EUROPEAN COMMISSION

Brussels, 22.11.2017

COM(2017) 800 final

COMMUNICATION FROM THE COMMISSION

2018 Draft Budgetary Plans: Overall Assessment

1. Introduction

EU legislation foresees that euro area Member States submit Draft Budgetary Plans (DBPs) for the following year to the Commission by 15 October with the aim of improving coordination of national fiscal policies in the Economic and Monetary Union. 1  

These plans summarise the draft budgets that governments submit to national parliaments. On each plan, the Commission provides an Opinion, assessing whether it is compliant with the Member State's obligations under the Stability and Growth Pact (SGP).

The Commission is also required to provide an overall assessment of the budgetary situation and prospects for the euro area as a whole.

Eighteen euro area Member States (hereafter EA-18 or 'euro area') 2 were required to submit their 2018 DBPs to the Commission by 16 October, in line with the provisions of the so-called "Two-Pack". 3 Greece, which is under the ESM stability support programme, is not obliged to submit a plan, as the programme already provides for close fiscal monitoring.

In line with the guidelines of the Two-Pack Code of Conduct, Austria and Germany submitted no-policy-change DBPs because these Member States have only caretaker governments without full budgetary powers following recent elections. 4 The incoming governments are expected to submit full DBPs once they take office. Spain has also submitted a no-policy-change DBP as the procedure for the approval of the Central Government and Social Security budgets has lagged behind its usual schedule. It is expected to submit a full DBP as soon as possible.

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

In addition, in July 2015, the Council invited the Eurogroup to monitor and coordinate euro area Member States' fiscal policies and the aggregate fiscal stance for the euro area to ensure a growth-friendly and differentiated fiscal policy. 5 The Council recommended that euro area Member States, without prejudice to the fulfilment of the requirements of the SGP, "coordinate fiscal policies to ensure that the aggregate euro area fiscal stance is in line with sustainability risks and cyclical conditions".

In November 2016, the Commission proposed an updated Recommendation on the economic policy for the euro area, which was endorsed by EU leaders at the European Council meeting on 9 and 10 March 2017 and adopted by the Council on 21 March 2017. 6 This recommendation is an anchor for the Commission's assessment. As part of the annual cycle of the European Semester, the Commission is also proposing a new Recommendation on the economic policy of the euro area for 2018-2019 alongside this package. 7

In July 2017, the Council adopted country-specific recommendations highlighting the Commission's intended treatment of Member States for which the matrix implies a fiscal adjustment of 0.5% of GDP or above. 8 The recitals stated that the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Member States' public finances. In that context, the Council noted that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/ 97, in particular in the light of the cyclical situation of the Member State.

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

2. Main euro area findings

Economic outlook according to Member States' plans and the Commission forecast

Member States and the Commission have revised growth projections substantially upwards since spring. According to the macro-economic assumptions provided in the DBPs, aggregate real GDP in the euro area (excluding Greece) is now expected to grow by 2.2% in 2017 and 2.0% in 2018. This is substantially higher than the growth outlook for these years underlying the most recent Stability Programmes (see Table 1), when it stood at 1.7% for both years. The Commission 2017 autumn forecast projects similarly strong growth rates for the euro area, at 2.2% in 2017 and 2.1% in 2018. All in all, the economic assumptions of the DBPs are very close to the Commission forecast (see Annex IV Table 1). This may also be related to the fact that all Member States, with the exception of Germany and Belgium, comply with the requirement of Regulation EU 473/2013 to base the draft budget, and implicitly the DBP, on independently endorsed or produced macro-economic forecasts.

With the economy growing above its potential, the output gap is further narrowing in 2017 and is expected to turn positive in 2018. The aggregate output gap, both on the basis of the Commission forecast as well as on the basis of the plans, turns positive in 2018. All DBPs assume a (recalculated) output gap that is positive in 2018, or, in the case of France and Finland, just marginally negative. 9  

Both the Member States and the Commission expect headline inflation to remain stable and below the benchmark rate of 2%. According to the plans, headline inflation in the euro area is set to reach 1.5% in 2017 and 1.4% in 2018. This is broadly unchanged compared to the assumptions of the Stability Programmes, while also the Commission forecast projects an identical inflation rate for the euro area. Only in Estonia, Latvia and Lithuania, inflation is expected to exceed 2%.

The economic expansion in the euro area continues, but is characterized by some atypical features. The recovery in the euro area has strengthened and has become increasingly broad-based across countries amid steady employment gains and improving business sentiment. It is nonetheless characterised by some atypical features. Specifically, core inflation and wage growth remain subdued and do not reflect the labour market improvements as signalled by standard labour market indicators. In particular, subdued wage growth appears to be due to remaining labour market slack in some economies, low inflation expectations feeding in wage negotiations and low productivity growth. Lastly, the recovery appears to still be supported by exceptional tailwinds such as the ECB's accommodative monetary policy. Against this background, there is a case for only gradually unwinding policy support to growth. Indeed, the Commission announced that it intends to make use of its degree of discretion in the light of the cyclical situation of the Member States (see Box 1).

Table 1: Overview of economic and budgetary aggregates (EA-18) for 2017-2018

Source: 2017 Stability Programmes, 2018 Draft Budgetary Plans, European Commission 2017 autumn forecast.

Fiscal outlook according to the plans and the Commission forecast

The aggregate headline deficit is expected to continue its downward trend on the back of cyclical improvements. According to the Commission forecast, the euro area deficit will decrease from 1.6% of GDP in 2016 to 1.1% in 2017. The DBPs expect a marginally higher deficit outcome in 2017, at 1.2%, which is 0.15 pp. better than the target of the Stability Programmes submitted by Member States in spring 2017 when growth assumptions were however significantly less dynamic. A large upward revision of the 2017 deficit target compared to the Stability Programme only occurs in the case of Slovakia. In 2018, the implementation of Member States' plans would result in a headline deficit of 0.9% of GDP for the euro area. This confirms the aggregate headline deficit coming out of the spring 2017 Stability Programmes, despite the better-than-previously expected outcome for 2017 and a substantial upward revision of the 2018 growth outlook. This means implicitly that the structural adjustment has been somewhat revised downwards compared to the latest Stability Programmes (see below). While differences between plans and the Commission forecast exist for individual Member States (see Annex IV Table 2), the 2018 aggregate deficit of the Commission forecast is fully in line with the plans.

Seven out of 18 Member States plan a surplus of the headline balance in 2018. From the Member States in deficit, only Latvia and Finland plan an increase in their headline deficit. No Member State plans a deficit above the 3% of GDP reference value in 2018. France plans to correct its excessive deficit in 2017, as recommended by the Council, while Spain plans to correct it by its deadline of 2018. Slovakia, Italy, Belgium and France plan substantially larger deficits than in their Stability Programmes.

The aggregate primary balance of the euro area, obtained by removing interest expenditure from the headline balance, is in surplus. It is planned to further improve from 0.8% of GDP in 2017 to 0.9% of GDP in 2018. France, Latvia and Finland are the only euro area Member States that plan a primary deficit in 2018.

There is barely any fiscal adjustment over 2017-2018 in the budgetary plans, or in the forecast, as measured by the change in the aggregate structural balance. 10  Overall, the Commission forecast expects the euro area structural balance to remain stable in 2017. The (recalculated) budgetary plans expect a marginal structural improvement in 2017, in line with the Stability Programmes. For 2018, the Draft Budgetary Plans result in a slight deterioration of the structural balance for the euro area, by 0.1% of GDP, while the most recent Stability Programmes still planned a 0.2% of GDP improvement on aggregate (see Annex IV, Table 3). The Commission also projects a deterioration of 0.1 pp. in 2018 for the euro area, similar to the Plans. However, this hides substantial differences with the DBPs for individual Member States. In particular, the Commission projects a substantially lower structural adjustment in Belgium, Spain, France, Lithuania, Portugal and Slovenia (see below). In the euro area aggregate, this is offset by a stable structural balance in Germany, compared to a 0.5% of GDP expansion in Germany's DBP.

Overall, large differences remain in Member States' positions vis-à-vis their Medium Term Objectives (MTOs) (see Annex IV, Graph 5). According to the Commission forecast, six euro area Member States are at (Lithuania) or above their MTO (Cyprus, Germany, Luxembourg, Malta and the Netherlands) in 2017. 11 They are all projected to remain so in 2018, while some of the 'over-achievers' are projected to use part of their fiscal space. 12 According to its no-policy-change DBP, also Germany is expected to use some of its fiscal space. 13 Of the Member States not yet at their MTO, Ireland is projected to reach it in 2018 while Slovakia is set to make substantial progress towards it. On the other hand, for some Member States that are still far away from their MTO, the Commission currently hardly projects any improvement (Spain, Italy, Portugal and Slovenia) or even expects a deterioration (Belgium and France). Apart from Slovenia, these are also the Member States with the highest debt ratios (see below). The (recalculated) DBPs plan a larger adjustment compared to the forecast for these Member States, ranging from 0.0% pp. of GDP in the case of France to 0.5% of GDP in the case of Slovenia. Lastly, also Estonia, Austria, Finland and Latvia are projected to move somewhat further away from their MTO, while remaining within a distance of 1pps. of GDP.

Compared to the structural balance, the Discretionary Fiscal Effort (DFE), calculated on the basis of the Commission forecast, is somewhat more expansionary in 2017 and 2018. 14 The DFE is conceptually close to the expenditure benchmark of the EU fiscal framework, and gives the sum of planned revenue measures and primary expenditure developments relative to (medium-term) potential growth rate. Calculated on the basis of the forecast, the DFE points to an expansion of almost 0.4% of GDP in 2017. This is especially the result of primary expenditure growth exceeding medium term potential growth, while discretionary revenue measures are neutral in 2017. The difference with the change in the structural balance is partly explained by the fact that interest gains are not taken into account in the DFE. 15 In 2018, the DFE calculated on the basis of the plans confirms the reading of the structural balance, pointing to a close to neutral aggregate stance of the policy plans. Primary expenditure growth in the euro area is planned to slightly exceed the medium term potential growth, while discretionary revenue measures are only marginally expansionary (see below). The DFE calculated on the basis of the Commission forecast amounts to 0.25% of GDP, pointing to a somewhat more expansionary fiscal stance in 2018 (see Annex IV, Graph 4). 16  

Public debt is expected to continue its declining path thanks to the cyclical upswing and continued low interest rates. General government debt of the euro area, which peaked in 2014 at almost 93% of GDP, is expected to decline from 89.6% of GDP in 2016 to just below 88% of GDP in 2017, both on the basis of the Commission forecast as well as on the basis of Member States' plans. Aggregated plans result in a further debt reduction to just over 86% of GDP in 2018. The decline in 2018 is driven by a debt-reducing snowball effect and a primary surplus, while planned stock-flow adjustment contribute in the opposite direction. According to the Commission forecast, the decline in the debt ratio will be slightly larger.

All Member States but France plan a decline in the debt-to-GDP ratio over 2017-2018 (See Annex IV, Table 6). In the case of France, debt is expected to stabilise just below 97% of GDP. All Member States benefit from a debt-reducing snowball effect and also the planned primary surpluses in most Member States have a downward impact (see Annex IV, Graph 6). In general, divergences in debt developments for 2018 between the Commission forecast and the DBPs are relatively limited, except in the case of Cyprus and Slovenia where plans are more optimistic, and Germany where the Commission forecast is more optimistic. Italy and Portugal remain the Member States with the highest public debt level, above 120% of GDP, while Belgium, Cyprus, France and Spain are hovering around 100% of GDP. Ten euro area Member States that submitted DBPs are currently subject to the debt reduction benchmark. 17 Prima facie, Belgium and Italy are not projected to be compliant with it in 2018 according to the Commission's forecast. This is also the case for France which, in the event of a timely and sustainable correction of its excessive deficit, would become subject to the transitional debt rule as of 2018.

Composition of fiscal adjustment

Member States project a moderate decline in the cyclically-adjusted expenditure ratio, which is fully offset by a similar drop in the revenue ratio. According to plans, the cyclically-adjusted expenditure ratio is expected to fall 0.25 pp, driven by declining interest expenditure as well as primary expenditure growing at a slightly lower pace than potential growth. In comparison, the Commission forecast expects somewhat more dynamic primary expenditure developments, resulting in a stable cyclically-adjusted expenditure ratio. Member States plan outlays on social payments and compensation of employees to grow less than nominal GDP, contributing to the drop in expenditure ratio (see Annex IV, Graph 8). Public investment on the other hand is planned to slightly increase in 2018, after a steady decline between 2010 and 2016. The Commission forecast confirms this slight rebalancing of public expenditure. Interest expenditure, both in the plans and in the Commission forecast, decreases by 0.1 pp.to reach 1.9% of GDP in 2018. In 2012, at the peak of the sovereign-debt crisis, interest expenditure amounted to 3.0% of GDP. All Member States, except Cyprus, assume a further decline in the implicit interest rate on the outstanding debt. On average, the implicit interest rate underlying the DBPs falls from 2.25% in 2017 to 2.15% in 2018, similar to the Commission's assumptions.

The revenue ratio is expected to decline on the back of revenue-reducing measures as well as revenue shortfalls. The total deficit-increasing impact of reported revenue-measures amounts to 0.1% of GDP according to the plans, while Member States also expect almost 0.2% of GDP of revenue shortfalls compared to what could be expected based on the nominal growth outlook (See Annex IV, Table 8). 18 The decrease in the revenue ratio is mainly driven by a decline in social contributions and a decline in non-tax revenues. According to the plans, both direct taxes and indirect taxes remain unchanged as percentage of GDP. The Commission forecast projects a similar impact of revenue measures and revenue shortfalls.

Assessment of the fiscal policy orientation in the euro area.

Overall, the euro area fiscal stance is expected to remain broadly neutral over 2017-2018. Following significant fiscal consolidation between 2011 and 2013, the aggregate fiscal stance turned broadly neutral in subsequent years. It is estimated to remain so in 2017. Measured by the change in the structural balance, both the aggregation of Member States' DBPs and the Commission forecast point to the continuation of a broadly neutral stance in 2018, with the structural balance only marginally deteriorating. The evolution of the structural primary balance points to a slightly more expansionary stance in 2018 (see Annex IV, Table 4), as it does not include the ongoing decline in interest expenditure. This is also confirmed by the Discretionary Fiscal Effort (see above) calculated on the basis of the Commission forecast (see Annex IV, Graph 4).

A broadly neutral fiscal stance at aggregate level for the euro area appears still appropriate in the light of the current economic recovery, which is strengthening but remains incomplete. This is even more relevant in the context of a persistent debt legacy from the crisis. Striking the right balance between ensuring the long-term sustainability of public finances, depending on country-specific conditions, and supporting the economic recovery is of the essence. Indeed, the orientation of the fiscal position in 2017-2018 needs to be assessed against the dual objectives of long-term sustainability and short-term macro-economic stabilisation. Long-term sustainability requires that public debt is put and maintained on a sustainable path, taking into account the current level of debt and projected future ageing-related expenditure. While macroeconomic stabilisation can be expressed in terms of closing the output gap at an appropriate pace in the short to medium term, it should also factor in other economic elements, such as the level of inflation, the slack in the labour market and the need to rotate from external to domestic sources of growth.

Graph 1: Real long-term interest rate (%) and discretionary fiscal effort (% of potential GDP), euro area

Source: European Commission 2017 autumn forecast

Note: A real long term interest rate of +1.0 is considered broadly in line with potential growth over the forecast horizon

The fiscal stance should take due consideration of the very accommodative monetary policy in a context of low inflation. The monetary policy has been very accommodative in recent years in the euro area. The ECB has undertaken a range of monetary policy easing measures, including cuts in policy rates into negative territory, targeted long-term refinancing operations, asset purchasing programmes and forward guidance. Overall, these measures have provided a substantial monetary stimulus. The ECB recently decided to recalibrate its asset purchase programme from January 2018 onwards in light of an increasingly robust and broad-based economic expansion in the euro area. At the same time, it was considered that an ample degree of monetary stimulus remained necessary as domestic price pressures were still muted overall and the economic outlook and the path of inflation remained conditional on continued support from monetary policy. Despite an assumed continuation of favourable financing conditions, the latest ECB staff macroeconomic projections for the euro area expect headline inflation to strengthen only gradually and stay significantly below 2% over the 2017-2019 period. This is also broadly in line with the latest inflation forecast of the European Commission.

The joint orientation of monetary and fiscal policies (the 'policy mix') can be respectively proxied by the evolution of financing conditions (e.g. real long-term interest rate) and fiscal efforts (e.g. discretionary fiscal effort). As shown in Graph 1, financing conditions eased substantially between 2011 and 2012, thanks to the ECB intervention in response to the crisis. Financing conditions have then continued easing after 2013, but to a lesser extent. In fact, while the ECB managed to exert downward pressure on nominal long-term interest rates with its additional measures, long-term inflation expectations also declined and only started to pick up towards the end of 2016. Financing conditions are expected to turn less loose in 2018, when the euro area output gap is finally projected to close. In 2018, average real long-term rates are expected to increase, as the expected gradual rise in nominal rates is set to be accompanied by a relatively more limited pick-up in inflation expectations further out. 19 However, financing conditions are expected to remain very supportive overall.

The aggregate situation of the euro area nonetheless hides considerable differences at national level, with some countries facing the need to consolidate, while others have some fiscal space (see Graph 2 and 3). While in most Member States output gaps are expected to be positive in 2018, there remains significant slack in the economy in several Member States. 20 On the other hand, some Member States face high sustainability risks. Based on the Commission 2017 autumn forecast, a sustainability risk assessment has been carried out, taking into account, inter alia, current debt levels and primary balance, as well as the expected cost of ageing. 21 No Member State appears to face short-term sustainability risks. Based on a debt sustainability analysis as well as the calculation of the S1 indicator, Belgium, Spain, France, Italy, Portugal and Finland appear to face high medium-term risks, while for Cyprus, Lithuania, Austria and Slovenia, medium-term risks are assessed as medium. 22

A differentiated approach to national fiscal policies is thus needed in order to balance the objectives of stabilising the economy and ensuring the longer-term sustainability of public finances. However, based on the Commission forecast, the expected fiscal adjustment is relatively limited or even negative for some high-indebted Member States, such as Italy, Portugal, Belgium, Spain, and France. The plans of these Member States are somewhat more optimistic, but require additional measures in order to attain the targeted effort as set by Member States in their DBP. Looking ahead, further fiscal effort may be needed in Member States characterised by high debt-to-GDP ratios, especially in case of persistently moderate growth prospects and rising interest rates given the current historically low levels.

Graph 2: A fiscal map for the euro area in 2018

 Note: Based on European Commission 2017 autumn forecast. Good(bad) economic times are measured by the output gap in 2018, in % of potential GDP, calculated according to the commonly-agreed methodology. The consolidation needs or fiscal scope are measured by the Commission's S1 indicator of risks to sustainability, in % of GDP, based on 2017 autumn forecast calculations and using 2017 as the base year.

Graph 3: Change in the structural primary balance in 2018 in the Draft Budgetary Plans against sustainability and stabilisation needs (% of GDP)

Source: European Commission based on Commission 2017 autumn forecast and Draft Budgetary Plans.

How to read this chart:

The sustainability criterion is based on the S1 indicator and assumes that 25 % to 50 % of the indicated change in the SPB is implemented in 2017, corresponding to more or less frontloading of the consolidation effort if S1 is positive. For countries with a negative S1, this indicates some scope for expansionary policies in response to possible stabilisation needs.

The stabilisation criterion is measured as the change in the SPB for which fiscal policy reduces by 25% (short blue bar) or 50% (long blue bar) the output gap that would result from a neutral-fiscal policy scenario in 2018, In other words, this output gap closure of 25% or 50% is achieved in addition to the spontaneous output gap closure, as projected in Commission 2017 autumn forecast (adjusted by assuming neutral fiscal stance). This assumes that fiscal policy always plays a countercyclical role, either supporting the closure of the output gap or mitigating its widening. If the neutral-fiscal-policy assumption implies that the output gap is changing sign, then the stabilisation objective caps the closure of the output gap at 100%, thus avoiding pro-cyclicality.

The red crosses show the planned changes in the SPB presented by Member States in their 2017 Draft Budgetary Plans, as recalculated by the Commission using the commonly agreed methodology for potential output. The green dots show the change in the SPB according to the Commission spring 2017 forecast, which is derived on a no-policy-change assumption.

3. Overview of the Draft Budgetary Plans

The Commission Opinions on the DBPs focus on compliance with the SGP and the recommendations issued on that basis. For Member States in the Excessive Deficit Procedure (EDP), the Commission Opinions take stock of progress made in correcting the excessive deficits, with respect to both headline deficit and structural effort targets. For Member States in the preventive arm of the SGP, the Commission Opinions assess adherence to, or the progress towards, the country-specific medium-term budgetary objectives (MTOs), as well as compliance with the debt rule, in order to verify whether the plans are in line with the SGP and the fiscal country-specific recommendations contained in the Council Recommendations of 11 July 2017.  23  

All non-programme euro-area Member States submitted their DBPs in due time, in line with Article 6 of Regulation (EU) No 473/2013. In line with the provisions of the Two-Pack Code of Conduct, two countries, Austria and Germany submitted no-policy-change DBPs due to caretaker governments being in place. The incoming governments are expected to submit full DBPs once they take office. Spain submitted a no-policy-change DBP as well, although the government is not considered a caretaker. In its letter of 27 October 2017, the Commission invited Spain to submit an updated DBP as soon as possible. The Netherlands' outgoing government submitted a DBP by the deadline, and the incoming government's submitted an addendum to the DBP with complementary information on new measures. As the addendum does not include tables that meet the requirements under the Code of Conduct, the authorities should submit such updated tables without undue delay.

No DBP was found in "particularly serious non-compliance" with the SGP as referred to in Article 7(2) of Regulation (EU) No 473/2013. Nevertheless, some of the submitted plans give rise to concerns. Therefore, the Commission sent letters to Belgium, France, Italy and Portugal on 27 October 2017 asking for further information and highlighted a number of preliminary observations related to the Draft Budgetary Plan. The Member States concerned replied at the end of October. The information contained in the letters has been taken into account in the Commission's assessment of budgetary developments and risks. In the case of Italy, the debt ratio above 130% of GDP is a reason for concern. The improving macroeconomic and financial conditions create a window of opportunity to accelerate the reduction of public debt. However, more information is needed on the government's overall strategy and concrete steps planned to decisively put the debt ratio on a downward path that would ensure compliance with the debt criterion. As considerable uncertainty continues to surround the fiscal outlook in 2017, the Commission intends reassessing Italy's compliance with the debt criterion in spring 2018, based on outturn data for 2017 and the final budget to be adopted by the Parliament in December 2017.

Tables 2a and 2b summarise the assessments of individual Member States' DBPs as per the Commission's Opinions adopted on 22 November together with the assessment of progress with fiscal-structural reforms. These assessments are based on the Commission 2017 autumn forecast. In order to facilitate comparison, the assessment of the plans is summarised in three broad categories, which have different meanings depending on whether a Member State is in EDP or not:

·Compliant: according to the Commission's forecast, there is no need to adapt the budgetary plans within the national budgetary procedure to ensure that the 2018 budget will be compliant with the SGP rules.

·Broadly compliant: According to the Commission's forecast for 2018, the DBP is expected to ensure broad compliance with the SGP rules.

For Member States in EDP: while the Commission's forecast for 2018 projects that either the intermediate headline deficit target will be achieved or that the excessive deficit will be corrected in a timely manner, there is a noticeable shortfall in fiscal effort compared to the recommended level that puts at risk compliance with the EDP recommendation.

For Member States in the preventive arm of the SGP: the Commission's forecast for 2018 projects some deviation from the MTO or the adjustment path towards it, but the shortfall relative to the requirement would not represent a significant deviation from the recommended adjustment. These Member States are assessed to comply with the debt reduction benchmark, where applicable.

·Risk of non-compliance: According to the Commission's forecast for 2018, the DBP is not expected to ensure compliance with the SGP rules.

For Member States in EDP: the Commission's forecast for 2018 projects that neither the recommended fiscal effort will be delivered nor that the intermediate headline deficit target will be achieved or that the excessive deficit will be corrected in a timely manner.

For Member States in the preventive arm of the SGP: the Commission's forecast for 2018 projects a significant deviation from the MTO or the required adjustment path towards it, and/or non-compliance with the debt reduction benchmark, where applicable.

No Member State has requested additional flexibility for 2018 in line with the "Commonly agreed position on flexibility within the Stability and Growth Pact" endorsed by the Council on 12 February 2016. To recall, in 2017 the Council has granted flexibility to Finland, Latvia and Lithuania on the basis of the structural reform clause and to Finland on the basis of the investment clause. Finland has been granted flexibility in view of the implementation of major structural reforms with a positive impact on the long-term sustainability of public finances, and of national expenditure on projects co-financed by the EU under the European Structural and Investment Funds. For Latvia, flexibility has been granted in relation to a health care reform. Lithuania benefits from flexibility in view of major structural labour market and pension reforms with a positive impact on the long-term sustainability of public finances.

A number of Member States mentioned the budgetary impact of the increased inflow of refugees and of additional security measures. The provisions of Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 allow for a temporary deviation from the adjustment path towards the medium-term budgetary objective in order to cater for such additional expenditure, to the extent that the inflow of refugees as well as the severity of the threats to security are exceptional events, their impact on public finances is significant and sustainability would not be compromised. The Commission considered a possible temporary deviation for refugee-related costs in 2015 and 2016 (Belgium, Italy, Austria, Slovenia and Finland). For 2017, Austria, Italy, and Slovenia have been granted an additional allowance ex ante for the refugee-related expenditure. While refugee-related costs are also mentioned in Italy's 2018 DBP and in the reply 24 to the Commission's request for clarification on Italy's planned fiscal effort, no additional flexibility has been requested. With regards to security-related expenditure, flexibility had been granted in 2016 and 2017 to Belgium, Italy and Austria; no further flexibility was requested in the 2018 DBPs. The Commission will make a final assessment, including on the eligible amounts, on the basis of observed data to be provided in spring 2018 by the authorities. In spring 2017, the Commission provisionally assessed Italy to be eligible for an allowance in relation to the budgetary impact of a preventive investment plan for the protection of the national territory against seismic risks under the unusual event clause. This budgetary impact is confirmed in the 2018 DBP. Nevertheless, the allowance will be reassessed ex-post in spring 2018 on the basis of observed data as provided by the Italian authorities, in particular given implementation uncertainties regarding the investment plan.

For some Member States (Cyprus, Finland, Italy, and Slovenia), the output gaps for 2017 estimated according to the commonly-agreed methodology appear subject to particular uncertainty, as indicated by the Commission's plausibility screening tool. In such cases, in its assessment of the DBP the Commission analysed the estimates of the output gap in more detail under the constrained judgement approach, following-up on the requested improvements to the methodology from the April 2016 Amsterdam Informal ECOFIN Council. The approach taken by the Commission is unchanged from the one that was implemented in the assessment of the 2017 Draft Budgetary Plans and the 2017 Stability and Convergence Programmes. For Cyprus and Finland, although the plausibility tool provided indications of particular uncertainty, the Commission did not see sufficient ground to deviate from the estimates based on the common methodology after taking into account all relevant factors. For Italy, the constrained judgement approach would lead to the conclusion of a negative output gap, compared to the positive output gap estimated on the basis of the common methodology. For Slovenia, it was found that a more plausible estimate would bring Slovenia close to the border between good and normal economic times in 2018. For neither of these two Member States would this affect the requirements under the preventive arm. It would thus have no implication for the assessment of their DBP.

Finally, the Commission has preliminarily assessed the degree of progress with the implementation of the fiscal-structural reforms outlined in the Council Recommendations of 11 July 2017. The assessment of the DBPs is summarised in the following five broad categories: no progress, limited progress, some progress, substantial progress and fully addressed. A comprehensive assessment of progress made with the implementation of the country-specific recommendations will be made in the 2018 Country Reports and in the context of the 2018 country-specific recommendations to be adopted by the Council in 2018.

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

*    The Commission issued a report on 22 May 2017 in accordance with Article 126(3) of the Treaty for the Member State. The report concluded that, after the assessment of all relevant factors, the debt criterion should be considered as complied with.

**    The Commission issued a report on 22 February 2017 in accordance with Article 126(3) of the Treaty in which it concluded that unless the additional structural measures, worth at least 0.2% of GDP that the government committed to adopt at the latest in April 2017 were credibly enacted by that time in order to reduce the gap to broad compliance with the preventive arm in 2017 (and thus in 2016), the debt criterion should be considered as not complied with at that stage. On 22 May 2017, the Commission concluded that the requested additional consolidation measures for 2017 had been delivered.

***    DBP submitted by a caretaker government on a no-policy-change basis.

****    The DBP submitted by the outgoing government has been updated with an addendum by the new government.

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

*     France is currently under the corrective arm of the SGP, but could move to the preventive arm as from 2018 if the excessive deficit is corrected in a timely and sustainable manner. 

(1)

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

(2)

     Therefore, in the remainder of this Communication, euro area refers to the aggregate of euro area member states excluding Greece.

(3)

     As the submission deadline of 15 October fell on a Sunday in 2017, in line with the applicable legal rules, the deadline was extended to Monday 16 October 2017.

(4)

     "Specifications on the implementation of the Two Pack and Guidelines on the format and content of draft budgetary plans, economic partnership programmes and debt issuance reports", endorsed by ECOFIN on July 9, 2013, and amended on November 7, 2014, available at http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/2014-11-07_two_pack_coc_amended_en.pdf

(5)

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

(6)

   See Council Recommendation of 21 March 2017 on the economic policy of the euro area (OJ 2017/C92/01):
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017H0324(01)&from=EN

(7)

     See COM(2017) 770 final.

(8)

     Matrix specifying the annual fiscal adjustment towards the Medium-Term Objective under the preventive arm of the SGP, as set out in the Commission Communication of 13 January 2015 on making the best use of the flexibility within the existing rules of the Stability and Growth Pact, see: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0012&from=EN

(9)

     The output gap on the basis of the Draft Budgetary Plans is recalculated by the Commission on the basis of the information provided in the plans using the commonly agreed methodology. The output gap taken at face value from the plans remains negative in the case of Belgium, France and Italy.

(10)

     The structural balance is the cyclically-adjusted balance net of one-off and temporary measures. The structural balances of the DBPs are recalculated by the Commission on the basis of the information provided in the programme using the commonly agreed methodology.

(11)

     Based on the plans, also Estonia is at its MTO in 2017. It plans to remain so but this is not confirmed by the recalculated figure.

(12)

     In particular, Cyprus, Luxembourg, Malta and the Netherlands.

(13)

  However, this fiscal expansion is not reflected in the Commission forecast, which projects a stable structural balance. For the euro area aggregate, the less expansionary stance of Germany in the Commission forecast is offset by a substantially more expansionary or less contractionary stance in the forecast compared to the plans of some other Member States (In particular Belgium, Spain, France, Lithuania, the Netherlands, Portugal, Slovenia).

(14)

     The discretionary fiscal effort (DFE) is an indicator for the fiscal effort. It combines a top-down approach on the expenditure side with a bottom-up or narrative approach on the revenue side. In a nutshell, the DFE consists of the increase in primary expenditure net of cyclical components relative to economic potential on the one hand, and of discretionary revenue measures (excluding one-off measures) on the other hand. See European Commission (2013): Measuring the fiscal effort, Report on Public Finances in EMU, part 3 http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee-2013-4.pdf

(15)

     Also the different reference growth rate underlying the calculation of the DFE plays a role.

(16)

     The difference with the plans is explained by a more dynamic primary expenditure pattern, while discretionary revenue measures (excluding one-offs) are broadly neutral as is the case in the plans. The more expansionary stance of the DFE compared to the reading of the structural balance is explained by the fact that it does not include interest windfalls and has a lower underlying reference growth rate, which only partly offset the impact of revenue shortfalls which impact the change structural balance.

(17)

     Or with the transitional debt rule during the three years following the correction of an excessive deficit.

(18)

     The aggregate revenue-to-GDP elasticity of both the plans and the Commission forecast is around 0.9, compared to a standard revenue-to-output gap elasticity of 1.

(19)

     Long-term interest rates are derived from the 10-year swap rate deflated by inflation expectations.

(20)

     As mentioned in section 3, the output gap estimates of some Member States appear subject to particular uncertainty.

(21)

     The methodology used to assess fiscal sustainability risks is presented in the European Commission Fiscal Sustainability Report 2015 (European Economy Institutional Paper, no. 018, January 2016) and the European Commission Debt Sustainability Monitor 2016 (European Economy Institutional Paper, no. 047, January 2017). These updated results, based on the Commission 2017 Autumn forecast, will be presented in the forthcoming European Commission Debt Sustainability Monitor 2017.

(22)

     The Commission's S1 sustainability indicator shows the total effort required over 2020-2024 (the five years beyond the forecast horizon) so as to bring debt to 60% of GDP by 2032, taking into account contingent liabilities related to ageing. It points to an additional adjustment of 1.8% of GDP for the euro area (excluding Greece) over these five years. This translates into an additional yearly adjustment of approximately 0.4% of GDP between 2020 and 2024.

(23)

     Council Recommendations of 11 July 2017 (JO 2017/C261)

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:C:2017:261:TOC

(24)

     Letter by the Italian Minister of Economy and Finance from 30 October 2017, sent in reply to the Commission's letter from 27 October 2017.

EUROPEAN COMMISSION

Brussels, 22.11.2017

COM(2017) 800 final

ANNEXES

to the

Communication from the Commission

2018 Draft Budgetary Plans: Overall Assessment

ANNEX I: Country-specific assessment of DBPs

Member States under the preventive arm of the SGP

Plans compliant with the country's obligations

The Commission is of the opinion that the Draft Budgetary Plan of Germany, which is currently under the preventive arm and subject to the debt reduction benchmark, is compliant with the provisions of the Stability and Growth Pact. Germany’s favourable budgetary situation provides scope to cover additional expenditure for stimulating potential growth, including through public investment in infrastructure, education, research and innovation, as recommended by the Council in the context of the European Semester, and to reduce the accumulated investment backlog, especially at municipal level. The Commission is also of the opinion that Germany has made limited progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Lithuania, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to implement the 2018 budget. The Commission is also of the opinion that Lithuania has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Latvia, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to implement the 2018 budget. The Commission is also of the opinion that Latvia has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Luxembourg, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to implement the 2018 budget.  The Commission is also of the opinion that Luxembourg has made limited progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of the Netherlands, which is currently under the preventive arm, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to implement the 2018 budget. The Commission is also of the opinion that the Netherlands has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Finland, which is currently under the preventive arm and subject to the debt reduction benchmark, is compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to implement the 2018 budget.  The Commission is also of the opinion that Finland has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

Plans broadly compliant with the country's obligations

The Commission is of the opinion that the Draft Budgetary Plan of Estonia, which is currently under the preventive arm, is broadly compliant with the provisions of the Stability and Growth Pact. The Commission's autumn forecast projects risk of some deviation from the adjustment path towards the MTO in 2018. The Commission invites the authorities to stand ready to take further measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP.

The Commission is of the opinion that the Draft Budgetary Plan of Ireland, which is currently under the preventive arm and subject to the transitional period to make sufficient progress towards compliance with the debt reduction benchmark, is broadly compliant with the provisions of the SGP. The Commission invites the authorities to stand ready to take further measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP. The Commission is also of the opinion that Ireland has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Cyprus, which is currently under the preventive arm and subject to the transitional period to make sufficient progress towards compliance with the debt reduction benchmark, is broadly compliant with the provisions of the Stability and Growth Pact. Based on the Commission 2017 autumn forecast, there is a risk of some deviation from the MTO in 2017 and in 2018. Cyprus is projected to be compliant with the debt criterion in 2017 and 2018. The Commission invites the authorities to stand ready to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP, and to carefully monitor expenditure developments in the short and medium term, due to the risks associated with increases in expenditure being financed by revenue windfalls.  The Commission is also of the opinion that Cyprus has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Malta, which is currently under the preventive arm, is broadly compliant with the provisions of the Stability and Growth Pact. While at face value the structural balance is expected to remain in surplus in 2018, according to the Commission forecast there appear to be risks concerning the dynamics of public expenditure. The Commission invites the authorities to stand ready to take further measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP. The Commission is also of the opinion that Malta has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Slovakia, which is currently under the preventive arm, is broadly compliant with the provisions of the Stability and Growth Pact. The Commission invites the authorities to stand ready to take further measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP. The Commission is also of the opinion that Slovakia has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

Plans at risk of non-compliance with the country's obligations

After considering the need to balance the two objectives of strengthening the ongoing recovery and ensuring fiscal sustainability, the Commission is of the opinion that the Draft Budgetary Plan of Belgium, which is currently under the preventive arm and subject to the debt reduction benchmark, is at risk of non-compliance with the provisions of the SGP. In particular, the Commission projects a risk of significant deviation from the required adjustment towards the MTO for both 2017 and 2018. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP and to use windfall gains to accelerate the reduction of the government debt-to-GDP ratio. Compliance with the preventive arm requirements is a key relevant factor when assessing compliance with the debt criterion. The Commission is also of the opinion that Belgium has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and invites the authorities to make further progress.

After considering the need to balance the two objectives of strengthening the ongoing recovery and ensuring fiscal sustainability, the Commission is of the opinion that the Draft Budgetary Plan of Italy, which is currently under the preventive arm and subject to the debt reduction benchmark, is at risk of non-compliance with the provisions of the Stability and Growth Pact. The fiscal adjustment projected in the Commission 2017 autumn forecast for 2018 is not adequate in light of the sustainability challenges that Italy faces. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP and to use windfall gains to accelerate the reduction of the government debt-to-GDP ratio. Compliance with the preventive arm requirements is a key relevant factor when assessing compliance with the debt criterion. The Commission is also of the opinion that Italy has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 and invites the authorities to make further progress.

While acknowledging the no-policy-change nature of its projections, the Commission is of the opinion that the Draft Budgetary Plan of Austria, which is currently under the preventive arm and subject to the debt reduction benchmark, is at risk of non-compliance with the provisions of the Stability and Growth Pact. The Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP. The Commission is also of the opinion that Austria has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the European Semester and thus invites the authorities to make further progress.

After considering the need to balance the two objectives of strengthening the ongoing recovery and ensuring fiscal sustainability, the Commission is of the opinion that the Draft Budgetary Plan of Portugal, which is currently under the preventive arm and subject to the transitional arrangements as regards compliance with the debt reduction benchmark, is at risk of non-compliance with the provisions of the Stability and Growth Pact. In particular, the Commission projects a risk of significant deviation from the required adjustment towards the MTO for both 2017 and 2018. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP.  The Commission is also of the opinion that Portugal has made limited progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester and thus invites the authorities to accelerate progress.

After considering the need to balance the objectives of strengthening the ongoing recovery and of ensuring fiscal sustainability, the Commission is of the opinion that the Draft Budgetary Plan of Slovenia, which is currently under the preventive arm and subject to the transitional period to make sufficient progress towards compliance with the debt reduction benchmark, is at risk of non-compliance with the provisions of the Stability and Growth Pact. The fiscal adjustment projected in the Commission forecast for 2018 is not adequate in light of the medium-term sustainability challenges that Slovenia faces. The improvement in the headline deficit and the debt-to-GDP ratio is partly explained by the favourable economic environment. The firming recovery provides the conditions for Slovenia to restore sufficient fiscal buffers needed to weather future downturns. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP. The Commission is also of the opinion that Slovenia has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Recommendation of 11 July in the context of the 2017 European Semester and thus invites the authorities to make further progress.

Member States under the corrective arm of the SGP

Plans broadly compliant with the country's obligations

The Commission is of the opinion that the Draft Budgetary Plan of Spain, which is currently under the corrective arm, is broadly compliant with the provisions of the SGP as the Commission 2017 autumn forecast projects that the excessive deficit will be corrected in a timely manner. However, – while acknowledging the no-policy-change nature of the Draft Budgetary Plan projections – neither the Commission forecast nor the Draft Budgetary Plan project the headline deficit target set by the Council Decision to be met in 2018. Also the required fiscal effort in 2018 is not projected to be met by a wide margin.  The Commission is also of the opinion that Spain has made some progress with regard to the structural part of the fiscal recommendations contained in the Council Decision of 8 August 2016 and in the Council Recommendation of 11 July 2017 in the context of the 2017 European Semester, calling for a strengthening of Spain's fiscal and public procurement policy frameworks.

Plans at risk of non-compliance with the country's obligations

After considering the need to balance the two objectives of strengthening the ongoing recovery and ensuring fiscal sustainability, the Commission is of the opinion that the Draft Budgetary Plan of France for 2018, which is currently under the corrective arm and could become subject to the preventive arm and the transitional debt rule from 2018, is at risk of non-compliance with the provisions of the Stability and Growth Pact. In particular, the Commission projects a risk of significant deviation from the required adjustment towards the MTO for 2018. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2018 budget will be compliant with the SGP and to use windfall gains to accelerate the reduction of the government debt-to-GDP ratio. Compliance with the preventive arm requirements is a key relevant factor when assessing compliance with the debt criterion. The Commission is also of the opinion that France has made some progress with regard to the structural part of the fiscal recommendations contained inthe Council Recommendation of 11 July 2017 issued in the context of the 2017 European Semester and invites the authorities to make further progress.

ANNEX II: The methodology and assumptions underpinning the Commission autumn 2017 forecast

According to Article 7(4) of Regulation (EU) No 473/2013, "the methodology and assumptions of the most recent economic forecasts of the Commission services for each Member State, including estimates of the impact of aggregated budgetary measures on economic growth, shall be annexed to the overall assessment". The assumptions underlying the Commission 2017 autumn forecast, which is produced independently by Commission staff, are explained in the forecast document itself. 1

Budgetary data up to 2016 are based on data notified by Member States to the Commission before 1 October 2017 and validated by Eurostat on 23 October 2017. Eurostat has made no amendments to the data reported by Member States during the autumn 2017 notification round. Eurostat has withdrawn the reservation on the quality of the data reported by Luxembourg in relation to the sector classification of hospitals, as well as a number of technical issues such as the recording of receivables and payables, the size of statistical discrepancies in the EDP tables and the unavailability of data for local government. Eurostat expressed a reservation on the quality of the data reported by France in relation to the recording of some operations of the Agence Française de Développement. Eurostat maintained the reservation on the quality of the data reported by Belgium in relation to the sector classification of hospitals. Eurostat also maintained a reservation on the quality of the data reported by Hungary in relation to the sector classification of Eximbank. On the other hand, Eurostat has withdrawn the reservation on the quality of the data reported by Hungary in relation to the sector classification of the statutory protection funds and the Hungarian Restructuring and Debt Management company.

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

For 2018, budgets adopted or presented to national parliaments and all other measures known in sufficient detail are taken into consideration. In particular, all the information included in the DBPs submitted by mid-October is reflected in the autumn forecast. For 2019, the 'no-policy-change' assumption used in the forecasts implies the extrapolation of revenue and expenditure trends and the inclusion of measures that are known in sufficient detail. 

European aggregates for general government debt in the forecast years 2017-2019 are published on a non-consolidated basis (i.e. not corrected for intergovernmental loans). To ensure consistency in the time series, historical data are also published on the same basis. General government debt projections for individual Member States in 2017-19 include the impact of guarantees to the EFSF, bilateral loans to other Member States, and the participation in the capital of the ESM as planned on the cut-off date of the forecast. 3

According to the Commission autumn 2017 forecast, the budgetary measures reported in the DBPs for 2018 are marginally deficit-reducing on aggregate (impact of less than 0.1% of GDP). This is entirely due to the aggregate impact of expenditure measures, while revenue measures are neutral on aggregate. Overall, the mechanical impact on GDP growth in the short-term is projected to be negligible.

It is important to be prudent in interpreting this estimate:

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

·The Regulation aims at evaluating the effect of the measures taken in the DBPs. Therefore measures taken and having entered into force before the DBP are not included in the assessment (even if they can have an additional impact on the public finance projections for 2018).

·Measures taken with effect in 2018 can also compensate for existing measures having a one-off impact in 2017 or for the trend increase in some expenditure items. Indeed, the baseline against which the above-mentionned expenditure measures are reported in itself implies an expansionary stance. This is illustrated by the fact that despite the marginally deficit-reducing impact of DBP measures, the aggregate fiscal stance in 2018 is mildly expansionary.

ANNEX III: Sensitivity analysis

According to Article 7 of Regulation (EU) No 473/2013, "the overall assessment shall include sensitivity analyses that provide an indication of the risks to public finance sustainability in the event of adverse economic, financial or budgetary developments". This Annex therefore presents a sensitivity analysis of public debt developments to possible macroeconomic shocks (to growth, interest rates and the government primary balance), relying on results from stochastic debt projections. 4 The analysis allows gauging the possible impact on public debt dynamics of downside and upside risks to nominal GDP growth, the effects of positive/negative developments on financial markets, translating into lower/higher borrowing costs for governments, and fiscal shocks affecting the government budgetary position.

With stochastic projections the uncertainty in future macroeconomic conditions is featured in the analysis of public debt dynamics around a 'central' debt projection scenario, which corresponds respectively to the Commission autumn 2017 forecast scenario and the DBPs' forecast scenario in the two panels of the graph below, reporting results for the EA-18 (in both cases the usual no-fiscal policy change assumption is made beyond the forecast horizon). 5 Shocks are applied to the macroeconomic conditions (short-term and long-term interest rates on government bonds; growth rate; government primary balance) assumed in the central scenario to obtain the 'cone' (distribution) of possible debt paths presented in the graph below. The cone corresponds to a wide set of possible underlying macroeconomic conditions, with as many as 2000 shocks simulated on growth, interest rates and the primary balance. The size and correlation of the shocks reflect the variables' historical behaviour. 6 This implies that the methodology does not capture real-time uncertainty, which at the present juncture may be higher especially for the output gap. The resulting fan charts in the graph below therefore provide probabilistic information on debt dynamics for the EA-18, taking into account the possible occurrence of shocks to growth, interest rates and the primary balance of a magnitude and correlation mirroring those observed in the past.

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

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

For both the Commission and the DBP forecast scenarios, accounting for both downside and upside risks to the government primary balance, growth and financial market conditions leads to a EA-18 debt in 2018 lying between around 83% and 89% of GDP with an 80% probability (as the cone represents 80% of all possible simulated debt paths). Lower and upper bounds of the debt ratio interval in 2018 would thus be fairly similar for the Commission scenario compared to the DBP scenario, due to a very small difference between the respective central forecasts to which shocks apply (a debt ratio at around 86% in the Commission scenario and the DBP scenario).

Beyond 2018, the horizon of the current DBPs, simulation results show that the difference in projected debt ratios under shocks between the Commission and the DBP scenarios remains fairly limited. At the end of the projection horizon considered in the fan charts (2022), there would be a 50% probability of a debt ratio higher than around 79% and 80% of GDP in the DBP and Commission scenarios respectively. This small difference is mainly due to the structural primary balance kept constant at a slightly higher last forecast surplus in the DBP scenario compared to the Commission scenario.

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

ANNEX IV. Graphs and Tables

Table IV.1: Real GDP growth (%) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2017 autumn forecast (COM)

Table IV.2: Headline balance targets (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2017 autumn forecast (COM)

Graph IV.1: Comparison of headline government balance (% of GDP) as projected for 2018 by the Commission 2017 autumn forecast (COM) and by the Draft Budgetary Plans (DBP)

Note: The graph plots the 2018 headline budget balances from the DBPs (horizontal axis) against the projections of the Commission 2017 autumn forecast (vertical axis). Member States above (below) the bi-sector line are those where the Commission forecasts a lower (higher) headline balance than the DBPs.

Graph IV.2: Decomposition of the difference in headline balance targets (% of GDP) for 2018 between the Commission 2017 autumn forecast and the Draft Budgetary Plans

Note: The graph breaks the difference in 2018 headline balance between DBP and Commission forecast down into the impact of a different starting point (2017 base effect), the impact of different growth assumptions (nominal growth effect), and a residual which includes a policy gap related to the expected impact of measures. A positive sign means that the Commission forecast is more optimistic.

Table IV.3: Changes in structural balance (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2017 autumn forecast (COM)

Table IV.4: Changes in structural primary balance (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2017 autumn forecast (COM)

Graph IV.3: Change in the structural balance in 2018 (% of potential GDP): Draft Budgetary Plans (DBP) versus Commission 2017 autumn forecast (COM)

Graph IV.4: Discretionary Fiscal Effort in 2018 (% of GDP): Draft Budgetary Plans (DBP) versus Commission 2017 autumn forecast (COM)

Note: For the calculation of the Discretionary Fiscal Effort on the basis of the DBP, the 10-year average potential growth rate of the Commission forecast is used as a benchmark rate for medium term economic growth.

Table IV.5: Medium-Term budgetary Objectives (MTOs), as set in the 2017 Stability Programmes, and Minimum Benchmarks (MB) as from 2018 for EA-18

Graph IV.5a: Member States position vis-à-vis their MTO according to the Commission 2017 autumn forecast (% of GDP)

Graph IV.5b: Member States position vis-à-vis their MTO according to the 2018 Draft Budgetary Plans (% of GDP)

Note: The graph sets out Member States' progress towards their respective MTOs between 2017 and 2018, based on the Commission forecast (upper graph) and the Draft Budgetary Plans (lower graph). The base of the arrow represents the starting position of the structural balance in 2017, while the tip of the arrow represents the projected or planned (recalculated) structural balance in 2018. Thus, the size of the green (red) arrow corresponds to the improvement (deterioration) in the structural balance between 2017 and 2018. Finally, the dark squares represent each Member State's MTO for 2018.

Table IV.6: Debt-to-GDP ratio (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2017 autumn forecast (COM)

Graph IV.6: Drivers for the change in debt ratio between 2017 and 2018, based on the DBPs (% of GDP)

Note: The graph breaks the change in debt-to-GDP ratios down into the impact of the primary balance, planned stock-flow adjustments and the 'snowball effect'. The snowball effect represents the difference between projected growth rates and interest rates.

Table IV.7: Composition of the fiscal consolidation in 2017 and 2018 for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2017 autumn forecast (COM)

Graph IV.7: Projected changes in cyclically-adjusted expenditure ratios in the 2018 Draft Budgetary Plans (DBP) and Commission 2017 autumn forecast (COM)

Graph IV.8: Projected changes in main types of expenditure (% of GDP) for 2018 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2017 autumn forecast (COM)

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

Graph IV.9: Investment (% of GDP) in 2018 according to euro area Member States' Draft Budgetary Plans

Graph IV.10: Discretionary revenue measures and other changes in the revenue ratio in 2018: Draft Budgetary Plans (DBP) versus Commission 2017 autumn forecast (COM)

Graph IV.11: Projected changes in main types of tax revenue (% of GDP) for 2018 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2017 autumn forecast (COM)

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

Table IV.8: Short-term elasticities underlying revenue projections for 2018 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2017 autumn forecast (COM) and standard elasticities estimated by the OECD

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

Table IV.9: Sustainability indicators based on the European Commission 2017 autumn forecast

Note: based on the methodology used in the European Commission Fiscal Sustainability Report 2015 and the Debt Sustainability Monitor 2016. These updated results, based on the European Commission 2017 autumn forecast, will be presented in the forthcoming Debt Sustainability Monitor 2017.

(1)

     Methodological assumptions underlying the Commission autumn 2017 economic forecast, available at: http://ec.europa.eu/economy_finance/publications/eeip/forecasts_en.htm ).

(2)

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

(3)

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

(4)

     The methodology for stochastic public debt projections used here is presented in the European Commission's Fiscal Sustainability Report 2015, Section 1.3.2, and in Berti K. (2013), "Stochastic public debt projections using the historical variance-covariance matrix approach for EU countries", European Economy Economic Paper No. 480.

(5)

     This entails that the EA-18 structural primary balance is assumed to remain constant at the last forecast value – a 0.8% surplus in 2018 in the DBP scenario, against a 0.6% surplus in 2019 in the Commission scenario – over the rest of the projection horizon.

(6)

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