14 Stability and Convergence Programmes
| (a)
(25973)
11189/04
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(b)
(25974)
11190/04
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(c)
(25975)
11191/04
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(d)
(25976)
11192/04
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(e)
(25977)
11193/04
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(f)
(25978)
11194/04
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(g)
(25979)
11195/04
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(h)
(25980)
11196/04
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(i)
(25981)
11197/04
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(j)
(25982)
11198/04
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Council Opinion on the convergence programme of the Czech Republic
Council Opinion on the convergence programme of Estonia
Council Opinion on the convergence programme of Cyprus
Council Opinion on the convergence programme of Latvia
Council Opinion on the convergence programme of Lithuania
Council Opinion on the convergence programme of Hungary
Council Opinion on the convergence programme of Malta
Council Opinion on the convergence programme of Poland
Council Opinion on the convergence programme of Slovenia
Council Opinion on the convergence programme of Slovakia
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| Legal base | Articles 99(4) and 104 EC; —; QMV
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| Documents originated | 6 July 2004
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| Deposited in Parliament | 1 October 2004
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| Department | HM Treasury
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| Basis of consideration | EM of 11 October 2004
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| Previous Committee Report | None
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| Discussed in Council | Already adopted
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
14.1 The Council of Economic and Finance Ministers (ECOFIN) issues
an Opinion on the Stability and Convergence Programme (SCP) of
each Member State.[28]
These Opinions, which are not binding on Member States, are based
on a recommendation from the Commission. The economic content
of the programmes is assessed with reference to the Commission's
current economic forecasts. If a Member State's programme is
found wanting, it may be invited by ECOFIN, in a Recommendation,
to make adjustments to its economic policies, though such Recommendations
are likewise not binding on Member States.
The documents
14.2 The documents provide the Council's Opinion on the convergence
programmes of each of the new Member States, which are assessed
in relation to the Commission's Spring 2004 economic forecasts.
A summary of the Council's comments for each of these Member
State is provided by the Financial Secretary to the Treasury (Mr
Stephen Timms) in his helpful Explanatory Memorandum (in which
he apologises for the failure to deposit these documents more
promptly), as follows:
Cyprus — Council Opinion on the Convergence Programme,
2004-2007
"On 5 July 2004, on the basis of recommendations
from the Commission, the Council decided that an excessive deficit
existed in Cyprus and made recommendations to Cyprus with a view
to bringing that situation to an end. The Opinion notes that the
programme foresees the fiscal deficit will be reduced to (below)
the 3% of GDP reference value in 2005 and to fall further thereafter.
This is underpinned by a package of mostly structural measures
to contain expenditure and to increase revenue, to about an equal
degree, mostly implemented from 2005 onward. The adjustment path
presented in the programme reflects the government commitment
to improve public finances, given their intention to adopt the
euro by 2007. The Opinion notes that given the mixed record on
fiscal consolidation, this looks rather ambitious and will therefore
require strong commitment, including taking additional measures
if necessary, for its implementation. The macro-economic scenario
underlying the programme seems to reflect plausible assumptions.
Regarding long-term sustainability, the Opinion notes that Cyprus
faces risks of budgetary imbalances in meeting the costs of an
ageing population and that timely implementation of reforms are
essential to put public finances on a sustainable footing.
Czech Republic — Council Opinion on the
Convergence Programme, 2004-2007
"On 5 July 2004, on the basis of recommendations
from the Commission, the Council decided that an excessive deficit
existed in the Czech Republic and made recommendations with a
view to bringing that situation to an end. The Opinion notes that
the programme indicates the elimination of the excessive deficit
by 2008. This is set to be achieved by fiscal consolidation measures
adopted to a large extent in 2003 and 2004. On the revenue side,
the programme constitutes a shift from direct to indirect taxation.
On the expenditure side, the programme foresees a decrease in
transfers and subsidies and in government consumption. The macro-economic
scenario underlying the programme reflects cautious growth assumptions.
But, the Opinion notes that the adjustment path is not very ambitious
in the absence of fundamental reforms in social expenditures and
taking account of the projected recovery. Regarding long term
sustainability, the Opinion notes that the Czech Republic faces
serious risks of budgetary imbalances in meeting the cost of an
ageing population. Greater budgetary consolidation and a comprehensive
reform of pension and healthcare systems are recommended.
Estonia — Council Opinion on the Convergence
Programme, 2004-2007
"The Opinion notes that the budgetary strategy
underlying the programme aims at maintaining a budgetary position
of close-to-balance or in surplus. The programme targets a small
fiscal surplus in 2004 and balanced budgets from 2005 onwards.
Public investment is forecast to remain high. The programme incorporates
reforms to reduce direct taxes, and increase transfer payments
and tax allowances. The Opinion notes that the macro-economic
assumptions are plausible. The risks are also broadly balanced.
On the one hand, Estonia has established a track record of prudent
forecasting and repeated overshooting of fiscal targets. On the
other hand, unexpected revenue shortfall from the planned tax
cuts, or adverse impacts on growth from exogenous shocks cannot
be excluded altogether. The Opinion notes that Estonia is well
placed to meet the budgetary costs of an ageing population.
Hungary — Council Opinion on the Convergence
Programme, 2004-2007
"On 5 July 2004, on the basis of recommendations
from the Commission, the Council decided that an excessive deficit
existed in Hungary and made recommendations with a view to bringing
that situation to an end. The Opinion notes that the budgetary
strategy underlying the programme aims at reducing the excessive
deficit by 2008, while also reducing the weight of the public
sector in the economy. To this end, the programme envisages a
frontloaded consolidation. This is expenditure-based, underpinned
by structural reforms, predominantly in public administration,
health and education. However, these reforms still have to be
specified and implemented. The Opinion notes that the macroeconomic
projections follow a somewhat optimistic projection of the rise
in the growth rate. The deficit reduction seems within reach,
but there are risks that growth could turn out lower than forecast,
from the experience with expenditure overruns in the past, and
the lack of information on the expenditure-reducing measures in
the outer years of the programme. Regarding long-term sustainability,
the Opinion notes that Hungary faces some risk of budgetary imbalances
in meeting the projected costs of an ageing population. Securing
an adequate primary surplus and reform, particularly in health
care, is essential.
Latvia — Council Opinion on the Convergence
Programme, 2004-2007
"The Opinion notes that the programme complies
only partly with the data requirements of the revised 'code of
conduct on the content and format of stability and convergence
programmes'. The budgetary strategy underlying the programme aims
to reduce the fiscal deficit towards balance in the long term.
The programme's targets for the general government deficit are
below the 3% of GDP reference value in each year. However, the
Opinion notes that the pace of consolidation is rather slow. Risks
to the budgetary outcome seem broadly balanced. The growth forecast
is possibly optimistic, while confidence is tempered by poor data
quality. This is countered by some apparent pessimism in revenue
forecasts, particularly in the later programme years. The Opinion
notes that Latvia is relatively well-placed to meet the budgetary
costs of an ageing population.
Lithuania — Council Opinion on the Convergence
Programme, 2004-2007
"The Opinion notes that the budgetary strategy
underlying the programme aims at approximating a cyclically balanced
general government budget. But, the strategy is not fully reflected
in the programme's deficit targets. The macro-economic scenario
underlying the programme also seems to reflect rather favourable
growth assumptions. The programme's targets for the general government
deficit are below the 3% of GDP reference value in each year,
but there is little safety margin in the initial years of the
programme. The Opinion notes that downside macroeconomic risks
and past experience with expenditure overruns in response to better-than-planned
revenue outturns represent a risk to the envisaged targets. The
opinion notes that Lithuania is placed relatively well to meet
the budgetary costs of an ageing population although some risk
may emerge in the long run.
Malta — Council Opinion on the Convergence
Programme, 2004-2007
"On 5 July 2004, on the basis of recommendations
from the Commission, the Council decided that an excessive deficit
existed in Malta and made recommendations with a view to bringing
that situation to an end. The Opinion notes that the budgetary
strategy underlying the programme aims at eliminating the excessive
deficit by 2006. This is underpinned by a package of measures
aiming at controlling and rationalising spending and, on the revenue
side, at avoiding tax evasion. The effect of the policy measures
necessary to achieve the targets is not fully quantified in the
programme. The macro-economic scenario underlying the programme
seems to reflect plausible growth assumptions. The Opinion notes
that achieving the consolidation path requires strong commitment
by the Maltese authorities and the programme may not be sufficient
to reduce the deficit. Regarding long-term sustainability, the
Opinion notes that Malta faces risks of budgetary imbalances in
meeting the projected costs of an ageing population. Securing
an adequate primary surplus and reform, particularly in health
care, is essential.
Poland — Council Opinion on the Convergence
Programme, 2004-2007
"On 5 July 2004, on the basis of recommendations
from the Commission, the Council decided that an excessive deficit
existed in Poland and made recommendations with a view to bringing
that situation to an end. The Opinion notes that the budgetary
strategy underlying the programme aims at eliminating the excessive
deficit by 2007. To this end, the programme incorporates a comprehensive
set of measures (the so-called Hausner plan). The Opinion notes
that the achievement of the deficit target is also conditional
on projected high growth throughout the programme period. But,
there is uncertainty over the implementation of the envisaged
measures, with the planned adjustment not only being heavily back-loaded
but also not fully consistent with the Hausner plan. The effect
of a recent Eurostat decision on the classification of the funded
pension scheme may also raise the deficit further. Therefore,
the budgetary stance in the programme may not sufficiently reduce
the deficit. Regarding long-term sustainability, the Opinion notes
that Poland faces a risk of budgetary imbalances in meeting the
projected costs of an ageing population. While earlier pension
reform has mitigated many of the risks, it has not entirely removed
them.
Slovak Republic — Council Opinion on the
Convergence Programme, 2004-2007
"On 5 July 2004, on the basis of recommendations
from the Commission, the Council decided that an excessive deficit
existed in the Slovak Republic and made recommendations with a
view to bringing that situation to an end. The Opinion notes that
the programme foresees the elimination of the excessive deficit
by 2007. This is underpinned by structural reforms, predominantly
in health care and social protection, which are mostly already
enacted and in force. This also takes place against the backdrop
of a far-reaching but revenue-neutral tax reform package (effective
since the beginning of 2004). The Opinion notes that the macro-economic
scenario underlying the programme reflects plausible assumptions.
Given the assumption of a very robust growth of the Slovak economy,
the size and path of the deficit reduction may not look very ambitious.
However, the reduction in primary expenditures, a revenue decrease
resulting from pensions reform, and the, partly one-off, adjustment
achieved in 2003 should all be taken into account. The overall
risks appear broadly balanced. They are more positive in 2004,
when the deficit is projected to increase marginally. Downside
risks are concentrated on expenditure and consist mainly in a
delay of the proposed health care reforms and public sector rationalisation.
The Opinion notes that the main risks to long-term sustainability
stem from a lack or a delay in reform implementation or from any
backtracking on already implemented reforms.
Slovenia — Council Opinion on the Convergence
Programme, 2004-2007
"The Opinion notes that the budgetary strategy
underlying the programme aims at achieving close-to-balance public
finances. To this end, the programme envisages a gradual reduction
of the general government deficit over the period covered, consistent
with a cut in both the revenue and the primary expenditure ratio,
the latter through restraint on mandatory expenditure. General
government deficits are foreseen to stay below the 3% of GDP reference
value in each year. But, the outcome could be worse than projected,
in particular, given the downside macroeconomic risks related
to an upbeat growth forecast in 2004. Moreover, the fiscal consolidation
is back-loaded. Therefore, the budgetary stance may not provide
a sufficient safety margin against breaching the threshold with
normal macroeconomic fluctuations, especially in the initial years
of the programme period. Regarding long-term sustainability, the
Opinion notes that Slovenia faces risks of budgetary imbalances
in meeting the costs of an ageing population. Implementing pension
and health care reform is essential."
The Government's view
14.3 The Minister comments:
"As we have consistently stated, the UK supports
a prudent interpretation of the Stability and Growth Pact, which
takes into account the economic cycle, sustainability
and the important role of public investment."
Conclusion
14.4 These documents, which we clear, and the
Minister's summaries give a useful overview of the prospects for
the economies of the new Member States.
14.5 We note the Minister's apology for the failure
to deposit these documents more promptly and trust that future
Opinions will, as in the past, be deposited shortly after publication.
28 The 12 Member States that have adopted the euro
have Stability Programmes, whereas the other 13 Member States
(UK, Denmark and Sweden and the ten new Member States) produce
Convergence Programmes. Back
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