5.4.2006   

EN

Official Journal of the European Union

C 82/1

(1)

On 14 March 2006, the Council examined the updated stability programme of Greece, which covers the period 2005 to 2008.

(2)

Over the last decade, driven by robust productivity growth, real GDP growth in Greece averaged 3,5 % and was among the highest in the EU. Sustained robust growth has led to strong real convergence, accompanied by a dramatic fall in HICP inflation, which nevertheless remains well above the EU average, and by rising external imbalances. The general government deficit, in spite of high growth, remained on average well above 5 % of GDP and attained 6,6 % of GDP in 2004. Together with large below-the-line operations, it contributed to the accumulation of public debt which remained close to or above 110 % of GDP during the last ten years.

(3)

On 5 July 2004, the Council decided that Greece was in excessive deficit. On 17 February 2005, the Council decided to give notice to Greece, in accordance with Article 104(9) to correct the excessive deficit by 2006. The Commission services' autumn 2004 forecast underlying this decision expected the deficit to reach 5,5 % of GDP in 2004. In its opinion of 6 April 2005 on the March 2005 revised updated stability programme, covering the period 2004-2007, the Council invited Greece to implement permanent measures to correct the excessive deficit by 2006 at the latest, reduce the cyclically-adjusted deficit by at least 0,5 % of GDP from 2007 onward, ensure a faster debt reduction path, implement the enacted pension reforms to ensure the sustainability of public finances, and further improve the collection and processing of general government data.

(4)

The update estimates the 2005 deficit at 4,3 % of GDP (2), which compares with an estimate of 3,7 % of GDP in the Commission services' autumn forecast and in the previous update. The difference with the latter mainly reflects carry-over effects of the September 2005 revisions of 2002-2004 deficit outcomes, notably leading to a revised 2004 deficit of 6,6 % of GDP, while the Commission services' autumn 2005 forecasts included one-off revenues from an announced securitisation operation, which has not taken place.

(5)

The update was submitted on 21 December 2005, three weeks later than the deadline specified in the new Code of Conduct on the content and format of stability and convergence programmes. The new programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new Code of Conduct (3).

(6)

The macroeconomic scenario underlying the programme expects real GDP growth will pick up from 3,6 % in 2005 to 3,9 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on favourable growth assumptions, with the projected evolution of growth in the medium term appears to be on the high side, implying a relatively high estimate of the potential output growth. The programme's projections for inflation appear realistic.

(7)

The update's budgetary strategy aims at reducing the deficit below the 3 % of GDP threshold by 2006, in compliance with the Council notice under Article 104(9), and at pursuing fiscal consolidation towards a balanced budget. The fiscal correction is frontloaded in 2006. The deficit declines from 4,3 % of GDP in 2005 to 2,6 % in 2006 and, then, to 1,7 % in 2008. The time profile for the primary surplus is similar, improving from 0,9 % of GDP to 2,8 %. The projected adjustment is achieved through both higher tax revenues and cuts in expenditures (interest payments and public consumption). One-off revenues worth 0,6 % of GDP are envisaged for 2006. The favourable macroeconomic scenario partly explains the frontloading of the adjustment in the current update when compared with the previous one.

(8)

According to the calculations of the Commission services on the basis of data in the programme and the commonly agreed methodology, the structural balance (the general government budget in cyclically-adjusted terms net of one off and other temporary measures) is projected to improve from -4,8 % of GDP in 2005 to -2,4 % of GDP in 2008, thus providing for a reduction of around 0,6 % of GDP per year. The update clearly sets a medium-term objective (MTO) for the budgetary position as meant in the Stability and Growth Pact of a balanced budget in structural terms, which the update does not envisage to achieve by 2008. As the MTO identified in the programme is more demanding than the minimum benchmark (estimated at -1,25 %), its achievement should fulfil the aim of providing a safety margin, against the occurrence of an excessive deficit. The MTO set in the programme is at an appropriate level under the current assessment as it lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and therefore, adequately reflects the debt ratio and average potential output growth in the long term.

(9)

The budgetary outcomes could be worse than projected in the programme. There are risks associated with the favourable macroeconomic scenario and information on measures envisaged at the end of the programme is lacking. Moreover, there are still some pending statistical issues with Eurostat (the estimation of surpluses of social security funds and of local governments) which might lead to an upward revision of deficit figures until 2005, with possible carry-over effects in 2006 and beyond, while the one-offs planned for 2006 are still pending of Eurostat's classification as deficit-reducing.

(10)

Based on current information, and conditional on the risks above, Greece is broadly on track to correct its excessive deficit by the 2006 deadline set by the Council. The planned 2005 deficit seems consistent with a rigorous implementation of the 2005 budget, while the 2006 budget targets a deficit of 2,6 % of GDP. Since this includes one-off revenues worth 0,6 % of GDP, the excessive deficit would not be corrected in 2006 on a permanent basis. However, the structural correction in 2006 is above the minimum 0,6 % of GDP required by the Council. By contrast, the correction is less than 0,5 % of GDP in 2008, when Greece should still enjoy an economic situation of good times. Moreover, according to the calculations of the Commission services on the basis of data in the programme and the commonly agreed methodology the cyclically-adjusted budget balance is not expected to respect the minimum benchmark within the programme period.

(11)

The debt ratio is estimated to have reached around 108 % of GDP in 2005, far above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by more than eleven percentage points over the programme period, mainly driven by the projected improvement in the primary surpluses, and lower debt-increasing financial operations. The evolution of the debt ratio is likely to be less favourable than projected in the programme given (1) the risks to the budgetary targets mentioned above; (2) uncertainty about the stock-flow adjustment, which has tended to be large and predominantly debt-increasing in the past. In view of this risk assessment, the debt ratio seems to be sufficiently diminishing towards the reference value.

(12)

With regard to the sustainability of public finances (4), Greece appears to be at high risk on grounds of the projected budgetary costs of ageing populations. The debt ratio is currently the highest in the EU, and is projected to remain at very high levels throughout the projection period up to 2050. It is therefore necessary to implement rigorously the planned consolidation of public finances over the medium-term and to further strengthen the budgetary position in order to reduce risks to public finance sustainability. At the same time, the projected increase of government expenditure, notably on pensions, over the projection period is expected to put a high burden on public finances. To this end, resolutely implementing measures enacted and designing and carrying out additional structural reforms, notably on pensions, are necessary so as to reduce the risks to public finance sustainability.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, the programme is consistent with the guideline (i) to secure economic stability; (ii) to safeguard economic and fiscal sustainability, and (iii) to promote a growth-and employment-oriented and efficient allocation of resources However, actions to tackle important challenges on the pension system are postponed to a future social agreement.

(14)

The National Reform Programme of Greece, submitted on 15 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: (i) long-term sustainability of public finances;(ii) employment and education;(iii) business environment and competition; and (iv) R&D and innovation. Its budgetary implications are fully reflected in the update. The measures in the area of public finances envisaged in the stability programme are broadly in line with the actions foreseen in the National Reform Programme. In particular, the programme outlines, among others, measures to reduce the corporate tax rate to 25 % by 2007, to fight against tax evasion, reform the property taxation, and to rationalise healthcare spending.

(i)

implement the necessary permanent measures leading to the correction of the excessive deficit by 2006 at the latest;

(ii)

further pursue the reduction of the deficit in structural terms towards the MTO set in the programme, taking advantage of good economic times to reduce primary spending;

(iii)

enhance the efforts to identify and control factors other than net borrowing that contribute to the change in the debt levels, in order to ensure that the debt ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace;

(iv)

control public pension expenditure, resolutely implement the approved pension reforms and carry out additional structural reform to ensure the long term sustainability of the public finances;

(v)

further improve the collection and processing of the general government data, notably by enhancing the mechanisms that ensure a prompt and correct supply of budgetary data, in particular on social security.

5.4.2006   

EN

Official Journal of the European Union

C 82/6

(1)

On 14 March 2006 the Council examined the updated stability programme of Germany.

(2)

GDP growth in the last ten years was 1,4 % p.a., trailing the euro-area average by more than half a percentage point. The growth potential has been steadily declining throughout this period. Activity, while being driven by buoyant exports, was held back by sluggish domestic demand. From an extended stagnation in the early part of the decade, demand and real GDP peaked shortly in 2000 and also in 2004, but weakened again thereafter. With employment creation also subdued, the unemployment rate rose to 9,5 % of the labour force. The general government deficit breached the 3 % of GDP Treaty reference value for the fourth consecutive year in 2005. Public debt, having been close to 40 % of GDP in 1991, has been exceeding the 60 % of GDP Treaty reference value since 2002.

(3)

On 21 January 2003, the Council decided that an excessive deficit existed in Germany, and recommended, based on Article 104(7), that the excessive deficit be corrected by 2004. In its Communication to the Council of December 2004 on ‘the situation of Germany and France in relation to their obligations under the excessive deficit procedure following the judgement of the Court of Justice’, the Commission concluded that 2005 should be considered as the relevant deadline for the correction. In January 2005, the Council concurred with this view. On 14 March 2006, the Council decided to give notice to Germany in accordance with Article 104(9) to take measures to remedy the situation of excessive deficit by 2007. In its opinion of 17 February 2005 on the December 2004 update of the stability programme, covering the period 2004-2008, the Council invited Germany: to do the necessary to ensure the correction of the excessive deficit in 2005; to implement budgetary adjustments in the years beyond 2005 and make the necessary effort in structural terms to achieve a budgetary position of close to balance by the end of the period covered by the programme; and to continue with structural reforms in order to further improve the long-term sustainability of public finances in particular as regards the health care system.

(4)

According to data provided by Eurostat, the general government deficit in Germany amounted to 3,3 % of GDP in 2005. These data, pending a further assessment of their quality, are based upon a provisional notification from Germany pursuant to Council Regulation (EC) No 3605/93, which Germany submitted to the Commission on 24 February 2006. The previous update of the stability programme had set a target of 2,9 % of GDP for 2005.

(5)

The German stability programme update was submitted on 22 February 2006. The programme covers the period from 2005 to 2009. The programme broadly follows the model structure for stability and convergence programmes specified in the new code of conduct (2).

(6)

The macroeconomic scenario underlying the programme envisages that real GDP growth will pick up from 0,9 % in 2005 to 1,4 % in 2006, with domestic demand gaining momentum. After a slowdown to 1 % in 2007, growth is set to resume thereafter, yielding an average growth rate of 1,5 % for the period from 2005 to 2009. This growth profile is influenced by the policy settings agreed by the new coalition government. The reference scenario, considered against currently available information, appears plausible, but may be slightly favourable in the outer years of the programme. The programme's projections for inflation appear realistic.

(7)

The main goal of the medium-term budgetary strategy indicated in the programme is to ensure the long-term sustainability of public finances. To achieve this, the programme proposes to continue budgetary consolidation, while improving the conditions for growth and employment. The programme envisages correcting the excessive deficit by 2007. Specifically, for 2006 and 2007 the projections in the update are for nominal deficits of 3,3 % and 2,5 % of GDP, respectively. Thereafter, the deficit is projected to decline by 0,5percentage point of GDP per year to reach a level of 1,5 % of GDP in 2009. The budgetary adjustment is both revenue- and expenditure-based. The programme identifies the restraint in social expenditure as the crucial element of the consolidation strategy. On the revenue side, an increase in the tax share is broadly offset by a decrease in the share of social contributions. The share of public investment in GDP is projected to remain constant. Compared with the previous update, the adjustment path has remained broadly the same. However, the deficit ratio is planned to be higher for each year by a rounded 0,5 percentage point, and for 2006 by even more, than foreseen in the previous update.

(8)

The correction of the excessive deficit by 2007 entails, according to the programme, an improvement in the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) by more than one percentage point cumulatively between 2005 and 2007, concentrated in 2007. Over the programme period, the structural balance calculated according to the commonly agreed methodology is planned to improve on average by about 0,5 % of GDP per year, although slightly less in 2008 and 2009. The programme sets the medium-term objective (MTO) for the budgetary position as balance in structural terms, which, however, it does not aim to achieve within the programme period. As it is more demanding than the minimum benchmark (estimated at a deficit of around 1,75 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme's MTO lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and is slightly more demanding than implied by the debt ratio and average potential output growth in the long term.

(9)

Concerning 2006, the risks to the budgetary outcome are considered to be balanced. However, as from 2007, the budgetary outcome could be worse than projected in the programme. The restraint in social spending, which is not laid out in full detail in the programme but is supposed to provide a key contribution to the budgetary adjustment, hinges on the rigorous implementation of the plans. Social expenditure has been one of the main drivers behind the overshooting of the budgetary targets compared with previous programmes. The budgetary targets would be jeopardised if the planned exoneration on social contributions was fully carried out without achieving the corresponding expenditure targets. Moreover, shortfalls in growth might imply shortfalls in revenues, which might prove difficult to compensate by further reduction in expenditure in order to maintain the planned path of the deficit ratio. The programme further announces reforms of the corporate tax system by 2008 and to health and long-term care insurance which, if not fully financed as envisaged in the programme, would entail a negative impact on the deficit in the short term.

(10)

In view of this risk assessment, the budgetary stance in the programme seems consistent with a correction of the excessive deficit by 2007. However, it does not seem to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations until the penultimate year of the programme period. In the years following the correction of the excessive deficit, the pace of the adjustment towards the programme's MTO implied by the programme is broadly in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times.

(11)

The debt ratio is estimated to have reached 67,5 % of GDP in 2005, above the 60 % of GDP reference value of the Treaty. The programme projects the debt ratio to increase to a rounded 69 % of GDP in 2006 and to decline thereafter to reach 67 % at the end of the programme period. The evolution of the debt ratio might be less favourable than projected in the programme, given the risks to the budgetary targets mentioned above. In view of this risk assessment, the debt ratio may not be sufficiently diminishing towards the reference value.

(12)

With regard to the sustainability of public finances, Germany appears to be at medium risk on grounds of the projected budgetary costs of ageing populations (3). The structural reforms carried out in previous years, and in particular the pension reform, have helped to contain future rises in public expenditure. In view of the current level of government gross debt exceeding the Treaty reference value of 60 % of GDP and the currently high structural deficit, implementing rigorously a strong budgetary consolidation over the programme period is necessary so as to reduce the risks to long-term sustainability.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, Germany plans to implement a number of structural reforms in order to improve the sustainability of government finances in the medium to long run. If the expenditure restraint in the social security systems was implemented as planned, the composition of public expenditure would be more favourable towards growth-enhancing categories in line with the Lisbon strategy.

(14)

Germany's National Reform Programme (NRP), submitted on 7 December 2005 within the context of the renewed Lisbon strategy for growth and jobs, identifies six key challenges: the knowledge society; market functioning and competitiveness; business environment; the sustainability of public finances (including sustainable growth and social security); ecological innovation; and the re-orientation of the labour market. Overall, the measures in the area of public finances envisaged in the stability programme are in line with the actions foreseen in the National Reform Programme. The budgetary implications of the actions outlined in the NRP are broadly reflected in the budgetary projections of the stability programme. In addition to the content of the NRP, the stability programme envisages, as part of the reform of the federal system, that potential sanctions, which might arise from the Stability and Growth Pact, would be allocated according to a rule across levels of government. This would be inserted into the German Constitution.

—

Ensure the planned cumulative structural adjustment of at least one percentage point in the years 2006 and 2007 which would bring the general government deficit below 3 % of GDP at the latest by 2007 in a credible and sustainable manner;

—

Rapidly achieve the medium-term budgetary objective through a reduction in the structural balance of at least 0,5 percentage point per year after the excessive deficit has been corrected, notably by implementing the planned expenditure restraint rigorously so as to be able to provide the planned relief on social contributions, and by ensuring that the announced reform on corporate taxation does not jeopardise the fiscal consolidation;

—

Implement the plans to reform the federal system in order to improve the budgetary framework and thus contribute to ensuring that budgetary targets are achieved at all levels of government.

5.4.2006   

EN

Official Journal of the European Union

C 82/10

(1)

On 14 March 2006 the Council examined the updated stability programme of Spain, which covers the period 2005 to 2008.

(2)

At an average annual rate of 3,5 %, real GDP growth in Spain was among the highest in the EU over the last ten years. Increasing by 3,25 % per year, job creation underpinned robust growth. In contrast, Spain has been lagging behind the euro area in terms of productivity growth (0,5 % compared with 1 % in the euro area). HICP inflation while easing to a level close to 3 % in 2004 has remained above the euro-area average. The higher inflation and lower productivity growth than its main (trade) partners have led to competitiveness losses contributing together with robust domestic demand to the deterioration of the external position, which attained a deficit of 6,5 % of GDP in 2005. Fiscal consolidation since the second half of the nineties has contributed to containing such developments.

(3)

In its opinion of 8 March 2005 on the previous update of the stability programme, also covering the period 2004-2008, the Council invited Spain to adopt measures to prevent the emergence of unsustainable trends, in particular a comprehensive reform of the pension system aimed at aligning more closely contributions and pension benefits.

(4)

As regards budgetary implementation in 2005, the general government surplus is estimated at 1 % of GDP, which compares with 0,2 % in the Commission services' autumn forecast and 0,1 % of GDP in the previous update. The overachievement of the 2005 target is the result of higher-than-expected revenues, while the expenditure ceilings of the central government will most likely be met.

(5)

The new programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2). The update was submitted four weeks beyond the 1 December deadline set in the code of conduct.

(6)

GDP growth is projected at around 3,25 % over the programme period. GDP is projected to be sustained by domestic demand, though the growth of private and public consumption as well as residential construction is expected to slow down. The negative contribution of the external sector is expected to diminish, whilst the external net borrowing is projected to widen further to above 8 % of GDP in 2008. Inflation should decelerate from 3,5 % in 2005 to 2,25 % in 2008. Based on the Commission services' autumn 2005 forecasts, this macroeconomic scenario appears plausible, although the negative contribution of the external sector to growth could be larger, thus leading to a faster deterioration of the external position, and inflation could be higher.

(7)

The update aims at (i) maintaining budgetary stability over the economic cycle, in line with the ongoing reform of the Budgetary Stability Laws, (ii) prioritising productive public expenditure and policies aimed at improving the quality of public finances, and (iii) ensuring the long-term sustainability of public finances as a necessary means of guaranteeing the sufficiency and sustainability of social spending. The general government budget balance surplus is envisaged to decline from 1 % of GDP in 2005 to about 0,5 % in 2008 The time profile of the primary surplus is similar, falling from 2,75 % in 2005 to 2 % in 2008. While, an announced, but not spelled out, direct tax reform would lower tax receipts by 0,5 % of GDP over the programme period, expenditures should remain broadly unchanged. The previous update projected smaller, albeit rising, surpluses. The difference between the two updates is to be found in a much better 2004 deficit outcome than projected one year earlier, with carry-over effects over the programme period.

(8)

According to the calculations carried out by the Commission services on the basis of the programme based on the commonly agreed methodology, the structural balance (i.e. the general government budget in cyclically-adjusted terms and net of one-off and other temporary measures) is estimated to attain a surplus of around 1,25 % of GDP, stable over 2005-2007. In 2008, it would decline to around 1 %, against the backdrop of a sharp reduction in the estimated negative output gap. The programme sets the medium-term objective (MTO) of a balanced budget in structural terms, and plans to maintain a structural balance that satisfies the programme's MTO by a large margin throughout the programme period. As regards appropriateness, the programme's MTO lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and is more demanding than implied by the debt ratio and average potential output growth in the long term.

(9)

Overall, the risks to the budgetary targets seem broadly balanced. The budgetary projections in the update are based on plausible growth assumptions, below current estimates of potential GDP growth and in line with the Commission services' autumn 2005 forecasts.

(10)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the programme's MTO until 2008, as envisaged in the programme. In addition, the budgetary stance provides a sufficient safety margin against breaching the 3 % of GDP threshold with normal macroeconomic fluctuations between 2005 and 2008. The fiscal policy stance is in line with the Stability and Growth Pact in the sense that it is not pro-cyclical.

(11)

The debt ratio is projected to fall from 43 % of GDP in 2005 to 36 % of GDP in 2008, remaining well below the 60 % of GDP Treaty reference value. The projected high primary balance surpluses in the programme are the main drivers of debt reduction. Overall, the debt reduction path projected in the update appears plausible.

(12)

With regard to the sustainability of public finances, Spain appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. The currently favourable budgetary position, including the debt position and accumulation of assets in the Social Security Reserve Fund, contribute to absorb somewhat the projected increase of pension expenditures. However, the significant increase in these expenditures over the projection period suggests that the implementation of the measures within the announced social welfare reform aimed at containing the budgetary impact of ageing, notably concerning pensions, could be an important element in reducing risks to the sustainability of public finances.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, the fiscal stance in the programme ensures the respect of the medium-term budgetary objective, avoids pro-cyclicality and should help address the risks associated with external imbalances. The budgetary strategy gives priority to measures aimed at enhancing productivity and encouraging accumulation of physical, human and knowledge capital. A broad package of reforms of the social security system was submitted to the social partners on 10 November 2005.

(14)

The National Reform Programme of Spain, submitted on 13 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: (i) the reduction of the debt-to-GDP ratio to 34 % in 2010, and (ii) the relative increase of productive spending (such as infrastructure, R&D, better education and human capital). The budgetary implications of the actions outlined in the National Reform Programme are sufficiently reflected in the budgetary projections of the updated stability programme. The measures in the area of public finances envisaged in the stability programme are in line with the actions foreseen in the National Reform Programme.

5.4.2006   

EN

Official Journal of the European Union

C 82/14

(1)

On 14 March 2006 the Council examined the updated stability programme of France, which covers the period 2005 to 2009.

(2)

French GDP growth was over the last 10 years close to the euro-area average at 2,3 %. Since 1998 it was about half a percentage point higher, sustained by relatively buoyant domestic demand. Despite the relatively good performance over this period, the employment rate increased only slightly and the unemployment rate remained high, although it recently diminished, from 10,2 % in March 2005 to 9,5 % in January 2006. Following a record deficit level of 6 % of GDP in 1993, the budgetary situation improved and the 3 % of GDP Treaty reference value was respected from 1997 onwards. However, the reference value was breached again from 2002 onwards as the budgetary situation deteriorated, which was partly due to the slowdown in growth. Since 2004, the deficit ratio has been declining.

(3)

On 3 June 2003, the Council decided that France was in excessive deficit and recommended based on Article 104(7) that the excessive deficit be corrected by 2004. In its Communication to the Council of December 2004 on ‘the situation of Germany and France in relation to their obligations under the excessive deficit procedure following the judgement of the Court of Justice’, the Commission concluded that 2005 should be considered as the relevant deadline for the correction. In January 2005, the Council concurred with this view. In its opinion of 17 February 2005 on the December 2004 update of the stability programme, covering the period 2004-2008, the Council invited France to do the necessary to ensure the correction of the excessive deficit in 2005 and the continued budgetary consolidation thereafter and to implement structural reforms and control expenditure in order to secure the respect of the multi-annual expenditure targets.

(4)

As regards budgetary implementation in 2005, the general government deficit was estimated at 3,2 % of GDP in the Commission services' autumn 2005 forecast, against a target of 2,9 % of GDP set in the previous update and 3 % of GDP in this update. Despite less favourable macroeconomic conditions compared to the previous programme, recent partial information suggests that the deficit in 2005 is likely to have been reduced to around 3 % of GDP notably thanks to better control of public expenditure, a strong performance of non-fiscal receipts and taxes based on asset prices, and additional revenues in end-December linked to a change in the corporate tax legislation. It should also be noted that the deficit reduction in 2005 included substantial one-offs.

(5)

The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2). The update was submitted 6 weeks beyond the 1 December deadline set in the code of conduct, reflecting the authorities' wish to incorporate some of the ‘Pébereau report’ (3) proposals for debt-reduction in their intensified debt-reduction strategy.

(6)

The programme contains two different scenarios for the macroeconomic and budgetary projections: a ‘low growth’ scenario and a ‘high growth’ scenario. The ‘low growth’ scenario is considered as the reference scenario for assessing budgetary projections because, considered against currently available information, it appears to be based on plausible growth assumptions. It envisages that real GDP growth will pick up from 1,5 % –2,0 % in 2005 and to 2,25 % on average over the rest of the programme period. The programme's projections for inflation also appear realistic.

(7)

The update aims at bringing the public accounts back to balance and reducing the public debt-to-GDP ratio below the 60 % reference value by 2010. It also confirms that the deficit should be brought back to the 3 % reference value in 2005 and below it from 2006 onwards. Over the programme period, a reduction by 2 percentage points of GDP in the general government deficit to 1,0 % of GDP in 2009 is foreseen. A primary surplus would be restored from 2007 onwards. As in previous updates, the planned consolidation is expenditure-driven. The medium-term strategy is based on multi-annual targets for the increase in government expenditures in real terms that imply a reduction of the expenditure-to-GDP ratio. Compared with the previous programme, the planned deficit reduction has been postponed in the new update, partly reflecting a less favourable macroeconomic scenario and frontloaded tax reductions. One-off measures will still have a deficit-reducing effect in 2006, but to a lesser extent than in 2005.

(8)

Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve on average by 0,6 % of GDP per year. The authorities set the medium-term objective (MTO) for the budgetary position at a structural balance, which they do not aim to achieve within the programme period but by 2010. As it is more demanding than the minimum benchmark (estimated at a deficit of around 1,5 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme's MTO lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(9)

The budgetary outcome could be worse than projected in the programme. Concerning 2006, the downside risks stem from the macroeconomic scenario and from the fact that revenues could be lower and expenditures in the areas of local administration and healthcare higher. For the rest of the period, the ambitious targets set in the update are welcome. The enhancement of expenditure-growth rules at the different levels of the general government will improve the oversight of public finance and raise the accountability of all public stakeholders for spending control. The strong grip on state expenditure and the recent enhancement of the enforcement mechanisms on health expenditure are welcome, such as the creation of a permanent committee gathering all stakeholders of public finances, which would be responsible for drafting proposals for public expenditure control and debt reduction. However, expenditure control will have to be strictly implemented, given the track record related to the achievement of overall budget balance objectives. The new targets imply a drastic expenditure restraint compared to previous targets, which will require large structural reforms to be further detailed, especially concerning local authorities.

(10)

If the risks mentioned above were to materialise, a permanent and sustainable reduction of the deficit below 3 % of GDP would require additional measures in 2006. The planned structural adjustment in 2006 is slightly below 0,5 % of GDP in structural terms. Thereafter, the pace of the adjustment towards the MTO implied by the programme is in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark. Nevertheless, if the above risks materialise, reaching the MTO by 2010 is not ensured. The budgetary stance in the programme seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations at the end of the programme period.

(11)

The debt ratio is estimated to have reached 66 % of GDP in 2005, above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 3 percentage points over the programme period. The evolution of the debt ratio might be less favourable than projected in the programme, notably given the risks to the budgetary targets mentioned above. In view of this risk assessment, the debt ratio may not be sufficiently diminishing towards the reference value. However, the government recently announced that any extra tax receipts related to growth would be devoted to the deficit reduction, which is welcome.

(12)

With regard to the sustainability of public finances, France appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. Recent reforms, notably the 2003 pension reform, have substantially helped to contain future rise in public expenditure and their full implementation will be crucial to ensure the expected results. The current level of government gross debt is above the Treaty value of 60 % of GDP, and the currently high structural deficit, if unchanged, will prevent the necessary reduction of debt in view of the future cost of ageing. Therefore, in the absence of additional reforms, strong budgetary consolidation is needed in order to reduce the risks to long-term sustainability.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, France plans to implement a number of structural reforms in order to secure the deceleration in government expenditures and improve the sustainability of government finances in the medium to long run, while the correction of the excessive deficit may require additional measures.

(14)

France's National Reform Programme (NRP), submitted on 7 November 2005 within the context of the renewed Lisbon strategy for growth and jobs, identifies three main priorities: (a) to create the necessary conditions for strong economic growth including sustainable public finances, (b) to reduce unemployment and increase employment and (c) to build a knowledge-based economy. Similarly, the improvement of potential output — notably thanks to the so-called emergency plan for employment and other labour market reforms — is one of the three pillars of the French budgetary strategy mentioned in the update. Overall, the measures in the area of public finances envisaged in the stability programme are broadly in line with the actions foreseen in the National Reform Programme. The stability programme complements these measures with changes in the institutional features of the public finances, namely a definition and enhancement of expenditure-growth rules to all levels of the sub-sectors of the general government and the set-up of a basis of a better coordination among stakeholders. However, not all budgetary implications of the actions outlined in the NRP are sufficiently detailed in the budgetary projections of the stability programme.

—

Ensure the necessary structural adjustment to bring the general government deficit below 3 % of GDP in 2006 in a credible and sustainable manner;

—

Take the necessary measures to ensure the planned fiscal consolidation towards the medium-term objective and improve long-term sustainability; and

—

Strengthen the monitoring and enforcement of expenditure rules defined for the sub-sectors of the general government so as to ensure the respect of the ambitious multi-annual expenditure ceilings.

5.4.2006   

EN

Official Journal of the European Union

C 82/19

(1)

On 14 March 2006 the Council examined the updated stability programme of Ireland, which covers the period 2005 to 2008.

(2)

Ireland has experienced an impressively rapid increase in real GDP per capita and employment levels over the last decade. In recent years the Irish economy has continued to grow at just below 5 % p.a., the highest rate in the euro area, while employment is on the rise and inflation has converged rapidly towards the euro-area average. As regards budgetary developments, the fiscal position has been broadly sound, with the general government balance recording surpluses in most years over the last decade and the debt ratio falling significantly (to under 30 % of GDP in 2005).

(3)

In its opinion of 17 February 2005, the Council endorsed the budgetary strategy presented in the previous update of the stability programme, covering the period 2004-2007. As regards budgetary implementation in 2005, the previous update targeted a general government deficit of 0,8 % of GDP, while the current update estimates a 0,3 % surplus despite a downward revision of growth. The main reason for the far better outcome in 2005 than initially targeted is to be found on the revenue side.

(4)

The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2).

(5)

The macroeconomic scenario underlying the programme envisages that real GDP growth will remain in a narrow range of between 4,5 % and 5 % over the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. While the current picture suggests a broadly healthy condition of the economy with robust growth to continue, there are some downside risks to the macroeconomic outlook in the medium term. In particular, these are related to global economic prospects, given the openness of the economy; and domestically, to any sharp downturn from the extended residential construction boom. The programme's projection for HICP inflation may be on the low side.

(6)

The update confirms the commitment of the Irish government to maintaining sound public finances. Starting from a 0,25 % of GDP surplus in 2005, the budgetary strategy envisages a general government deficit of 0,6 % in 2006 and 0,8 % of GDP in the final two years of the programme. The primary surplus falls from 1,5 % of GDP in 2005 to 0,5 % in the years 2006-2008. The revenue-to-GDP ratio is on a declining trend, while the expenditure ratio initially increases and falls back to the 2005 level only towards the end of the programme period. The investment-to-GDP ratio is projected to increase by 0,5 percentage point of GDP over the period 2005 to 2008. Apart from the better-than-expected 2005 outturn, the new update broadly confirms the budgetary targets of the previous programme.

(7)

Following the fiscal expansion planned for 2006, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to stabilise at around 0,1 % of GDP over the rest of the programme period. The programme sets the medium-term objective (MTO) for the budgetary position at a structural position of close to balance and plans to maintain a structural position that satisfies the programme's MTO throughout the programme period. As the programme's MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1,25 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. As regards appropriateness, the programme's MTO lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and is more demanding than implied by the debt ratio and average potential output growth in the long term.

(8)

The budgetary outcome could be better than projected in the programme, in particular in 2006. The revenue forecast might imply cautious assumptions on tax projections in the programme and, on the expenditure side, the capital outlays might turn out somewhat below planned allocations. Risks to the budgetary targets stemming from the macroeconomic projections in the update appear neutral and are broadly in line with the Commission services' evaluation; however, the budgetary projections could be vulnerable if the downside macroeconomic risks in the medium term were to be realised.

(9)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the programme's MTO throughout the programme period, as envisaged in the programme. In addition it provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations in each year.

(10)

The debt ratio, which was still just below 100 % of GDP in the early 1990s, is estimated to have reached 28 % of GDP in 2005, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to stabilise at this level over the programme period. In the absence of acquisition of non-general government assets by the National Pensions Reserve Fund (NPRF), the debt ratio would be falling significantly throughout the programme period.

(11)

With regard to the sustainability of public finances, Ireland appears to be at medium risk on grounds of the projected budgetary costs of an ageing population. The currently sound budgetary position, in conjunction with the low debt level and the accumulation of assets in the National Pension Reserve Fund, helps partly to offset the significant rise in age-related government expenditure, notably on pensions, projected over the long term. Ireland has also recently enacted reforms to the pension system for public servants, and the authorities envisage further measures that should contribute to a more sustainable basis for the provision of public service pensions. The commitment to monitoring the adequacy of contribution rates through regular actuarial reviews is helpful. Implementing additional measures aimed at easing the budgetary impact of an ageing population over the long term would be nevertheless an important element in reducing risks to the sustainability of public finances.

(12)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, Ireland respects its MTO and the update provides an overview of the government's structural reform programme that should contribute towards enhancing the quality of public services, increasing the efficiency of public spending and addressing the infrastructural needs of the Irish economy.

(13)

The National Reform Programme of Ireland, submitted on 28 October 2005 in the context of the renewed Lisbon strategy for growth and jobs identifies, in particular, the following challenges with significant implications for public finances: (i) to continue to prioritise public investment in economic and social infrastructure and other growth-enhancing expenditures; and (ii) to maintain a stable macroeconomic environment and sustainable public finances, and to ensure moderate inflation levels. The budgetary implications of the policy directions outlined in the National Reform Programme appear to be reflected in the budgetary projections of the stability programme. The measures in the area of public finances envisaged in the stability programme are in line with the actions foreseen in the National Reform Programme. The stability programme complements these measures with proposed changes in the institutional features of the public finances, including some innovations in the budgetary and estimates process.

5.4.2006   

EN

Official Journal of the European Union

C 82/23

(1)

On 14 March 2006 the Council examined the updated stability programme of Italy, which covers the period 2005 to 2009.

(2)

Between 1995 and 2004, Italian GDP grew at an average rate of 1,5 % per year, below the 2 % of the euro area. Over the last decade, Italy has experienced a marked slowdown in productivity growth, a progressive deterioration in competitiveness leading to a steady loss of export market shares and, since 2000, a significant contraction in manufacturing activity. Italy undertook significant fiscal consolidation efforts during the 1990s, reducing the government deficit from almost 12 % of GDP in 1990 to below 2 % at the end of the decade. However, the deficit rose again above 3 % of GDP in 2001, 2003 and 2004, remaining close to it only thanks to significant one-off measures (2). The primary surplus, from 5 % of GDP in 1999, fell to 1,8 % of GDP in 2004, and the decline in the debt-to-GDP ratio, which had peaked at 125 % in 1994, slowed down considerably. At the end of 2004, the debt was 106,5 % of GDP.

(3)

In its opinion of 17 February 2005 on the previous update of the stability programme, the Council invited Italy to: ensure the achievement of the 2005 deficit target, achieve a budgetary position of close to balance by 2008 and ensure that the debt-to-GDP ratio diminishes at a more rapid pace, paying particular attention to debt-increasing factors other than net borrowing. On 28 July 2005 the Council decided that Italy was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit has to be corrected by 2007. On 22 February, the Commission adopted a communication concluding that the actions taken by Italy before the 12 January 2006 deadline set by the Council, if fully implemented, would be consistent with the consolidation path contained in the Council recommendation.

(4)

The 2005 deficit is estimated at 4,3 % of GDP, against a target of 2,7 % of GDP set in the previous update. The target was missed due to: (i) a shortfall in GDP growth; (ii) slippages in primary expenditure and sale of real estate, not fully compensated by higher revenues and lower interest expenditure; and (iii) carry-over effects from 2004, essentially due to statistical revisions.

(5)

The programme broadly follows the model structure, but deviates on some material points from the data provision requirements for stability and convergence programmes specified in the new code of conduct (3). The update was submitted three weeks beyond the 1 December deadline set in the code of conduct, reflecting the authorities' wish to incorporate the final version of the 2006 budget.

(6)

The macroeconomic scenario underlying the programme envisages that real GDP growth will pick up from zero in 2005 to slightly above 1,5 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be plausible. The programme's projections for inflation also appear to be realistic.

(7)

The budgetary strategy outlined in the programme aims at reducing the deficit below 3 % of GDP by 2007, pursuing further fiscal consolidation towards a balanced budget in subsequent years. The primary balance is planned to improve from 0,6 % of GDP in 2005 to 3,2 % in 2009. The budgetary correction in 2006 is largely expenditure driven. For the years 2007-2009, the information is limited to the size of the correction required to achieve the budgetary targets relative to trend deficits based on unchanged legislation. Compared with the previous programme, the new update frontloads the planned adjustment against a less favourable macroeconomic scenario. However, the new deficit target for 2008 is 1,2 % of GDP worse than in the previous update, as the frontloading does not fully offset the effect of a much weaker 2005 starting position.

(8)

Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve on average by about 0,75 % of GDP per year. The programme sets the medium-term objective (MTO) for the budgetary position as meant in the Stability and Growth Pact at a balanced budget, which it does not aim to achieve within the programme period. As the programme's MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1,5 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. However, the minimum benchmark would only be achieved in 2009. The programme's MTO is at an appropriate level because it lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(9)

The budgetary outcomes could be worse than projected in the programme. There are significant uncertainties regarding the implementation of the 2006 budget, in particular of the sizeable expenditure savings. Beyond 2006, there is no information on the measures envisaged, and the size of the needed fiscal correction may be underestimated.

(10)

Taking into account the balance of risks, the correction of the excessive deficit by the 2007 deadline set by the Council crucially relies upon a full and effective implementation of the 2006 budget and the specification and implementation of substantial corrective measures for 2007 (4). The achievement of the safety margin in 2009 also hinges on these risks and on the specification and implementation of corrective measures for the years beyond 2007. In the years following the correction of the excessive deficit, the pace of the adjustment towards the programme's MTO implied by the programme is in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times.

(11)

The debt ratio is estimated to have reached 108,5 % of GDP in 2005, well above the 60 % of GDP Treaty reference value, and amongst the highest in the EU. The programme projects the debt ratio to decline by 7 percentage points over the programme period. The evolution of the debt ratio might be less favourable than projected in the programme given the risks to the budgetary targets mentioned above and uncertainty about the stock-flow adjustment. In view of this risk assessment, a further strengthening of the budgetary position would be necessary to guarantee a sufficiently diminishing debt ratio towards the reference value.

(12)

With regard to the sustainability of public finances, Italy appears to be at medium risk on grounds of the projected budgetary costs of an ageing population. Past reforms have helped to contain future rises in public expenditure and their full implementation, notably of the 2004 pension reform, will be crucial to obtain the expected results. The currently high level of gross debt and the weak budgetary position indicate the necessity for strong consolidation of public finances over the medium-term to reduce risks to public finance sustainability (5).

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, Italy is taking action to correct the excessive deficit and is committed to ensure an average annual structural adjustment, net of one-off measures, in line with the Stability and Growth Pact. However, it would be appropriate to envisage a more rapid pace of government debt reduction.

(14)

The National Reform Programme of Italy, submitted on 14 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies five challenges: extending the area of free choice for citizens and companies (by opening up energy and services markets); granting incentives for scientific research and technological innovation; strengthening education and training; upgrading infrastructure; and protecting the environment. With regard to public finances, a sixth priority, long-term fiscal sustainability, is addressed in the Economic and Financial Planning Document (DPEF) of July 2005. The measures in the area of public finance envisaged in the NRP and the DPEF are broadly in line with the actions foreseen in the stability programme. The update outlines measures to reduce social contributions, encourage private pension savings and reduce health care deficits.

(i)

achieve the structural efforts envisaged in the programme for 2006 and 2007 in order to ensure the correction of the excessive deficit by 2007 in a credible and sustainable manner;

(ii)

spell out the broad measures underlying the adjustment path in 2007 and the outer years of the programme and ensure that the adjustment towards the medium-term objective remains in line with the Stability and Growth Pact requirements;

(iii)

ensure that the debt-to-GDP ratio is declining towards the 60 % of GDP Treaty reference value at a more rapid pace including by paying particular attention to factors other than net borrowing which contribute to the change in debt levels; and

(iv)

improve the budgetary process by increasing its transparency and by an effective implementation of the past and new mechanisms to monitor, control and report expenditure.

5.4.2006   

EN

Official Journal of the European Union

C 82/27

(1)

On 14 March 2006 the Council examined the updated stability programme of the Netherlands, covering the period 2005 to 2008.

(2)

After buoyant economic growth in the second half of the 1990s, with GDP growth averaging 3,75 % per year also supported by a booming housing market and rising stock prices, growth came to a standstill in the years 2002 and 2003 and again in early 2005. Following a comfortable surplus in 2000, the general government balance deteriorated sharply, turning into a deficit in 2001 and 2002 and exceeding the 3 % of GDP threshold in 2003. On 2 June 2004, the Council decided that the Netherlands were in excessive deficit and recommended that the excessive deficit be corrected by 2005. A substantial budgetary consolidation was achieved already in 2004, which reduced the deficit to 2,1 % of GDP in 2004. On 7 June 2005, the Council decided that the excessive deficit in the Netherlands had been corrected in 2004 and therefore abrogated the excessive deficit decision.

(3)

In its opinion of 18 January 2005 on the previous update of the stability programme, covering the period 2004-2007, the Council invited the Netherlands to ensure that the deficit was brought below 3 % of GDP by 2005, and, in view of the risk of pro-cyclicality and the challenges of ageing population, to take the necessary measures to achieve a budgetary position close to balance thereafter.

(4)

As regards budgetary implementation in 2005, the December 2005 update estimates that the general government deficit fell to 1,2 % of GDP against a deficit target of 2,6 % of GDP set in the November 2004 update of the stability programme and a deficit projection of 1,8 % of GDP in the Commission services' autumn 2005 forecast. The largest part of the improvement can be attributed to better-than-expected revenues mainly from higher gas prices and higher dividend, VAT and corporate tax revenues According to most recent estimates presented to Parliament, the 2005 deficit is even likely to be near 0,75 % of GDP, substantially lower than projected in the programme update.

(5)

The December 2005 update of the Dutch stability programme, covering the period 2005 to 2008, was submitted to the Commission on 22 December 2005 (i.e., three weeks after the deadline of 1 December as prescribed in the code of conduct). According to the authorities, the late submission was caused by their wish to include new economic projections and possible supplementary policies. The programme broadly follows the model structure for stability and convergence programmes specified in the new code of conduct (2).

(6)

The programme projects real GDP growth to increase from an estimated 0,75 % in 2005 to 2,5 % in both 2006 and 2007, before slowing to 2,25 % in 2008. The projected pick-up in growth is driven by a recovery in both domestic demand and exports. The economic growth projections and the implied gradual decrease of the negative output gap are plausible, also in view of recent positive economic data. Inflation is expected to stabilise at 1,5 % in 2006, before falling to just above 1 % in 2007, which seems to be on the low side also compared to the Commission services' autumn forecast.

(7)

The authorities' main strategic objective is to achieve sound public finances to support sustainable economic growth and absorb the costs of ageing. After the substantial consolidation achieved in 2004 and 2005, the 2005 update of the stability programme projects the general government deficit to increase to 1,5 % in 2006 and subsequently to stabilise at around 1,1 % of GDP, with the primary surplus following a similar pattern. Compared with the previous programme which foresaw a continued deficit reduction, the new update takes into account the better-than-expected deficit outcome in 2005 of 1,2 % of GDP and foresees, against the background of a comparable macroeconomic scenario from 2006 onwards, a broad stabilisation at this level (except for a deterioration in 2006).

(8)

Based on Commission services' calculations on the basis of the programme according to the commonly agreed methodology, the structural balance, after having improved markedly from a deficit of 2,25 % of GDP in 2003 when the excessive deficit occurred to a balanced position in 2005, reflecting a strong adjustment effort in line with the Stability and Growth Pact, would deteriorate to a deficit of nearly 0,75 % of GDP in 2006 against a diminishing although still negative output gap. Half of this structural deterioration reflects the fact that companies paid higher-than-expected tax advances in 2005 to take advantage of above-market interest rates paid by the Government, with an expected mirror effect in 2006. The structural deficit balance would stabilise thereafter at a deficit slightly above half a percentage point of GDP. The programme sets the medium-term objective (hereafter MTO) for the budgetary position of a structural (i.e. cyclically-adjusted and net of one-off or other temporary measures) balance between -0,5 % and -1 % of GDP. This MTO is at an appropriate level because it lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term. Despite the projected fiscal deterioration in 2006, the deficit is expected to remain within the MTO range as set in the programme.

(9)

The risks to the budgetary strategy appear broadly balanced and the budget outcome could be even somewhat better than expected beyond 2006. On the one hand, current indicators suggest a strong pick-up in economic activity, the 2005 deficit is now expected to be substantially lower and, beyond 2006, there exists a positive risk to the programme's budgetary projection if the oil price turns out higher than anticipated in the programme since the budget would benefit from higher gas revenues while the growth forecast is already consistent with such a higher oil price. On the other hand, some of the better-than-expected outcome in 2005 may also have negative carry-over effects. Moreover, it is not yet clear whether the expected budgetary savings from the reforms in the health and social security systems that came into force at the beginning of 2006 will be fully achieved as the behavioural effects of the reforms cannot yet be assessed with accuracy.

(10)

Taking into account the risk assessment above, the budgetary strategy outlined in the programme seems sufficient to ensure that the programme's MTO is maintained throughout the programme period. The projected structural balance in every year falls within the MTO range as specified in the programme and is better than the minimum benchmark of a structural deficit of around 1 % of GDP, which ensures a sufficient margin against breaching the 3 % of GDP threshold in case of adverse cyclical developments. Nevertheless, despite the strong economic recovery, there is a deterioration of 0,75 % of GDP in the structural balance in 2006 although this is partly due to exceptional factors. If the recent information on the positive outcome in 2005 is confirmed, the fiscal deterioration implied by the 2006 target could even be larger, unless the authorities take measures to contain it.

(11)

The programme projects the government debt to broadly stabilise in 2006 at 54,5 % of GDP before gradually decreasing to around 53 % in 2008. These projections are very close to those of the Commission services. Risks to the debt forecasts stem primarily from the risks to the deficit projections, which, as stated above, appear broadly balanced.

(12)

With regard to the sustainability of public finances, the Netherlands appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. The current level of debt is under the Treaty value of 60 % of GDP and the recent improvement of the budgetary situation in the Netherlands has helped alleviate risks to long-term sustainability. The implementation of recent reforms of the disability scheme will also contribute to curb long-term public spending. However, even fully taken into account, the projected future rise in revenue, notably due to delayed taxation of pension are not sufficient to compensate the rise in public expenditure over the long-term. Further budgetary consolidation may therefore be necessary to fully offset the impact of ageing.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular they are in line with the integrated guideline on securing economic stability by maintaining the medium-term budgetary objective over the economic cycle. The programme also complies with the integrated guideline on safeguarding economic sustainability in view of the projected costs of ageing population.

(14)

The National Reform Programme of the Netherlands, submitted on October 14, 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies improving labour supply; faster growth in labour productivity through strengthening R&D and innovation; and improving price competitiveness through containing labour costs as challenges. Of these, strengthening R&D and innovation are expected to have significant implications for public finances. However, given limited information especially on the timing of the structural reforms in these areas, it is difficult to ascertain whether the actions outlined in the National Reform Programme are fully reflected in the budgetary projections of the stability programme. The measures in the area of public finances envisaged in the stability programme seem to be broadly in line with the actions foreseen in the National Reform Programme.

5.4.2006   

EN

Official Journal of the European Union

C 82/31

(1)

On 14 March 2006 the Council examined the updated stability programme of Portugal, which covers the period 2005 to 2009.

(2)

After averaging 4 % per year over the period 1995-2000, accompanied by a pro-cyclical fiscal expansion, Portuguese economic growth declined significantly to only 0,5 % per year between 2001 and 2005, lagging behind the euro area average. GDP per capita in purchasing power terms is expected to have fallen below 70 % of the area average in 2005. Apart from adverse cyclical influences from abroad, the subdued performance reflects a weak competitive position, which explains the sizeable external deficit, and the low potential growth. The fiscal position has been weak since the turn of the decade, with the persistence of a high structural deficit.

(3)

On 20 September 2005, the Council decided that Portugal was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit has to be corrected by 2008. Following the expiry of the six-month period foreseen by the recommendation, the Commission is due to carry out an assessment of the action taken by the Portuguese authorities in order to achieve the 2006 deficit target. In its opinion of 12 July 2005 on the previous update of the stability programme, covering the period 2005-2009, the Council invited Portugal to limit the deterioration of the fiscal position in 2005; achieve a sustained correction of the excessive deficit, taking a substantial step in 2006; bring the gross debt ratio onto a firm downward path; control the evolution of expenditure and improve the quality and ensure the long-term sustainability of public finances; and to further improve the processing of general government data.

(4)

In 2005, the general government deficit is estimated to have reached 6 % of GDP according to the Commission services' autumn 2005 forecast, against a target of 6,2 % of GDP set in the previous update of June 2005. This small difference is entirely due to an upward revision of the GDP series. In addition to the increase in expenditure, the sharp deterioration from the previous years was largely due to the government no longer raising revenues through sizeable one-off measures.

(5)

The programme provides the compulsory data required for stability and convergence programmes specified in the new code of conduct, although it deviates on material points from the model structure (2).

(6)

The macroeconomic scenario presented in the update projects real GDP growth to pick up over the programme period, from 0,5 % in 2005 to 1,1 % in 2006 and 1,8 % in 2007 to eventually 3 % in 2009. Growth is assumed to be driven by domestic demand and exports, although the external contribution is expected to be close to neutral over the programme period. The negative output gap is foreseen to narrow from around -2,5 % of GDP in 2006-2007 to less than -1 % at the programme horizon. Assessed against currently available information, the programme's growth assumptions are favourable, especially in the outer years of the programme. Inflationary pressures are foreseen to remain low, but there are some risks for 2006 and towards the end of the programme period. The large external deficit is expected to remain broadly unchanged.

(7)

The programme aims at a lasting correction of the large fiscal imbalance, reducing the general government deficit to below the 3 % of GDP reference value in the year 2008 and pursuing further fiscal consolidation thereafter. It envisages the consolidation of public finances to take place on the back of structural measures with substantial steps in each year. After widening to 6 % of GDP in 2005, the general government deficit is targeted to decline to 4,6 % in 2006 and further to 3,7 % of GDP in 2007, 2,6 % in 2008 and 1,5 % of GDP in 2009. The projected time profile for the primary balance is similar, with an improvement from a deficit of 3,2 % of GDP to a surplus of 1,5 % of GDP between 2005 and 2009. The fiscal adjustment is helped by both the revenue and the expenditure side. In the short term, consolidation relies mainly on additional revenues generated by higher tax rates and improved tax collection. Expenditure restraint extending to all major primary expenditure categories is expected to support fiscal consolidation in a progressive manner over the period, with the most sizeable savings to come from changes in public administration, including personnel, and changes in social protection schemes. Compared with the previous update, the December 2005 update of the stability programme largely confirms the planned adjustment against lower growth assumptions, although still favourable against currently available information.

(8)

(9)

The budgetary outcomes could be worse than projected in the programme. While the programme assumptions about the tax intensity of economic activity seem broadly plausible, the growth outlook underpinning the budgetary targets is favourable, especially in the outer years. Moreover, the update outlines an ambitious medium-term plan to curb expenditure growth and several measures have been recently enacted, but nevertheless important measures related to the strategy still have to be defined and implemented, in particular changes in public administration which are expected to yield substantial savings from 2007 onwards. Their full implementation will be crucial for the attainment of the budgetary targets. Finally, the programme outlines measures that should improve the framework of budgetary execution and control, which if properly implemented are expected to contribute to the achievement of the budgetary objectives.

(10)

Taking into account the balance of risks, the correction of the excessive deficit by the 2008 deadline set by the Council hinges upon an effective implementation of all the measures announced in the programme for 2006, and of substantial corrective measures for 2007 and beyond. Provided the risks to the budgetary targets highlighted above are duly addressed, the pace of the adjustment towards the programme's MTO is fully in line with the Stability and Growth Pact, yet the MTO will not be achieved by the end of the programme period. Providing a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations in the year following the planned correction of the excessive deficit, requires that the risks to the budgetary targets are properly addressed.

(11)

The debt ratio is estimated to have reached 65,5 % of GDP in 2005, above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to further increase to some 69 % of GDP in 2007 and to decline thereafter to slightly above 66 % of GDP in 2009. The evolution of the debt ratio might be less favourable than projected in the programme given the risks to the budgetary targets mentioned above, the uncertainty about the stock-flow adjustment and the possible lower-than-expected economic growth. In view of this risk assessment, ensuring the attainment of the budgetary targets specified in the programme seems necessary to achieve a sufficiently diminishing debt ratio towards the reference value.

(12)

With regard to the sustainability of public finances, Portugal appears to be at high risk on grounds of the projected budgetary costs of ageing populations. The currently high level of gross debt and the weak budgetary position indicate the necessity for implementing rigorously the planned consolidation of public finances over the medium-term and to ensure the attainment of the budgetary targets in order to reduce risks to public finance sustainability. However, the projected increases in pension and health care expenditures over the projection period clearly indicate the necessity of a comprehensive strategy in dealing with the challenge posed by ageing populations that goes beyond improving the currently weak budgetary position. The ongoing introduction of changes to the pension and health-care systems should go some way in making these systems more sustainable. However, further reforms are required to curb the projected growth of age-related expenditures.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, they aim at a correction of the excessive deficit in a structural way as further specified in the Council recommendation under Article 104(7) of 20 September 2005 and the outlined fiscal policy is expected to contribute to a correction of the external deficit. Nevertheless, it should be noted that the planned evolution of government debt in the first half of the programme period represents a deviation from what is expected in the guidelines.

(14)

The National Reform Programme of Portugal, submitted on 21 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges in the area of public finances: (i) enhancing economic growth and promoting the sustainability of public finances; and (ii) the reform of public administration. The measures envisaged in the stability programme are in line with the actions foreseen in the National Reform Programme in the area of public finances. In fact, the NRP took fully on board the substance of June 2005 update. The most recent update of the stability programme confirms the strategy. However, it does not spell out the budgetary implications of the actions outlined in the National Reform Programme in the various policy areas.

(i)

adopt and implement with rigour the structural measures envisaged in the programme in order to ensure the correction of the excessive deficit by 2008 in a credible and sustainable manner; ensure a continued adjustment towards the MTO, once the excessive deficit has been corrected, in line with the SGP requirements; and create margins to deal with the budgetary impact of possible lower-than-projected economic growth;

(ii)

enact decisively the planned measures to control expenditure; improve the budgetary process at all levels of general government, possibly through the more extensive use of binding expenditure ceilings and, as outlined in the programme, by strengthening mechanisms of monitoring, controlling and reporting expenditure and revenue;

(iii)

improve the long-term sustainability of public finances, in particular by implementing the measures already envisaged in the programme and by enacting further reforms in the area of pensions and health care;

(iv)

bring the government gross debt ratio onto a firm downward path by ensuring that it reflects both the progress in the reduction of the government deficit and the projected privatisation proceeds, and by considering carefully the impact on debt of major public investment projects, including those in partnership with the private sector.

5.4.2006   

EN

Official Journal of the European Union

C 82/36

(1)

On 14 March 2006, the Council examined the updated convergence programme of Cyprus, which covers the period 2005 to 2009.

(2)

Supported by robust productivity and employment growth, Cyprus' real GDP growth (3,5 %) was among the highest in the EU over the last decade. Net borrowing vis-à-vis the rest of the world (the external deficit) has expanded (4,8 % of GDP in 2004) due to a number of factors, including robust domestic demand, competitiveness losses related to increased competition in some of Cyprus' main export sectors, the appreciation of the Cyprus pound, as well as higher reinvested earnings. This was largely matched by the borrowing needs of the public sector, which posted a deficit of 4,1 % of GDP in 2004. HICP inflation remained below 3 % for most of the decade.

(3)

On 5 July 2004, the Council decided that Cyprus was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit had to be corrected by 2005. In its opinion of 8 March 2005 on the previous update of the convergence programme, covering the period 2004-2008, the Council invited Cyprus to implement with vigour the measures envisaged to bring the deficit below 3 % of GDP by 2005, ensure that the debt ratio started to decline by then, and pursue pension and health reforms.

(4)

The current update estimates the 2005 deficit outcome at 2,5 % of GDP, compared with 2,75 % of GDP in the Commission services' autumn 2005 forecast and just below 3 % in the previous update. The difference with the update mainly reflects a 0,5 % of GDP better than expected interest expenditure.

(5)

The new programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2). The update was submitted 2 weeks beyond the 1 December deadline set in the code of conduct reflecting the authorities' wish to incorporate the budgetary measures announced in the second week of December.

(6)

The macroeconomic scenario underlying the programme envisages real GDP growth just above 4 % over the period 2005-2009. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions until 2007 and slightly favourable ones in 2008 and 2009. As a result, cyclical conditions, as measured by the output gap, might be more favourable than implied by the programme's projections. The programme's projections for inflation appear realistic.

(7)

Building on the deficit reduction to below 3 % of GDP in 2005, the update aims at further consolidating public finances until 2009, when the deficit would approach 0,5 % of GDP. After reaching 0,75 % of GDP in 2005, the primary surplus is projected to rise gradually to 1,75 % of GDP in 2009. The narrowing of the deficit reflects a cut in the expenditure ratio by around 4 % of GDP that is less than fully compensated by a decline in the revenue ratio (by 2 %). The adjustment is based on structural cuts in current primary expenditure, savings on interest expenditure and a combination of structural and one-off measures on the revenue side. The more gradual adjustment over 2006-2008 compared to the previous programme reflects slightly lower GDP growth.

(8)

Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve on average by more than 0,5 % of GDP per year, from a deficit of around 3 % of GDP in 2005 to about 0,5 % in 2009. The lack of improvement in the structural balance in 2007 reflects the anticipated deterioration of Cyprus' net position vis-à-vis the EU budget, as temporary compensating grants associated with accession to the EU are terminated in 2006. The programme sets the medium-term objective (MTO) for the budgetary position at a structural deficit of 0,5 % of GDP and aims to achieve this position by 2009. As this MTO is more demanding than the minimum benchmark (estimated at a deficit of close to 2 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme's MTO is at an appropriate level as it lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(9)

The risks to the budgetary projections in the programme appear broadly balanced. Given Cyprus' strong specialisation in tourism, the risks for the macroeconomic scenario are mainly associated with geopolitical developments in the region. Moreover, the macro outlook in 2008 and 2009 is slightly optimistic and tax projections seem somewhat favourable. However, the Cypriot government has so far over-achieved the budgetary targets and the update reiterates its commitment to adopt additional measures if needed to achieve the projected adjustment.

(10)

Based on the estimated outturn for 2005 and taking account of the balance of risks to the budgetary targets, the budgetary stance in the programme seems consistent with a correction of the excessive deficit by 2005 as recommended by the Council. In addition, it seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations from 2008. Furthermore, it seems sufficient to ensure that the programme's MTO is almost reached by 2009, as envisaged in the programme. In the years following the correction of the excessive deficit, the pace of adjustment towards the programme's MTO implied by the programme is broadly in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad times.

(11)

The debt ratio is estimated to have reached 70,5 % of GDP in 2005, above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline to 53,5 % in 2009. The risks to the projected evolution of the debt ratio appear to be broadly balanced. In view of this risk assessment, the debt ratio seems to be sufficiently diminishing towards the reference value.

(12)

With regard to the sustainability of public finances, Cyprus appears to be at high risk on grounds of the projected budgetary costs of ageing populations. Implementing rigorously the planned consolidation of public finances over the medium term will alleviate the risks to long-term sustainability and, as recognized in the programme, substantial pension and health care reform measures will also be necessary to contain the projected high increase in age-related expenditure in the period up to 2050 and to reduce the risk to long-term sustainability.

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, Cyprus is on track to correct its excessive deficit by the deadline set by the Council and does the necessary to achieve its MTO, while the debt ratio is on a declining path from 2005 onwards.

(14)

The National Reform Programme of Cyprus, submitted on 11 November 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: (i) promoting R&D and innovation and facilitation of ICT diffusion; (ii) upgrading of basic infrastructures; (iii) enhancing human capital development and (iv) social cohesion. The budgetary implications of the actions outlined in the National Reform Programme are reflected in the budgetary projections in the update of the convergence programme. The envisaged measures in the area of public finances are consistent with the priorities foreseen in the National Reform Programme. In particular, the update outlines measures to monitor and better control public spending.

(i)

In line with the updated convergence programme, ensure through measures of a permanent nature that budgetary consolidation towards the programme's medium-term objective is sustained after the excessive deficit has been corrected;

(ii)

Control public pension expenditure and implement further reforms in the areas of pensions and health care in order to improve the long-term sustainability of the public finances.

5.4.2006   

EN

Official Journal of the European Union

C 82/40

(1)

On 14 March 2006 the Council examined the updated convergence programme of Lithuania, which covers the period 2005 to 2008.

(2)

During the last decade, Lithuania successfully completed the transition to a functioning market economy and currently enjoys one of the highest growth rates in the EU. Structural reforms allowed to increase employment significantly since 2001. Real GDP growth averaged almost 8 % in the period 2001-2004. GDP per capita in purchasing power standards was about 48 % of the EU-25 average in 2004. There have not been significant macroeconomic imbalances, although it remains important to continue speedy reduction of the structural unemployment and manage risk of demand pressures related to lagged and ongoing effects of a rapid expansion of bank credit. A significant deterioration of the general government deficit occurred as a consequence of the external shock induced by the Russian crisis in 1998. Afterwards, a budgetary consolidation plan was implemented. Since 2001 the deficit has remained at 2 % of GDP or below and the cyclically adjusted deficit was brought to 1 % of GDP in 2002.

(3)

In its opinion of 8 March 2005 on the previous update of the convergence programme; covering the period 2004-2007, the Council invited Lithuania to make further progress towards a close to balance budgetary position, particularly in order to manage domestic demand pressures, to implement strictly the budget for 2005 in order to reduce the risk of breaching the 3 % reference value and to use better-than-projected or additional revenues and unused expenditure items for deficit reduction.

(4)

As regards budgetary implementation in 2005, the general government deficit for 2005 was estimated at 2 % of GDP in the Commission services' autumn 2005 forecast, against a target of 2,1 % of GDP set in the previous update of the convergence programme (2). The updated programme presents a deficit estimated at 1,5 % of GDP. However, preliminary data for the whole of 2005 point to an even better deficit outcome, at around 1 % of GDP. The better-than-targeted outcome stems from a good budgetary performance of all levels of general government, which are estimated to have recorded higher-than-planned revenues while expenditure plans were broadly achieved.

(5)

The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct. (3)

(6)

The macroeconomic scenario presented in the programme expects real GDP growth to reach 7 % in 2005 and to decelerate progressively to 5,3 % in 2007, bouncing back to 6,8 % in 2008. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions (and cautious assumptions for 2007). The programme's projections for inflation could be on the low side if demand pressures increase.

(7)

The main goal of the programme is to reduce the general government deficit in structural terms (i.e. in cyclically-adjusted terms and net of one-off and other temporary measures) to or below 1 % of GDP, which is the country's medium-term objective (MTO) for the budgetary position as meant in the Stability and Growth Pact, by the end of the programme period. The update foresees the general government deficit to gradually decrease from 1,5 % of GDP in 2005 to 1,0 % in 2008. The time profile of the primary deficit is similar, with a decline from 0,6 % of GDP in 2005 to 0,2 % at the end of the programme period. Overall, the programme relies on a favourable economic outlook that would create good conditions for fiscal retrenchment. The consolidation foreseen in the programme is expenditure-driven, mostly due to a cut in collective consumption and social transfers as a percentage of GDP. A significant increase in government investment is planned, from 4,1 % of GDP in 2005 to 5,2 % in 2008, remaining well above the EU average (2,5 % of GDP). Against a broadly unchanged macroeconomic scenario, taking into account the reclassification of savings and real estate restitutions, the budgetary adjustment is slower compared to the previous update. The slower adjustment is a result of personal income tax reduction.

(8)

Based on Commission services' calculations according to the commonly agreed methodology, the structural deficit (i.e. the cyclically-adjusted deficit net of one-off and other temporary measures) would improve from about 2,25 % of GDP in 2005 to 1,25 % in 2008. The programme sets the medium-term objective (MTO) for the budgetary position at a structural deficit of 1 % of GDP and aims at achieving this position by 2008. As the programme's MTO is more demanding than the minimum benchmark (estimated at a deficit of 1,75 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme's MTO is at an appropriate level because it lies within the range indicated for euro area and ERM II Member States and adequately reflects the debt ratio and average potential output growth in the long term.

(9)

The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, the general government deficit outcome in 2005 is very likely to be lower than estimated in the programme. A likely carry-over to 2006 and the authorities' track record of cautious revenue planning in the last few years indicate that outcomes could be better than targeted in 2006. On the other hand, the programme largely relies on a decrease in expenditure (as a percentage of GDP), particularly through public payroll moderation in the context of lower personal income tax rates. Nonetheless, the moderation could prove difficult to obtain and there are some uncertainties about the impact of the pension reform and tax reforms towards the end of the programme period.

(10)

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure that the programme's MTO is achieved by 2008, as envisaged in the update. However, the budgetary stance in the programme seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations from 2007. The pace of the adjustment towards the programme's MTO implied by the programme is not fully in line with the Stability and Growth Pact, which specifies that, for euro area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times. In particular, the planned structural adjustment towards the MTO is on average 0,4 % of GDP in the period 2006-2008, against the background of favourable cyclical conditions (indicated by a large positive output gap that gradually closes over the programme period) according to the agreed methodology. However, the data availability and structural breaks in Lithuania imply that estimates of output gaps and structural balances are subject to a margin of uncertainty.

(11)

According to the Stability and Growth Pact, ‘major structural reforms’ with a verifiable impact on the long-term sustainability of the public finances should be taken into account when defining the adjustment path to the programme's MTO. The medium-term budgetary strategy outlined in the programme embodies a temporary deviation from the adjustment path towards the programme's MTO. While the programme lists several reforms to support the deviation, only the pension reform, consisting in the introduction of a funded pillar, is sufficiently detailed in the programme and can be considered as having a beneficial impact on the long-term sustainability of the public finances. The average annual structural adjustment towards the MTO over the period 2006-2008 is 0,5 percent of GDP if the net budgetary cost of the ongoing pension reform, which increases from 0,5 % of GDP in 2005 to 0,8 % in 2008, is taken into account. However, a safety margin against breaching the 3 % of GDP deficit threshold would not be provided in 2006, when the structural deficit (calculated by Commission services) exceeds the minimum benchmark by 0,25 percentage point of GDP. Thus, the temporary deviation would be admissible in the meaning of the revised Stability and Growth Pact and the new code of conduct, conditional on meeting the minimum benchmark in 2006, which is possible if a better-than-planned deficit outcome in 2005 is carried over to 2006 and subsequent years.

(12)

The debt ratio is estimated to have reached about 19 % of GDP in 2005, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to remain at about 19-20 % of GDP throughout the remainder of the programme horizon.

(13)

With regard to the sustainability of public finances, Lithuania appears to be at low risk on grounds of the projected budgetary costs of ageing populations. The level of gross debt is currently very low and is projected to remain below the 60 % of GDP reference value throughout most the projection period and a contained government deficit is planned over the programme period. Lithuania has enacted a pension reform which contributes significantly to contain the budgetary impact of ageing populations. Further changes to the pension system are envisaged by the Lithuanian authorities, aiming at increasing the replacement rates for pensioners and at the same time gradually raising the retirement age. The implementation of the latter measure would be key in ensuring the financial sustainability of the public pension system.

(14)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, taking into account the temporary deviation linked to pension reform, Lithuania is making progress towards its MTO. Also, the government is taking several measures to improve the quality of public finances (e.g. tax reform) and has also progressed with the pension reform in order to improve the sustainability of public finances in the long-term.

(15)

The measures presented in the NRP in the area of public finances are consistent with those presented in the programme, and mostly relate to next steps to be taken with the pension, health care and tax reforms. Measures aiming at improving budgetary procedures (e.g. to complete programme-based budget at the different levels of the general government and a flexible use of funds for co-financing of EU projects) are also in line with those described in the update. The budgetary implications of the limited number of concrete reform measures specified in the NRP are reflected in the budgetary projections of the convergence programme.

(i)

strengthen the effort in the structural budgetary adjustment in order to speed up the attainment of the MTO, and

(ii)

in particular, aim for a more demanding general government deficit target in 2006, making sure that a better-than-projected deficit outcome in 2005 is carried over to 2006 and subsequent years.

5.4.2006   

EN

Official Journal of the European Union

C 82/44

(1)

On 14 March 2006, the Council examined the updated convergence programme of Malta, which covers the period 2005 to 2008.

(2)

Malta's real GDP growth averaged 2,75 % per year between 1995 and 2005. However, since 2001 economic growth stalled in the wake of unfavourable external conditions and domestic structural weaknesses. The combination of these two factors resulted in a loss in competitiveness, while export performance worsened adding further pressure on the external deficit. In recent years, the general government deficit has averaged around 6 % of GDP, peaking at 10,3 % of GDP in 2003, and declined to 5,1 % of GDP in 2004.

(3)

On 5 July 2004, the Council decided that Malta was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit had to be corrected by 2006. The Council opinion of 17 February 2005 on the previous update of the convergence programme, covering the period 2004-2007, invited Malta to do the necessary to ensure the correction of the excessive deficit in 2006, ensure that the debt ratio is declining towards the 60 % of GDP Treaty reference value at a satisfactory pace and make further progress in the design and implementation of the pension and health care reforms.

(4)

The update estimates the 2005 deficit close to 4 % of GDP, against 4,25 % of GDP in the Commission services' autumn 2005 forecast and a target of 3,75 % of GDP set in the previous update of the convergence programme. The difference between the update and the Commission services' autumn 2005 forecast is explained by the inclusion of recent data showing lower general government expenditure than previously projected.

(5)

The update was submitted 5 weeks beyond the 1 December deadline set in the code of conduct. The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2).

(6)

The macroeconomic scenario underlying the programme envisages that real GDP growth will pick up from 0,9 % in 2005 to an average of 1,4 % over the rest of the programme period reflecting an improved external demand. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions, except in 2006. In particular, the update projects a relatively quick economic recovery driven by a strong contribution of external demand to growth, mainly attributed to a recovery in the electronics industry, as well as sustained investment activity. The possibility that the long-anticipated pickup in this industry will not materialise in 2006 poses a downside risk to GDP growth.

(7)

(8)

Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated by the Commission services according to the commonly agreed methodology is planned to improve on average by 1 % of GDP per year. The programme clearly identifies its medium-term objective (MTO) as a balanced budgetary position, which it aims to achieve by the end of the programme period. As the programme's MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1,75 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme's MTO is at an appropriate level because it lies within the range indicated for euro area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(9)

The budgetary outcome could be worse than projected in the programme, especially on account of the favourable macroeconomic scenario projected for 2006. Although the update foresees higher indirect taxes in 2006 than in the Commission services' autumn 2005 forecast, projections for total revenues in that year are comparable. While the information given in the programme on the policy measures for 2006 do not seem to fully justify these developments, the measures underpinning the consolidation process are not disclosed for 2007 and 2008, making an overall assessment difficult to carry out.

(10)

Assuming that the 2006 budget is fully implemented and the macroeconomic risks are duly addressed, the budgetary stance in the programme seems consistent with a correction of the excessive deficit by the deadline indicated by the Council. The programme seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations after the planned correction of the excessive deficit. The budgetary strategy outlined in the programme seems sufficient to ensure that the programme's MTO is broadly achieved in 2008. In the years following the correction of the excessive deficit, the annual structural adjustment towards the programme's MTO implied by the programme is well above 0,5 % of GDP, and hence consistent with the Stability and Growth Pact.

(11)

The gross government debt is estimated to have reached 76,75 % of GDP in 2005, above the 60 % of GDP Treaty reference value. Starting in 2006, the debt ratio is expected to gradually fall, reaching 67,25 % of GDP by the end of the programme period. The evolution of the debt ratio might be less favourable than projected in the programme in view of the risks associated to some implementation risk surrounding privatisation given its critical role in reducing the debt ratio in 2006. Unexplained below-the-line operations partially offset privatisation receipts in 2006. Taking into account the balance of risks, the debt ratio seems to be sufficiently diminishing towards the reference value.

(12)

With regard to the sustainability of public finances, Malta appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. The level of gross debt is currently above the 60 % reference value and the currently high structural deficit, if unchanged, will prevent the necessary reduction of the gross debt ratio from falling below the Treaty reference value over the long term. Implementing rigorously the planned budgetary consolidation over the programme period would therefore contribute to reducing debt below the reference value, with positive consequences for risks to public finance sustainability. Changes to the pension system are envisaged by the Maltese authorities, aiming at ensuring adequacy and sustainability of the pension system. The implementation of the reform would be key in ensuring the financial sustainability of the public pension system (3).

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. Although the update foresees the correction of the excessive deficit and the reduction of the debt ratio at a satisfactory pace in line with the Council's recommendations and anticipates the achievement of the medium-term budgetary objective within the programme period, it does not announce implementation measures to address the problem of the long-term sustainability.

(14)

The National Reform Programme of Malta, submitted on 21 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: sustainability of public finances; competitiveness; the environment; employment; and education and training. Although not explicitly stated, the update takes into account the budgetary implications of the NRP. The measures in the area of public finances envisaged in the convergence programme are broadly in line with the actions foreseen in the National Reform Programme. In particular, the updated convergence programme confirms the intention to pursue reforms to enhance the efficiency of the public sector, improve tax compliance, pursue privatisation and provide support for the training of the labour force.

(i)

implement with rigour the 2006 budget measures and ensure the correction of the excessive deficit this year and in line with the updated convergence programme, and ensure that budgetary consolidation towards the programme's medium-term objective is sustained after the excessive deficit has been corrected;

(ii)

ensure that the debt ratio is declining towards the 60 % of GDP Treaty reference value at a satisfactory pace from 2006 onwards;

(iii)

improve the long-term sustainability of the public finances by making further progress in the design and implementation of the pension reform.