20.3.2008   

EN

Official Journal of the European Union

C 74/5

(1)

On 4 March 2008, the Council examined the updated stability programme of Slovenia, which covers the period 2007 to 2010.

(2)

Slovenia's generally strong GDP growth throughout the last decade peaked during the first year of membership in the euro area. However, a marked pick-up in inflation, mainly due to commodity price developments in conjunction with a lack of competition in some sectors, was also registered in 2007, with spill-overs to wages being a risk for 2008.

Against the background of the strong economic growth during the run-up to EU and euro area entry, good progress in consolidating public finances was made. For the future, enhancing labour productivity, keeping wages in line with productivity and continued fiscal efforts will be needed to foster macroeconomic stability, including lower inflation. Addressing the recent acceleration of inflation in Slovenia would help preserve the competitiveness of this export-oriented economy. Moreover, the long-term sustainability of public finances remains a challenge in view of the significant expected effects of ageing on the budget in the absence of further pension reform. To support the economy's ongoing catching-up process, it will be important to continue with structural reforms, especially regarding labour and product markets. In the same context, further redirecting public expenditure towards growth-enhancing categories, while tackling budget rigidity and improving the efficiency of spending, will also be beneficial.

(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will slow from 5,8 % in 2007 to 4,6 % in 2008 and 4,1 % in 2009 before picking up to reach 4,5 % by the end of the programme period. Assessed against currently available information (2), this scenario appears to be based on plausible growth assumptions, although risks for 2008 stemming from the external environment have increased since the completion of the stability programme. After the unexpected increase in inflation in 2007, the programme's projections for inflation are significantly higher than in last year's scenario. Nevertheless, they still appear to be on the low side for 2008 given recent developments in food and energy prices. Second-round effects from the strong pick-up in inflation in 2007 as well as public sector wage increases spilling over to the private sector could lead to a larger inflation differential with the rest of the euro area. If persistent, this would entail less favourable competitiveness developments than implied by the programme.

(4)

For 2007, the general government deficit is estimated at 0,7 % of GDP in the Commission services' autumn 2007 forecast, against a target of 1,5 % of GDP set in the 2006 programme. The difference is mainly explained by a positive base effect from the 2006 outcome and by higher-than-projected nominal GDP growth in 2007. At the same time, also according to the 2007 update of the programme, more positive-than-planned revenue developments were partly offset by higher expenditure growth than planned in the 2006 programme. However, more recent information on a cash basis points to a better 2007 outturn, possibly a slight surplus. Overall, budgetary implementation in 2007 was in line with the Council opinion of 27 February 2007 on the 2006 stability programme (3), which invited Slovenia to speed up the achievement of the MTO taking advantage of the good economic conditions, including the better-than-expected budgetary outcome in 2006. The Council notes that the budgetary implementation in 2007 is also consistent with the April 2007 Eurogroup orientations for budgetary policies.

(5)

The main goal of the medium-term budgetary strategy in the update is to respect the medium-term objective (MTO), which is a structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 1 % of GDP, by a growing margin over the programme period, although some weakening is planned for 2008. This change vis-à-vis the previous programme's goal to reach the MTO by 2009 follows from the above-mentioned better-than-expected 2006 outturn (mainly reflecting higher nominal GDP growth), which implied that the MTO had already been broadly met in 2006. Compared to the 2006 programme, the headline deficit planned in the 2007 update is about 0,5 percentage point of GDP lower throughout the programme period, against the background of a better starting position.

The deficit is planned to widen to 0,9 % of GDP in 2008 and then to gradually close, with the largest adjustment planned in the final year. Following a similar path, the primary surplus is projected to reach just above 1 % of GDP by 2010. The planned consolidation results from expenditure restraint more than offsetting, except in 2008, the gradual decline in the revenue ratio. The projected decline of primary expenditure over the programme period amounts to 2,25 percentage points of GDP. While relatively broad-based, it reflects especially contained developments of social spending, representing 1/3 of the total consolidation. Largely influenced by the ongoing tax reform, the gradual decline in the revenue ratio, by 1,75 percentage points, is mainly driven by indirect taxes, while a slight increase in the direct tax burden is projected.

(6)

The risks to the budgetary projections in the programme appear broadly balanced in 2008, whereas budgetary outcomes could be somewhat worse than targeted in the outer years. In 2008, the possibility of a positive base effect due to a potentially better-than-expected 2007 budgetary outturn counterbalances the risks associated with the current deterioration of the external environment. Thereafter, there are certain risks to the implementation of the budgetary strategy due, in particular, to the sizeable magnitude of the back-loaded planned reduction in expenditure, with not all underlying measures spelt out in sufficient detail. To some degree, these risks are mitigated by Slovenia's good track record in the recent past, which suggests that outcomes might be better than expected.

(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO throughout the programme period, but with a possibly smaller margin than planned for the outer years. The slight deterioration of the structural balance envisaged for 2008 may turn out to be pro-cyclical, although downside risks stemming from the external environment have increased. This would not be in line with the Stability and Growth Pact. Furthermore, a tighter fiscal stance than presently envisaged for 2008 appears to be warranted given the current strong inflationary pressures. The Council notes that this would also be consistent with the April 2007 Eurogroup orientations for budgetary policies, which called for carefully designing fiscal policy plans for 2008 to avoid feeding macroeconomic imbalances. After 2008, the fiscal policy stance implied by the programme is in line with the Pact.

(8)

Slovenia appears to be at high risk with regard to the sustainability of public finances. The budgetary position in 2007 as estimated in the programme remained roughly unchanged compared with 2006 and is just sufficient to stabilise the debt ratio over the long-term before the budgetary impact of an ageing population is considered. However, the latter is well above the EU average, mainly reflecting a stronger increase in pension expenditure. High primary surpluses over the medium term and, in particular, further measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances.

(9)

The stability programme seems to be consistent with the October 2007 implementation report of the national reform programme. In particular, both documents give account of the main reform measures under implementation, such as the comprehensive tax reform, infrastructure investments as well as changes to the system of social transfers. The programme does not include a detailed qualitative assessment of the overall impact of the national reform programme within the medium-term fiscal strategy. However, while this is not done in a systematic way, information on the direct budgetary impact associated with major reforms envisaged is given and has been taken into account in budgetary projections.

(10)

The budgetary strategy in the programme is partly consistent with the country-specific broad economic policy guidelines included in the integrated guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. In particular, it does not include significant further measures to strengthen the reform of the pension system with a view to ensuring long-term sustainability.

(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (4).

(i)

building on a likely better-than-expected outturn in 2007, aim for stronger budgetary positions in 2008 and beyond than planned in the programme, thereby avoiding pro-cyclical policies;

(ii)

stand ready to adopt further measures to tame inflationary pressures, complementing the recommended fiscal stance with appropriate wage, labour market and competition policies;

(iii)

in view of the projected increase in age-related expenditure, improve the long-term sustainability of public finances, in particular by further reforming the pension system.