17 Stability and Growth Pact
| (a)
(28004)
13530/06
—
(b)
(28005)
13763/06
—
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Council Recommendation with a view to bringing an end to the situation of an excessive government deficit in Hungary
Council Opinion on the updated Convergence Programme of Hungary
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| Legal base | (a) Article 104(8) EC; —; QMV
(b) Articles 99(4) and 104 EC; —; QMV
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| Deposited in Parliament | 13 November 2006
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| Department | HM Treasury 2006
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| Basis of consideration | EM of 24 November 2006
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| Previous Committee Report | None
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| Discussed in Council | Adopted by ECOFIN Council 10 October 2006
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
17.1 The Stability and Growth Pact adopted by the Amsterdam European
Council in June 1997 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%.[44]
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 of Economic and Finance Ministers (ECOFIN)
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 impose appropriate fines on the Member State
concerned.
17.2 After Hungary's accession to the Community in May 2004 the
Commission initiated the excessive deficit procedure against the
new Member State, given that its deficit had exceeded 3% of GDP
in 2003. In July 2004 the Council issued an Article 104(7) Recommendation
to Hungary for correction of the deficit, with a target date for
implementation of corrective action of 5 November 2004. However,
in January 2005 the Council decided that Hungary had not taken
effective action in response to its Recommendation and that the
deficit target for 2005 would be missed. Given Hungary is not
in the eurozone the Council could only take action again under
Article 104(7), rather than going on to the next stage of the
excessive deficit procedure. Therefore, in March 2005 the Council
adopted a new 104(7) Recommendation for Hungary. The Hungarian
authorities were again recommended to take action in a medium-term
framework in order to bring the deficit below 3% of GDP by 2008.
In July 2005 it appeared that the targeted deficit (of 3.6% of
GDP) for 2005 was within reach and that the Hungarian Government
had taken effective action. The Commission concluded that no further
steps under the excessive deficit procedure were necessary at
that time.[45]
17.3 However, in September 2005 the Hungarian authorities submitted
a revised excessive deficit procedure notification announcing
a 2005 deficit of 6.1% of GDP instead of the targeted 3.6% of
GDP — even though no significant change or external shock
had occurred in the macro-economic environment. The Hungarian
Government informed the Commission that it did not intend to take
action to correct these developments, contrary to earlier commitments.
On this basis in November 2005 the Council took an Article 104(8)
Decision that the action being taken by Hungary to correct its
excessive deficit was proving to be inadequate.[46]
17.4 The ECOFIN Council issues an Opinion, at least once a year,
on the updated stability or convergence programme of each Member
State.[47] 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 the Council, in a Recommendation, to make adjustments to its
economic policies, though such Recommendations are likewise not
binding on Member States.
17.5 In its last Opinion on Hungary's convergence programme, issued
in January 2006, the Council, citing its November 2005 finding
that for the second time that Hungary had not complied with the
Council's Recommendation once it was evident that it would not
meet its 2005 targets, invited Hungary to submit a new convergence
programme by 1 September 2006.[48]
The documents
17.6 The Council Recommendation to Hungary, document (a):
- sets a new target date of 2009 for correction of the excessive
deficit and urges rigorous implementation of the necessary measures
to ensure a front-loaded and sustained substantial correction
of the structural deficit — with particular emphasis on
the reduction of expenditure;
- advises that the gross debt ratio be brought down to a downward
trajectory, preferably before 2009; and
- sets 10 April 2007 as the deadline for the Hungarian authorities
to have taken effective action to meet the 2006 and 2007 targets.
17.7 Document (b) is the Council's Opinion on Hungary's most recent
update of its convergence programme. In his Explanatory Memorandum
the Economic Secretary to the Treasury (Ed Balls) provides a summary
of the Council's comments and, as is customary, we reproduce this:
"The programme projects the budget deficit to have peaked
at 6.1% in 2005 before falling. This is more optimistic than the
Commission's assessment. Growth is expected to stabilise at 4%
per annum over the programme period [2005-2009] as both domestic
demand and inflation subside. The Council Opinion states that
'assessed against currently available information, this scenario
appears to be based on plausible growth assumptions, while it
seems to be favourable in the outer year'. While public debt
is projected to fall from 57.7% in 2005, the Opinion states that
'with regard to the sustainability of public finances, Hungary
appears to be at high risk on grounds of the projected budgetary
costs of ageing populations'."
The Government's view
17.8 The Minister reminds us that:
"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 Government agrees with both the Recommendation
and the Opinion.
Conclusion
17.9 We draw these documents, which we clear, to the attention
of the House as they give a useful overview of the prospects for
the economy of this Member State.
44 This obligation does not apply to Member States,
including the UK, whilst they remain outside the eurozone, but
they are required to endeavour to avoid excessive deficits. Back
45
(26677) 10605/05 (26791) 10801/05 (26792) 11282/05 (26793) 11478/05
(26794) 11480/05 (26936) 11124/05; see HC 34-viii (2005-06), para
19 (2 November 2005). Back
46
(26964) 13667/05; see HC 34-xi (2005-06), para 18 (23 November
2005). Back
47
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
48
(27227) 5615/06; see HC 34-xxiii (2005-06), para 23 (29 March
2006). Back
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