Select Committee on European Scrutiny Twenty-Fifth Report


6 Stability and Convergence Programmes

(a)

(27357)

7370/06


(b)

(27358)

7371/06


(c)

(27359)

7372/06

(d)

(27360)

7373/06


(e)

(27361)

7375/06


(f)

(27362)

7376/06


(g)

(27363)

7378/06


(h)

(27364)

7379/06


(i)

(27373)

7380/06

(j)

(27374)

7381/06


(k)

(27375)

7382/06


(l)

(27376)

7383/06


(m)

(27377)

7384/06


Council Opinion on the updated stability programme of Germany



Council Opinion on the updated stability programme of Greece



Council Opinion on the updated stability programme of Spain



Council Opinion on the updated stability programme of France



Council Opinion on the updated stability programme of Ireland



Council on the updated stability programme of Italy



Council Opinion on the updated stability programme of the Netherlands


Council Opinion on the updated stability programme of Portugal



Council Opinion on the updated convergence programme of Cyprus



Council Opinion on the updated convergence programme of Lithuania


Council Opinion on the updated convergence programme of Malta



Council on the updated convergence programme of Poland



Council on the updated convergence programme of the United Kingdom

Legal baseArticles 99(4) and 104 EC; —; QMV
Deposited in Parliament(a)-(h) 17 March 2006

(i)-(m) 22 March 2006

DepartmentHM Treasury
Basis of considerationEM of 9 April 2006
Previous Committee ReportNone
Discussed in CouncilAdopted by ECOFIN 14 March 2006
Committee's assessmentPolitically important
Committee's decisionDocuments (a) to (l) cleared. Document (m) not cleared, further information requested

Background

6.1 The Council of Economic and Finance Ministers (ECOFIN) issues an Opinion each year on the stability or convergence programme of each Member State.[14] 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

6.2 The documents provide the Council's Opinion on the stability or convergence programmes of 13 Member States, which are assessed in relation to the Commission's Autumn 2005 economic forecasts. (We have already reported on 12 other Opinions).[15] A summary of the Council's comments for each of these Member States is provided by the Economic Secretary to the Treasury (Mr Ivan Lewis) in his helpful Explanatory Memorandum, as follows:

    Germany — Council opinion on the updated stability programme, 2005-08

    "The projection for growth foresees a pick up from 0.9% in 2005 to 1.4% in 2006, with domestic demand gaining momentum. After a slowdown to 1.0% in 2007 due to the introduction of fiscal measures, growth rises to an average rate of 1.5% in 2005-2009. On 14 March 2006, the Council gave notice to Germany in accordance with Article 104(9) to take measures to remedy the situation of excessive deficit by 2007. The general government budget deficit is consolidated from 3.3% in 2006 to 2.5% of GDP in 2007. Thereafter, the deficit is projected to decline by 0.5ppt [percentage point] of GDP, per year to reach 1.5% of GDP in 2009. The gross debt-to-GDP ratio is projected to increase from 67.5% in 2005 to 69% in 2006. Debt is then forecast to decline to 67% of GDP by 2009. Due to the level of debt and budgetary position, Germany is at medium risk with regard to the sustainability of public finances."

    Greece — Council opinion on the updated stability programme, 2005-08

    "The Greek economy has outperformed that of the euro area since the mid-1990s. On the back of strong domestic demand, the programme projects growth accelerating from 3.6% in 2005 to 4.0% in 2008. In February 2005, under Article 104(9), the Council recommended correction of the excessive deficit by the end of 2006. The general government budget deficit is projected to decline from 4.3% of GDP in 2005 to 2.6% in 2006 and, then, to 1.7% in 2008. The gross debt-to-GDP ratio is projected to fall from around 108% of GDP in 2005 to below 97% in 2008, mainly driven by the projected improvement in the primary surplus, and lower debt-increasing financial operations. With regard to the sustainability of public finances, Greece appears to be at high risk on grounds of the projected budgetary costs of ageing populations."

    Spain— Council opinion on the updated stability programme, 2005-08

    "The Spanish economy has outperformed that of the euro area since the mid-1990s. GDP growth is projected around 3.25% between 2005 and 2008, exclusively sustained by domestic demand. The general government budget surplus is planned to decline from 1% of GDP in 2005 to about 0.5% in 2008. The gross debt-to-GDP ratio is projected to fall from 43% in 2005 to 36% in 2008, remaining well below the 60% of GDP Treaty reference value. Spain appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. This is due to the significant increase in pension expenditures over the projection period."

    France - Council opinion on the updated stability programme, 2005-08

    "France has been growing close to the euro area average of 2.3% over the last ten years. Growth in 2005 was 1.4% and projected to be 2.0-2.5% in 2006. Beyond this two scenarios are presented; a 'low growth scenario' foresees growth of 2¼% each year over 2007-2009 while a 'high growth scenario' has 3.0% growth over the same period. In December 2004, following the judgment of the Court of Justice the deadline to correct the excessive deficit under Article 104(7) was extended from 2004 to 2005. The general government budget deficit is 3.0% in 2005 and projected to move to -1.0% by 2009. The gross debt-to-GDP ratio is estimated to have reached 66% of GDP in 2005, above the 60% of GDP Treaty reference value. The programme projects the debt ratio to decline by 3 percentage points by 2009. France appears to be at medium risk on grounds of the projected budgetary costs of ageing populations. Recent reforms, notably the 2003 pension reform, have substantially helped to contain future rise in public expenditure."

    Ireland - Council opinion on the updated stability programme, 2005-08

    "Ireland has experienced an impressively rapid increase in real GDP per capita and employment levels over the last decade. In recent years the Irish economy has continued to grow at just below 5% per annum the highest rate in the euro area. Projections for growth in 2006 and 2007 are 4.8% and 5.0% respectively. In 2005, Ireland achieved a general government budget surplus of 0.3% of GDP, projections for 2006 foresee a deficit of between 0.6% and 0.8%. Gross debt in Ireland has declined from just below 100% of GDP in the early 1990s, stabilising below 30% of GDP in the current programme. The Council Opinion states that the sustainability of the public finances in Ireland is at medium risk on grounds of the projected budgetary costs of an ageing population."

    Italy — Council opinion on the updated stability programme, 2005-08

    "Between 1995 and 2004, Italian GDP grew at an average rate of 1.5% per year, below the 2% of the euro area. The programme projects GDP growth to recover from zero in 2005 to 1.5% in 2006 and 2007. In July 2005 the Council issued Recommendations under Article 104(7) to correct the excessive deficit by the end 2007 and that effective action is taken by 12 January 2006. On 22 February 2006, the Commission adopted a communication concluding that the actions taken by Italy before the 12 January 2006 deadline set by the Council, if fully implemented, would be consistent with the consolidation path contained in the Council recommendation. The 2005 general government budget deficit is estimated at 4.3% of GDP then projected to fall below 3.0% in 2007 to 2.8%. At 108.5%, the gross debt-to-GDP ratio is expected to increase in 2005 for the first time since 1994, then to fall just below 102% by 2009. Italy appears to be at medium risk on grounds of the projected budgetary costs of an ageing population. Past reforms have helped to contain future rises in public expenditure and their full implementation, notably of the 2004 pension reform, will be crucial to obtain the expected results."

    The Netherlands — Council opinion on the updated stability programme, 2005-08

    "The programme projects real GDP growth to increase from an estimated 0.75% in 2005 to 2.5% in both 2006 and 2007, before slowing to 2.25% in 2008. The general government budget deficit fell to 1.2% of GDP in 2005, it is projected to increase to 1.5% in 2006 and subsequently to stabilise at around 1.1% of GDP. Gross government debt is projected to stabilise in 2006 at 54.5% of GDP before gradually decreasing to around 53% in 2008. With regards to the sustainability of public finances, the Netherlands appears to be at low risk on grounds of the projected budgetary costs of ageing populations."

    Portugal — Council opinion on the updated stability programme, 2005-08

    "Economic growth declined significantly to only 0.5% per year between 2001 and 2005, significantly lagging behind the euro area average of around 1.4%. On 20 September 2005, the Council decided that Portugal was in excessive deficit and recommended under Article 104(7) correction by 2008. Following the expiry of the six-month period foreseen by the recommendation, the Commission is due to carry out an assessment of the action taken by the Portuguese authorities in order to achieve the 2006 deficit target. In 2005, the general government budget deficit reached 6% of GDP and is forecast to decline to 4.6% in 2006, and further to 3.7% of GDP in 2007, 2.6% in 2008 and 1.5% of GDP in 2009. Gross debt reached 65.5% of GDP in 2005, and is projected to increase to 69% of GDP in 2007 before declining to slightly above 66% of GDP by 2009. The Council concluded that the sustainability of public finances is at high risk from future age-related expenditure."

    Cyprus — Council opinion on the updated convergence programme, 2005-08

    "In 2004, under Article 104(7) the Council decided that Cyprus was in excessive deficit. It was given until 2005 to reduce its deficit below 3%. Better than expected growth in 2004 and 2005 helped reduce the general government budget deficit faster than expected. The deficit is now 2.5% in 2005 and forecast to continue to decrease to 1.9% of GDP in 2006 and 1.8% in 2007. Growth is expected to remain robust increasing from 4.1% in 2005 to 4.2% in 2006, 2007 and 2008. The gross debt-to-GDP ratio is projected to follow a steady decline from 70.5% in 2005 to 53.5% in 2009, as a result of steady growth. Long-term sustainability of public finances is at high risk due to high government debt, poor demographics and the need for considerable pension and health reforms."

    Lithuania — Council opinion on the updated convergence programme, 2005-08

    "Growth of GDP was 7% in 2005 and is forecast to slow in 2006 to 6%, and further to 5.3% in 2007. The general government budget deficit is forecast to decrease from 1.5% of GDP in 2005 to 1.4% in 2006 and 1.3% in 2007. The gross debt-to-GDP ratio is low 19.9% in 2006 and decreasing to 18.9% by 2008. The Opinion states that the long-term sustainability of public finances is at low risk."

    Malta — Council opinion on the updated convergence programme, 2005-08

    "In 2004, under Article 104(7) the Council decided that Malta was in excessive deficit requiring correction by 2006. The general government budget deficit is forecast to decrease from 3.9% of GDP in 2005 to 2.7% in 2006. The deficit is projected to decrease further to 1.2% by 2008. Recovering domestic demand is expected to help growth pick up to 1.1% and 1.2% in 2006 and 2007 respectively. External demand takes a more prominent role in 2008 pushing growth to 2%. Privatisation proceeds are expected to assist a decrease in gross government debt from 76.7% of GDP in 2005 to 67.3% in 2008. The long-term sustainability of public finances is at medium risk from the impact of an ageing population, due to high gross debt and the need for pension reforms."

    Poland — Council opinion on the updated convergence programme, 2005-08

    "GDP growth is forecast to recover throughout the projection period rising from 3.3% in 2005 to 4.3% in 2006 and 4.6% in 2007. In 2004, the Council decided that Poland was in excessive deficit under Article 104(7). As it faces special circumstances, it was given until 2007 to reduce its general government budget deficit below 3%. The deficit is forecast to fall from 2.6% in 2006 to 2.2% in 2007 and 1.9% in 2008. Gross government debt was 42.5% of GDP in 2005 and is expected to increase to 45.4% by 2008. Full implementation of the 1999 pension reform place Poland at low risk in terms of the long-term sustainability of public finances."

      United Kingdom — Council opinion on the updated convergence programme, 2005-08

      "UK macroeconomic performance has been impressive in the last decade. Growth is now forecast to pick up from 1.75% in 2005-06 to 3% in 2007-08, and then to dip to 2.75% and 2.25% thereafter. The Opinion notes that the Council adopted a Recommendation under Article 104(7) in January 2006. Following the expiry of the six month period foreseen by the recommendation, the Commission is due to carry out an assessment of progress made. Projections show a reduction in the general government budget deficit from just over 3% of GDP in 2005-06 to below 3% in 2006-07 and a decline to 1.5% percent of GDP by 2010-11. The gross debt-to-GDP ratio remains well below the Treaty 60% of GDP reference value throughout the programme period. The Opinion states that although contained rises in public pensions expenditure are projected, higher age-related expenditure pressures are possible. It therefore concluded that unless changes are made, the UK would be at medium risk in terms of fiscal sustainability."

    The Government's view

    6.3 The Minister comments, again in words similar to those of his predecessors in relation to such documents in earlier years:

      "The UK has consistently stated that it 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."

    He adds that "The UK agrees with the Council Opinions in these thirteen cases".

    Conclusion

    6.4 These documents and the Minister's summaries give a useful overview of the prospects for the economies of these 13 Member States. We clear 12 of them.

    6.5 However we note that the fifth point of the Opinion on the UK's programme reads: "The programme broadly follows the model structure, but deviates on some material points from the data provision requirements for stability and convergence programmes specified in the new code of conduct." And a footnote adds:

      "In particular, the section on institutional features of the public finances is missing. The programme has gaps in the provision of compulsory data (for example, the forecasts for employment, unemployment and compensation of employees, and the breakdown of expenditure for the last year required are not provided), and does not provide all optional data. Data for general government expenditure and receipts, while based on ESA 95 components, use different aggregation methods from the harmonised measure. The programme update also continues the UK practice of accounting receipts from the sale of UMTS[16] licences as an annual income stream rather than the sale of an asset, contrary to the Eurostat decision of 14 July 2000 on the allocation of such receipts. A number of data gaps have been filled through bilateral discussions between the Commission services and UK officials."

    6.6 These comments imply a degree of dissatisfaction in the Council with the presentation of the UK programme. Before we consider the document further we should like to hear from the Minister as to:

    • the significance of the omissions in the data, particularly compulsory data, presented;
    • the reasons for some data being aggregated differently from the harmonised measure;
    • the reason for presenting UMTS licence income in a way contrary to the Eurostat view of how it should be shown; and
    • which data gaps the Government have been able to agree to fill and which not.

    6.7 Meanwhile this document remains uncleared.


    14   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

    15   See (27280) 6323/06 (27281) 6324/06 (27282) 6325/06 (27283) 6326/06 (27284) 6327/06 (27285) 6328/06: HC 34-xxii (2005-06), para 13 (15 March 2006) and (27224) 5612/06 (27225) 5613/06 (27226) 5614/06 (27227) 5615/06 (27228) 5616/06 (27229) 5617/07: HC 34-xxiii, para 23 (29 March 2006). Back

    16   Universal mobile technology systems for delivering broadband information through third generation (G3) mobile communications technology. Back


     
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