19 Stability and Growth Pact
| (a)
(26677)
10605/05
SEC(05) 834
(b)
(26791)
10801/05
SEC(05) 887
(c)
(26792)
11282/05
SEC(05) 951
(d)
(26793)
11478/05
+ REV 1
SEC(05) 992
(e)
(26794)
11480/05
SEC(05) 994
(f)
(26936)
11124/05
—
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Draft Opinion in accordance with Article 5(3) of Regulation (EC) No. 1466/97 of 7 July 1997 on the updated stability programme of Portugal, 2005-2009
Draft Decision on the existence of an excessive deficit in Italy: Application of Article 104(6) of the Treaty establishing the European Community
Commission Communication: The action taken by Hungary in response to the Council Recommendation of 8 March 2005 according to Article 104(7) under the excessive deficit procedure
Draft Decision on the existence of an excessive deficit in Portugal prepared in accordance with Article 104(6) of the Treaty
Draft Council Recommendation to Portugal with a view to bringing an end to the situation of an excessive government deficit
Draft Council Recommendation to Italy with a view to bringing an end to the situation of an excessive government deficit - application of Article 104(7) of the Treaty establishing the European Community
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| Legal base | (a) Articles 99(4) and 104 EC; —; QMV
(b) and (d) Article 104(6) EC; —; QMV
(c), (e) and (f) Article 104 (7) EC; —; QMV
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| Documents originated | (a) 22 June 2005
(b) 29 June 2005
(c) 13 July 2005
(d) 20 July 2005
(e) 20 July 2005
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| Deposited in Parliament | (a) 1 July 2005
(b)-(e) 2 September 2005
(f) 24 October 2005
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| Department | HM Treasury
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| Basis of consideration | (a) EM of 3 October 2005
(b)-(e) EM of 3 October 2005
(f) EM corrigendum of 21 October 2005
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| Previous Committee Report | None
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| Discussed in Council | (a), (b) and (f) Adopted by ECOFIN 12 July 2005
(c) Not known
(d) and (e) Adopted by ECOFIN 29 September 2005
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
19.1 In the context of the Stability and Growth Pact adopted
by the Amsterdam European Council in June 1997, the Council of
Economic and Finance Ministers (ECOFIN) issues an Opinion each
year on the stability or convergence programme of each Member
State.[46] 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.
19.2 The Stability and Growth Pact emphasised the
obligation of Member States to avoid excessive government deficits,
defined as the ratio of a planned or actual deficit to gross domestic
product (GDP) at market prices in excess of a "reference
value" of 3%.[47]
The Pact also endorsed action in cases of an excessive government
deficit — the excessive deficit procedure provided for in
Article 104 EC and the relevant Protocol. This procedure consists
of Commission reports followed by a stepped series of Council
Recommendations (the final two steps do not apply to non-members
of the eurozone). Failure to comply with the final stage of Recommendations
allows the Council to require publication of additional information
by the Member State concerned before issuing bonds and securities,
to invite the European Investment Bank to reconsider its lending
policy for the Member State concerned, to require a non-interest-bearing
deposit from the Member State concerned whilst its deficit remains
uncorrected, or to imp ose appropriate fines on the Member State
concerned.
The documents
19.3 Document (a) provides the Council's Opinion
on the stability programme of Portugal, which is assessed in relation
to the Commission's Spring 2005 economic forecasts. (Our predecessors
have already reported on the Opinions for 23 Member States and
we reported on that for Greece in July 2005.)[48]
A summary of the Council's comments for Portugal is provided by
the Economic Secretary to the Treasury (Mr Ivan Lewis) in his
helpful Explanatory Memorandum, as follows:
"The Council Opinion notes that the Programme
is built around the need to correct a government deficit, which
at 6.2% of GDP in 2005 is planned to be well in excess of 3% of
GDP. This figure follows a deficit of 2.9% of GDP in years 2002
to 2004. The deterioration is explained by weaker than expected
growth, reassessment of expenditure growth, over-runs compared
to the budget and the non-introduction of one-off measures planned
in the previous Programme, as well by a corrective package of
some 0.6% of GDP adopted by the new government in June 2005.
"The Opinion notes that the general government
deficit is projected to decline to 4.8% of GDP in 2006, 3.9% in
2007 and 2.8% in 2008. In the early part of the Programme period,
consolidation is relying mainly on increasing revenues, through
higher tax rates, lower tax credits and improved tax collection.
In the outer years, the increased contribution from expenditure
restraint is foreseen to come from measures of a permanent nature,
such as the reform of the public administration, containment of
the wage bill and changes in the social security retirement schemes.
"The Opinion also notes that the budgetary
outcome in the Programme is subject to several risks. First, the
acceleration in economic activity may be slower than expected.
Second, the revenue raising and expenditure restraining measures
may be less effective than projected or take longer to produce
the desired results. In view of this assessment the government
might be called to fulfil its commitment to take additional measures
in order to avoid the deficit exceeding 3% of GDP for longer than
planned. The Opinion goes onto note that the Programme is insufficient
to ensure that the Stability and Growth Pact's medium-term objective
of a budgetary position of close to balance is achieved within
the Programme horizon.
"The Programme projects that after reaching
66.5% of GDP in 2005; it will peak at 67.8% of GDP, declining
thereafter until it reaches 64.5% in 2009. The evolution of gross
debt suffers from the same risks as the fiscal plus debt-increasing
stock flow adjustments, in particular the accumulation of financial
assets. With regard to the long-term sustainability of the public
finances, the Opinion notes that Portugal appears to be at risk
on grounds of the projected budgetary cost of an ageing population.
"The Opinion notes that in the light of
the deficit and debt figures for 2005 and following years presented
in Programme, the Commission initiated the excessive deficit procedure
for Portugal on 22 June."
19.4 Documents (d) and (e) concern the excessive
deficit procedure for Portugal flowing from document (a). In the
first document the Commission proposes that the Council adopt
a Decision that an excessive deficit exists in Portugal. In the
second it presents to the Council a draft Recommendation to Portugal
that establishes a deadline of six months for it to present corrective
action and until 2008, at the latest, to bring its excessive deficit
to an end. It recommends a reduction in the deficit of 1.5% of
GDP in 2006 from the 2005 level, followed by a further decrease
of at least 0.75% of GDP in each of the two subsequent years.
19.5 Documents (b) and (f) concern the excessive
deficit procedure for Italy. In the first document the Commission
proposes that the Council adopt a Decision that an excessive deficit
exists in Italy. In the second it presents to the Council a draft
Recommendation to Italy that establishes a deadline of six months
for it to present corrective action and until 2007 to bring its
excessive deficit to an end. It recommends a reduction in the
deficit of 1.6% of GDP in 2006 and 2007 from the 2005 level, with
at least half the correction in 2006.
19.6 Document (c) is a Commission assessment of Hungary's
response to a Council Recommendation of March 2005 to deal with
its excessive deficit.[49]
The Commission finds that the Hungarian authorities had taken
effective action regarding the 2005 budget deficit, in line with
the Council advice. But achieving the deficit target of 3.6% of
GDP in 2005 may require further action and important and decisive
adjustments will be needed to cut it further to 2.9% in 2006.
The Government's view
19.7 On document (a) the Minister comments, as his
predecessor did on previous Opinions, that the Government supports
a prudent interpretation of the Stability and Growth Pact, which
takes into account the economic cycle, sustainability and the
role of public investment. On the other documents he comments
that they have no direct policy implications for the UK.
Conclusion
19.8 We clear these documents, but, as with earlier
documents, draw them to the attention of the House as background
information on the operation of the Stability and Growth Pact
and on the economies of other Member States.
46 The twelve 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
47
This obligation does not apply to the UK whilst it remains outside
the eurozone, but the UK is required to endeavour to avoid excessive
deficits. Back
48
See (26300) 5254/05 (26301) 5255/05 (26302) 5260/05 (26303) 5261/05
(26304) 5262/05: HC 38-viii (2004-05), para 11 (10 February 2005),
(26367) 6082/05 (26368) 6083/05 (26369) 6084/05 (26370) 6085/05
(26371) 6086/05 (26372) 6087/05 (26373) 6088/05 (26374) 6089/05
(26375) 6090/05 (26376) 6091/05 (26377) 6092/05: HC 38-xi (2004-05),
para 13 (15 March 2005), (26409) 6634/05 (26410) 6636/05 (26411)
6637/05 (26412) 6638/05 (26413) 6639/05 (26414) 6640/05 (26415)
6641/05: HC 38-xv (2004-05), para 17 (6 April 2005) and (26483)
7805/05: HC 34-i (2005-06), para 54 (4 July 2005). Back
49
See (26418) 6599/05: HC 38-xv (2004-05), para 16 (6 April 2005). Back
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