in the debt ratio, show a much less positive picture than developments in interest expenditure taken in isolation.

Prospects and vulnerability

The cost of servicing debt within the euro area will likely remain historically low in the coming years. Indeed, large amounts of debt have been rolled over since the fall in interest rates and sovereign bond yields are expected to remain relatively low for some time, against the background of a subdued growth outlook, strong private demand for safe assets and the ECB's expanded asset purchase programme (intended to be carried out at last until September 2016).

Future developments in interest rate will affect interest payments differently depending on the maturity profile of debt. The share of outstanding debt to be renewed over the coming years could give an indication of the extent to which individual Member States can further benefit from the low interest rates if the situation remained unchanged and, conversely, shed light on how much Member States could be affected in case of a significant increase in interest rates. In this regard, the situation varies quite substantially across countries, with the proportion of outstanding debt to be renewed by 2018 ranging from 0% in the case of Luxembourg to 44% in the case of Spain (Graph A4.2)  10 . In addition, Member States will have to fund future deficits as they arise.

Graph A4.2: Percentage of debt maturing by 2018

Note: Maturing sovereign debt data as of 18 September 2015. Coverage: Central government.

Source: Bloomberg and Commission services calculations.

Member States' medium-term plans can be considered as built on relatively prudent assumptions. Indeed, the 2015 vintage of Stability Programmes appeared consistent with a gradual increase in long-term sovereign yields, which can be considered a reasonable assumption, to various degrees across Member States 11 . In particular, a number of high-debt countries appeared vulnerable to interest rate risks. By contrast, in the unlikely scenario that interest rates converged to the 2000-10 levels already by the end of the programmes' horizon, i.e. by 2018, interest expenditure would be some 0.5% of GDP higher for the euro area as a whole in 2018 compared to the programmes. A fortiori and in a stress scenario, should interest rates come back to the levels recorded at the peak of the sovereign debt crisis, the increase in interest expenditure would be even higher.

ANNEX 5: Graphs and tables

Table A5.1: Headline deficit targets (% of GDP) for the EA-16 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission's autumn 2015 forecast (COM)

Table A5.2a: Changes in structural balance (% of GDP) for the EA-16 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission's autumn 2015 forecast (COM) 12

Table A5.2b: Changes in structural primary balance (% of GDP) for the EA-16 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission's autumn 2015 forecast (COM) 13

Table A5.3: Debt-to-GDP ratio (% of GDP) for the EA-16 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission's autumn 2015 forecast (COM)

Table A5.4: Real GDP growth (%) for the EA-16 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission's autumn 2015 forecast (COM)

Table A5.5: Composition of fiscal consolidation in 2015 and 2016 for the EA-16 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission's autumn 2015 forecast (COM) 14

Table A5.6: Short-term elasticities underlying revenue projections for 2016 in EA-16: Draft Budgetary Plans (DBP) versus Commission's autumn 2015 forecast (COM) and OECD

Note: the comparison between the elasticities derived from the DBPs and the Commission's forecast, on the one hand, and the OECD's elasticities, on the other, should be made with care. While the first two are net elasticities to GDP growth, the latter are, strictly speaking, computed with respect to the output gap. Differences are in general minor.

Table A5.7: Discretionary fiscal efforts: Draft Budgetary Plans (DBP) versus Commission's autumn 2015 forecast (COM) and Stability Programmes (SP) 15

Graph A5.1a: Projected changes in expenditure ratios for 2016 in EA-16: Draft Budgetary Plans (DBP) versus Commission's autumn 2015 forecast (COM)

The graph shows the changes in expenditure ratios (lhs) between 2015 and 2016. The expenditure level shown on the RHS represents the Commission forecast's projection of the expenditure ratio in 2015. This differs only slightly from the DBP estimates from which the change in expenditure based on DBP is calculated.

Graph A5.1b: Projected changes in revenue ratios for 2016 in EA-16: Draft Budgetary Plans (DBP) versus Commission's autumn 2015 forecast (COM)

The graph shows the changes in revenue ratios (lhs) between 2015 and 2016. The revenue level shown on the RHS represents the Commission forecast's projection of the revenue ratio in 2015 This differs only slightly from the DBP estimates from which the change in revenue based on DBP is calculated.

Graph A5.2: Projected changes in main types of expenditure (% of GDP) for 2016 in EA-16: Draft Budgetary Plans (DBP) versus Commission's autumn 2015 forecast (COM)

The graph shows the contributions from the main components of expenditure to the projected changes in expenditure-to-GDP ratios.

Graph A5.3: Projected changes in main types of tax revenue (% of GDP) for 2016 in EA-16: Draft Budgetary Plans (DBP) versus Commission's autumn 2015 forecast (COM)

The graph shows the contributions from the main components of revenue to the projected changes in revenue-to-GDP ratios.

Graph A5.4: Comparison of headline government balance (% of GDP) as projected for 2016 by the Commission's autumn 2015 forecast (COM) and by the Draft Budgetary Plans (DBP)

The graph plots the 2016 nominal budget balances from the Commission's forecast (horizontal axis) against those planned in the DBPs (vertical axis). Member States above (below) the bi-sector line are those where the Commission forecasts a higher (lower) nominal balance than the DBPs.

Graph A5.5: Decomposition of the difference in debt targets (% of GDP) for 2016 between the Commission's autumn 2015 forecast and the Draft Budgetary Plans

The graph breaks the projected differences in debt-to-GDP ratios down into differences in base effects, primary balances, stock-flow adjustments and snowball effects. The snowball effect represents the difference between projected growth rates and interest rates.

(1)

     Methodological assumptions underlying the Commission's autumn 2015 forecast, available at: http://ec.europa.eu/economy_finance/publications/european_economy/forecasts/index_en.htm ).

(2)

     Available at: http://ec.europa.eu/eurostat/documents/1015035/2041337/FT-Eurostat-Decision-9-July-2009-3--final-.pdf .

(3)

     Available at: http://ec.europa.eu/eurostat/documents/2995521/7036737/2-21102015-AP-EN.pdf .

(4)

     In line with the Eurostat decision of 27 January 2011 on the statistical recording of operations undertaken by the EFSF, available at: http://ec.europa.eu/eurostat/documents/2995521/5034386/2-27012011-AP-EN.PDF .

(5)

     The methodology for stochastic public debt projections used here is presented in the European Commission's Fiscal Sustainability Report 2012, Section 3.3.3, and in Berti K. (2013), "Stochastic public debt projections using the historical variance-covariance matrix approach for EU countries", European Economy, Economic Paper 480.

(6)

     This entails that the EA-16 structural primary balance is assumed to remain constant at the last forecasted value – a slightly above 1% surplus in 2016 in the DBP scenario, against a 1% surplus in 2017 in the Commission scenario – over the rest of the projection horizon.

(7)

     The assumption is made that shocks follow a joint normal distribution.

(8)

     In 2016, the dashed line representing forecasts for the central scenario in the two fan charts corresponds, in both the DBP and Commission scenario, with the line indicating the 50th distribution percentile (meaning that 50% of all possible values for the debt-to-GDP ratio in 2016 would lie above the forecasted value).

(9)

     10-year bond yields as of 23 October 2015, 18:25. Source: Bloomberg.

(10)

     Maturing sovereign debt data as of 18 September 2015. Coverage: Central government. Source: Bloomberg. Note that, for some countries such as Spain, these data include debt issued by other bodies and guaranteed by the central government, which may affect cross-country comparisons.

(11)

     For further information, see "The 2015 Stability and Convergence Programmes: an Overview", European Economy, Institutional Paper 2, July 2015.

(12)

   Cyclically-adjusted balances net of one-off and temporary measures from SPs and DBPs have been recalculated by the Commission on the basis of the information provided in the programmes/plans using the commonly agreed methodology.

(13)

   Cyclically-adjusted primary balances net of one-off and temporary measures from SPs and DBPs have been recalculated by the Commission on the basis of the information provided in the programmes/plans using the commonly agreed methodology.

(14)

   Cyclically-adjusted revenue and expenditure ratios as well as cyclically-adjusted balances net of one-off and temporary measures from SPs and DBPs have been recalculated by the Commission on the basis of the information provided in the programmes/plans using the commonly agreed methodology.

(15)

   The DFE is an alternative indicator of the fiscal stance developed for analytical purposes and is separate from the indicators used to assess compliance under the SGP. It consists of a 'bottom-up' approach on the revenue side and an essentially 'top-down' approach on the expenditure side. For further information, see part III of "Report on Public Finances in EMU 2013", European Economy, 4, 2013.