7 Growth and Stability Pact: excessive
deficit procedure
| (a)
(31359)
5902/10
—
(b)
(31360)
5903/10
—
(c)
(31361)
6231/10
—
|
Council Recommendation with a view to bringing to an end to the situation of an excessive government deficit
Council Recommendation with a view to bringing to an end to the situation of an excessive government deficit
Council Recommendation with a view to bringing to an end to the situation of an excessive government deficit
|
| Legal base
| Article 126(7); —; QMV of eurozone Member States less the one concerned
|
| Documents originated
| — |
| Deposited in Parliament
| 1 March 2010
|
| Department
| HM Treasury
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| Basis of consideration
| EM of 6 March 2010
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| Previous Committee Report
| None |
| Discussed in Council
| 16 February 2010
|
| Committee's assessment
| Politically important
|
| Committee's decision
| Cleared |
Background
7.1 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%.[14]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[15]
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.
7.2 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.
7.3 On 7 July 2009 the Council issued
Recommendations to Malta, Lithuania and Romania with a view to
ending the excessive government deficits of these Member States.
It recommended Malta to correct its excessive deficit by 2010
at the latest, and to bring the public debt back on a declining
path towards the 60% of GDP reference value. It recommended to
Lithuania to correct its excessive deficit by 2011 at the latest.
And it recommended to Romania to correct its excessive deficit
by 2011 at the latest.[16]
The documents
7.4 In the new Recommendation to Malta,
document (a), the Council:
· found
that unexpected adverse economic events, with major unfavourable
consequences for government finances, had occurred;
· referred
particularly to a larger than expected decline in real GDP, a
larger than expected budgetary impact from the downturn, a much
lower intake of indirect taxes and lower employment, with the
associated fall of contributions to social security;
· noted
that, in response to the Council's recommendations in July 2009,
Malta executed the 2009 budget measures as planned — additional
measures to support the economy in line with the European Economic
Recovery Plan were taken, along with compensatory measures to
offset the support measures, including improving tax administration
and reducing the number of public sector employees, all compensatory
measures were permanent, whereas only 40% of the support measures
under the recovery plan had budgetary effects beyond 2010; and
· concluded,
that, overall, Malta could be considered to have taken effective
action.
7.5 In the document the Council set,
in light of the severe economic downturn in Malta, a new deadline
of 2011 at the latest for the correction of the excessive deficit.
It recommended Malta to:
· achieve
the 2010 deficit target by adopting additional consolidation measures
if necessary;
· ensure
a 0.75% point GDP fiscal effort in 2011;
· specify
the measures necessary to achieve the correction of the excessive
deficit in 2011; and
· strengthen
the binding nature of the medium-term budgetary framework and
improve the monitoring of budget execution.
The Council established a deadline
of 16 August 2010 for Malta to take effective action towards correcting
the excessive deficit and invited the Maltese authorities to implement
reforms to raise the potential growth rate of GDP and to pursue
further social security reforms towards addressing risks to the
long-term sustainability of the public finances.
7.6 In the new Recommendation to Lithuania,
document (b), the Council:
· found
that unexpected adverse economic events, with major unfavourable
consequences for government finances, had occurred;
· referred
particularly to the larger than expected GDP contraction in 2009,
the effect on public finances being more than expected and negative
revenue surprises having doubled between the Commission's spring
and autumn forecasts in 2009;
· noted
that, in response to the Council's recommendations in July 2009,
Lithuania implemented the fiscal consolidation measures outlined
in the 2009 budget, adopted a second supplementary budget later
in the year, had a total fiscal adjustment of around 8% of GDP,
the 2010 budget included further substantial cuts in expenditure,
combined with some tax measures, and completed a "National
Accord" with social partners that detailed a number of medium-term
structural reforms in addition to the fiscal consolidation measures;
· noted
that the net consolidation effort was estimated to be equivalent
to around 1.50% of GDP, in line with the Council recommendations
— even though some of the measures would expire or could
be reversed in the future; and
· concluded,
that, overall, Lithuania had taken effective action.
7.7 In the document the Council set,
in light of the severe economic downturn in Lithuania, a new deadline
of 2012 at the latest for the correction of the excessive
deficit. It recommended Lithuania to:
· implement
rigorously the corrective measures planned in the 2010 budget,
adopting additional measures if necessary to achieve the envisaged
consolidation;
· ensure
an annual average fiscal effort of at least 2.25% of GDP over
2010 to 2012;
· specify
and adopt the additional measures necessary to achieve the correction
of the excessive deficit by 2012 and, to this end, adopt and swiftly
implement the planned structural reforms;
· enhance
the medium-term budgetary framework by strengthening fiscal governance
and transparency for example.
The Council established a deadline
of 16 August 2010 for Lithuania to take effective action towards
correcting the excessive deficit and invited the Lithuanian authorities
to implement reforms towards raising the potential growth rate
of GDP.
7.8 In the new Recommendation to Romania,
document (c), the Council:
· found
that unexpected adverse economic events, with major unfavourable
consequences for government finances, had occurred;
· referred
particularly to a larger than expected contraction of GDP in 2009,
lower than projected government revenue and a widening of the
budget deficit despite efforts to cut public expenditure;
· noted
that, in response to the Council's recommendations in July 2009,
public expenditure in Romania was reduced by 1.50% of GDP, the
2010 budget was consistent with a structural effort of 2.0% of
GDP, underpinned by appropriate measures, the Romanian authorities
had undertaken several steps to improve fiscal governance, revised
public compensation legislation and drafted new legislation that
aimed to reform the pension system and strengthen the fiscal framework;
and
· concluded
that, overall, Romania had taken effective action.
7.9 In the document the Council set,
in light of the severe economic downturn in Romania, a new deadline
of 2012 at the latest for the correction of the excessive deficit.
It recommended Romania to:
· implement
the fiscal measures for 2010 under the budget law and continue
consolidation in 2011 and 2012;
· ensure
an average fiscal effort of 1.75% of GDP over the period 2010
to 2012;
· specify
the measures necessary to correct the excessive deficit by 2012;
and
· continue
implementing measures to improve fiscal governance by, in particular,
adopting and implementing the Fiscal Responsibility Law.
The Council established a deadline
of 16 August 2010 for Romania to take effective action towards
correcting the excessive deficit and invited the Romanian authorities
to implement reforms towards raising the potential growth rate
of GDP, including through enhancing the functioning of the labour
market.
The Government's view
7.10 The Economic Secretary to the
Treasury (Ian Pearson) says that there are no policy implications
for the UK arising from these documents (on which the Government
had no vote) and that the Government is in broad agreement with
the Council's assessments.
Conclusion
7.11 Whilst we are content to clear
these documents, we draw them to the attention of the House for
the information they provide about the fiscal situation of these
three Member States.
14 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
15
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
16
(30759) 11396/09 (30761) 11398/09 (30765) 11402/09 : see HC 19-xxvi
(2008-09), chapter 23 (10 September 2009). Back
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