11 Growth and Stability Pact
| (a)
(31306)
5891/10
COM(10) 10
(b)
(31309)
6089/10
COM(10) 24
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Commission Communication: Assessment of the action taken by Latvia and Hungary in response to the Council Recommendations of 7 July 2009 with a view to bringing an end to the situation of excessive government deficit
Commission Communication: Assessment of the action taken by Poland in response to the Council Recommendation to Poland with a view to bringing an end to the situation of excessive government deficit
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| Legal base | Article 126 TFEU; —; QMV without vote of subject Member State
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| Document originated | (a) 27 January 2010
(b) 3 February 2010
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| Deposited in Parliament | (a) 9 February 2010
(b) 10 February 2010
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| Department | HM Treasury
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| Basis of consideration | (a) EM of 15 February 2010
(b) EM of 16 February 2010
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| Previous Committee Report | None
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| Discussed in Council | 16 February 2010
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
11.1 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%.[25]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[26]
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. This whole procedure
is essentially the Pact's preventative arm.
11.2 On the other hand, the Pact also endorsed a
dissuasive or corrective arm involving action in cases of an excessive
government deficit — the excessive deficit procedure provided
for in Article 126 TFEU (formerly 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 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.
11.3 On 7 July 2009 the Council issued Recommendations
to Latvia, Hungary (the fourth such Recommendation for this Member
State) and Poland with a view to ending the excessive government
deficits of these Member States.[27]
The documents
11.4 In these Communications the Commission reports
its assessments of the actions taken by Latvia, Hungary and Poland
in response to the Council Recommendations of July 2009. The first,
document (a), deals with Latvia and Hungary. The Council had recommended
that Latvia correct its excessive deficit by 2012 at the latest
and in line with the consolidation path set out in the country's
EU Balance of Payments financial support programme. To meet this
deadline Latvia was asked to ensure an average annual fiscal effort
of at least 2.75% of GDP over the period 2010-12, to strengthen
fiscal governance and transparency (that is, improve the budgetary
framework) and to improve financial market regulation and supervision.
The Commission assesses that Latvia has made "adequate progress"
and can therefore be considered to have taken effective action.
It notes particularly that Latvia has:
- tightly implemented the 2009
budget that even allowed some flexibility for increased expenditure,
enabling Latvia to draw more from the EU Structural Funds;
- adopted a budget for 2010 that includes consolidation
measures roughly equivalent to 4.2% of GDP — these measures
also provide some leeway for unexpected events without jeopardising
efforts to meet the deficit target;
- has a 2010 budget represents a significant structural
adjustment "well above" 2.75% of GDP;
- showed signs in preparation of the 2010 budget
of improvement in fiscal governance; and
- has taken "significant steps" towards
strengthening financial market regulation and supervision.
The Commission also notes that:
- the main risk to Latvia meeting
the Council recommendations stem from implementing expenditure
cuts, particularly wage cuts, at local government level; and
- monitoring tax compliance and measures to combat
the grey economy would be important in ensuring that tax revenues
develop in line with expectations.
The Commission concludes that no further steps are
recommended for Latvia under the excessive deficit procedure.
11.5 The latest Council Recommendation for Hungary
had set a deadline of 2011 for correcting the excessive deficit
and for bringing public debt on a downward path in line with the
consolidation path set out in Hungary's EU Balance of Payments
financial support programme. To meet the Recommendation Hungary
was asked to achieve the budget deficit target in 2009 by adopting
additional fiscal consolidation measures if necessary; to ensure
a cumulative improvement in the structural balance of 0.5% over
2010 and 2011, to implement fully the recently adopted fiscal
responsibility law and to bring the debt-to-GDP ratio on a firm
downward trajectory. The Commission assesses that Hungary has
made "adequate progress" towards correcting the excessive
deficit and can therefore be considered to have taken effective
action. It notes particularly that Hungary:
- is likely to meet the budget
deficit target of 3.9% of GDP in 2009 by adopting cumulative fiscal
consolidation measures equivalent to 1.5% of GDP throughout the
year;
- has adopted a budget for 2010 that is in line
with achieving a budget deficit of 3.8% of GDP and is underpinned
by several structural measures;
- has backed the expenditure-reducing measures
with appropriate laws;
- has included a sufficient level of reserves in
the 2010 budget; and
- has started to introduce the new fiscal framework
for preparation of the 2010 budget and has initiated work towards
making further improvements in the budget planning process.
The Commission identifies "considerable"
risks in meeting the 2010 deficit target, including a number of
ways that government expenditure or revenue could be higher or
lower than expected. It suggests that, therefore, further fiscal
consolidation measures may be necessary to meet the 2010 deficit
target. The Commission concludes that no further steps are needed
for Hungary under the excessive deficit procedure.
11.6 The second Communication, document (b), deals
with Poland. The Council had recommended that Poland correct its
excessive deficit by 2012 in a credible and sustainable manner.
To meet this deadline Poland was asked to implement the fiscal
stimulus measures in 2009 as planned, in particular the public
investment plan, while structuring a supplementary budget in such
a way to avoid any further deterioration in public finances, to
ensure an average annual fiscal effort of at least 1.25% of GDP
starting in 2010, to spell out the detailed measures that are
necessary to bring the deficit below the reference value by 2012
and reforms to contain primary current expenditure over the coming
years and to limit risks to the adjustment by a strengthening
of the medium-term budgetary framework. The Commission assesses
that Poland has taken action towards correction of the excessive
deficit within the time limits set. It notes particularly that
Poland:
- adopted in January 2009 a consolidation
package with an estimated impact of 0.75% of GDP;
- adopted in July 2009, immediately after the Council
Recommendation, a supplementary budget including additional expenditure
cuts of 0.2% of GDP and higher dividends from state-owned companies
of 0.4% of GDP;
- took action to strengthen the fiscal framework,
made the existing debt rule more restrictive by introducing additional
specific provisions on the type of measures to be implemented
once public debt exceeds 55% of GDP and extended the fiscal planning
horizon for the central state budget from three to four years;
- is currently contemplating introduction of expenditure
rules in the course of 2010, which would facilitate future consolidation;
- has a budget for 2010 which is consistent with
a slight deterioration of the structural balance in 2010, foresees
a sizeable increase in public investment and the continued full
play of automatic stabilizers, which will imply a large increase
in social transfers and includes a nominal freeze in public wages,
nominal reductions in other current spending and increases in
taxes on cigarettes and fuel oil;
- based the budget for 2010 on cautious macroeconomic
assumptions, which might lead to positive revenue surprises in
2010; and
- announced in January 2010 the main measures of
the consolidation plan for 2010-2012, which include a gradual
increase and equalisation of the retirement age for men and women
at 67 years, the inclusion of uniformed services personnel in
the general security system, a broadening of the tax base and,
additionally, an acceleration of privatisations starting from
2010.
The Commission says that, while not negligible, the
fiscal effort implied by current policies for the period 2010-2012
is significantly smaller than that recommended by the Council
and that, although the improvement of the economic outlook since
the Commission's Spring 2009 forecast implies that a smaller structural
fiscal effort may be sufficient to correct the excessive deficit
by 2012, reducing the government deficit below 3% of GDP in 2012
will require an intensification of the fiscal effort in 2011 and
2012. The Commission concludes that no further steps in the excessive
deficit procedure for Poland are needed at present.
The Government's view
11.7 The Economic Secretary to the Treasury (Ian
Pearson) says that there are no policy implications for the UK
arising from these document and that the Government is in broad
agreement with the Commission's assessments.
Conclusion
11.8 Whilst clearing these documents, we draw
them to the attention of the House for the information they have
about progress of the excessive deficit procedure for Latvia,
Hungary and Poland.
25 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
26
The 16 Member States (Austria, Belgium, Cyprus, Germany, Greece,
Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia and Spain) that have adopted the
euro have Stability Programmes, whereas the other 11 Member States
(including the UK) produce Convergence Programmes. Back
27
(30773) 11660/09 (30763) 11400/09 (30766) 11404/09: see HC 19-xxvi
(2008-09), chapters 23 and 25 (10 September 2009). Back
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