14 Stability and Growth Pact: excessive
deficit procedure
| (32489)
5972/11
+ ADDs 1-4
COM(11) 22
| Commission Communication: Current state of the excessive deficit procedure in the Member States and assessment of the action taken by Cyprus, Finland, Bulgaria and Denmark in response to the Council Recommendations of 13 July 2010 with a view to bringing an end to the situation of excessive government deficit
|
| Legal base | —
|
| Document originated | 27 January 2011
|
| Deposited in Parliament | 4 February 2011
|
| Department | HM Treasury
|
| Basis of consideration | EM of 16 February 2011
|
| Previous Committee Report | None
|
| Discussed in Council | 15 February 2011
|
| Committee's assessment | Politically important
|
| Committee's decision | Cleared
|
Background
14.1 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%.[71]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[72]
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.
14.2 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.
14.3 In October 2009 the European Council endorsed
a fiscal exit strategy, incorporating four principles:
- it should be coordinated across
countries and should be consistent with the values of the Stability
and Growth Pact;
- a timely withdrawal of fiscal stimulus measures
and, providing that economic forecasts indicate the recovery is
strengthening, fiscal consolidation should start no later than
2011;
- the planned pace of fiscal consolidation should
be ambitious; and
- crucial supplementary policies should be implemented,
which should include strengthened national budgetary frameworks
and efforts to support long-term fiscal sustainability.[73]
14.4 On 13 July 2010 the Council adopted excessive
deficit procedure Recommendations for Bulgaria, Cyprus, Denmark
and Finland. The Council set a six-month deadline of 13 January
2011 for these Member States to take effective action. It gave
Bulgaria and Finland a deadline of 2011 to correct their excessive
deficits, Cyprus a deadline of 2012 and Denmark a deadline of
2013.[74]
The document
14.5 This Commission Communication is in two parts.
The first provides an update on the current state of excessive
deficits in all Member States and the second contains an assessment
of action taken in Bulgaria, Cyprus, Denmark and Finland.
14.6 In the first section the Commission says that:
- currently all Member States
except Estonia, Luxembourg and Sweden are in the excessive deficit
procedure;
- following the positive assessment of action taken
by the Member States concerned, the procedure for nineteen Member
States is now held in abeyance;
- its 2010 autumn forecast projects the general
government deficit in the EU to decline from 6.8% of GDP in 2010
to 5.1% in 2011 and for the eurozone from 6.3% to 4.6%;
- the structural fiscal effort (accounting for
the economic cycle and temporary measures) for 2011 amounts to
1% of GDP in the EU and 1.1% in the eurozone;
- for most Member States in excessive deficit procedure,
the fiscal effort in 2011 will significantly exceed the average
annual fiscal effort recommended by the Council;
- it expects Germany, the Netherlands, Finland,
Bulgaria and Malta to correct the excessive deficit within, or
even before, the respective deadlines;
- in Austria and Denmark the deficit is expected
to approach the target level one year before their respective
deadlines;
- based on the latest information other Member
States including Portugal, Spain, France and Romania are on track
to correct the excessive deficit within the required timescales;
- "the remaining effort needed to correct
the excessive deficit by [...] financial year 2014/15 for the
UK is in reach";
- at the time of the 2010 autumn forecast several
Member States were not on track to correct the excessive deficit
within the required period;
- of these Italy, Slovenia and the Czech Republic
require only limited additional consolidation to correct the excessive
deficits;
- in the cases of Slovakia, Cyprus and Latvia additional
measures have been announced after the 2010 autumn forecast to
bring the budgetary situation in line with the Council's recommendations;
- the Belgian authorities will announce further
consolidation measures in their 2011 budget to reduce their deficit
to below 4% of GDP in 2011;
- in Hungary one off changes to the pension system
have been made to bring the budget deficit to below 3% in 2011,
although the structural deficit continues to rise which would
cause the deficit to rebound into a deficit of about 5% of GDP
in 2012 if no further measures are taken;
- in Poland in 2010 the deficit will reach to 7.9%—one
percentage point higher than that foreseen in the 2010 convergence
programme;
- given these circumstance the Commission sent
letters to Hungary and to Poland, asking for reconfirmation of
the commitment to respect the Council Recommendations fully and
to announce further permanent, concrete and specific measures
to reduce their excessive deficits as recommended by the Council;
and
- it calls on those Member States, where the adjustment
effort so far has been less than that recommended by the Council,
to consider further consolidation measures.
14.7 The assessment of action taken in Cyprus, Finland,
Bulgaria and Denmark which the Commission reports in the second
section of its Communication is made in the context of:
- a Member State being considered
to have taken effective action towards correction of its excessive
deficit if it has acted in compliance with the Article 126(7)
TFEU;
- the Code of Conduct[75]
statement that the assessment of effective action should
in particular take into account whether the Member State concerned
has achieved the annual improvement of its cyclically adjusted
balance, net of one-off and other temporary measures; and
- the Commission's 2010 autumn forecast which,
as far as possible, incorporates Member States budgetary measures
envisaged for 2011.
The Communication is accompanied with a staff working
paper for each of the four Member States. They are technical documents
providing evidence in support of the Commission's conclusions.
In particular the working papers review how budgets were implemented
in 2010 for each of the Member States in question and detail how
economic outcomes compare to the forecasts underlying the current
Council Recommendations.
14.8 On Bulgaria the Commission says that:
- as a result of the economic
downturn and expenditure increases prior to parliamentary elections
in 2009, the deficit increased to 4.7% of GDP in 2009, from a
surplus of 1.8% in 2008;
- the Council recommended Bulgaria take steps to
correct the excessive deficit by 2011 at the latest;
- the deficit is forecast to decrease to 3.8% of
GDP in 2010, in line with the Council's Recommendation, despite
the cancellation of third countries' debt and a shortfall in tax
revenue;
- the Bulgarian authorities' latest forecast is
for a slightly better deficit ratio in 2010, at 3.6% of GDP;
- an improvement of 1.5% of GDP in the structural
balance is expected in 2010;
- for 2011 a deficit of 2.9% of GDP is forecast,
implying an annual deficit reduction of 0.9% of GDP;
- the Bulgarian authorities expect a slightly lower
deficit of 2.5% of GDP, with the difference explained by a more
optimistic outlook on economic activity;
- this will be achieved through increased revenue,
as a result of a rebound in economic activity and revenue-enhancing
measures combined with a containment of expenditure and improved
spending efficiency;
- an improvement of 0.75% of GDP in the structural
balance is expected in 2011;
- implementation risks, mainly pertaining to the
macroeconomic scenario that underpins the 2011 projections, are
that a slower recovery could lead to unexpected shortfalls in
revenue and that local and presidential elections in 2011 may
create spending pressure;
- Bulgaria should take steps to strengthen the
binding nature of its medium-term budgetary framework, as recommended
by the Council; and
- overall, Bulgaria has made adequate progress
towards the correction of the excessive deficit by avoiding a
deterioration of the 2010 deficit and by legislating adequate
fiscal efforts in the 2011 budget.
14.9 On Cyprus the Commission says that:
- as a result of a severe economic
downturn the general government deficit in Cyprus reached 6.1%
of GDP in 2009 from a surplus of 0.9% in 2008, triggering the
start of excessive deficit procedure;
- the Council recommended Cyprus take action to
correct the excessive deficit by 2012 at the latest;
- Cyprus will have a budget deficit of 5.9% in
2010, as a marginal increase in revenues was offset by a rise
in expenditure;
- recently published data, however, appear to support
a lower-than-expected budget deficit;
- the budgetary outcome for 2010 is, therefore,
in line with the Council Recommendation of a deficit no more than
6% of GDP;
- the Commission 2010 autumn forecast projects
a deficit of 5.7% of GDP for 2011;
- since the forecast Cypriot authorities have adopted
additional measures;
- taking into account the better-than-expected
outturn for 2010 an improvement in the structural balance is expected
in 2011 of around 2.25% of GDP—this would indicate a headline
deficit of 3.75% in 2011;
- adoption of the additional consolidation package
is expected to stabilise the debt-to-GDP ratio in 2011 at levels
similar to the 62% of GDP the Cypriot authorities expect for 2010;
- the effect of higher than expected inflation
on the cost of public wage indexation could pose a significant
threat to consolidation, in addition to pressures on social transfers
to alleviate the impact of indirect tax rises;
- no progress has been made towards strengthening
fiscal governance and plans for reforms to the pension system
are still under discussion;
- furthermore, contrary to the Recommendation of
the Council, the majority of measures taken by Cyprus have been
on the revenue side; and
- overall, Cyprus has ensured a fiscal effort of
at least 1.5% of GDP in 2011, has taken effective action to put
an end to the excessive deficit by 2012 and has taken steps to
bring the gross debt ratio back on a declining path within the
forecast horizon.
14.10 On Denmark the Commission says that:
- the budgetary balance turned
from a surplus of 3.2% of GDP in 2008 into a deficit of 2.7% in
2009;
- this widened to an expected 5.5% in 2010 with
continued fiscal stimulus spending as envisaged in the latest
convergence programme;
- the Council recommends Denmark begin consolidation
in 2011 in order to bring the deficit below 3% of GDP by 2013;
- the Danish deficit will improve by 1.6% between
2010 and 2010 (from -5.1% of GDP to -3.5%);
- in their latest economic update, which includes
measures not accounted for in the Commission forecast, the Danish
authorities predict a deficit of 3.6% in 2010, increasing to 4.7%
of GDP in 2011 before declining to 3.4% in 2012—this would
be close to the required 3% one year before the time limit set
by the Council;
- consolidation measures undertaken by the Danish
authorities contain a mixture of revenue and spending measures
including suspending the automatic indexation of several tax thresholds,
reforming and shortening unemployment benefit, introducing a ceiling
for deductions on trade union fees and a constriction in the growth
of government expenditure—these measures are expected to
amount to about 0.5% of GDP per year;
- Denmark has taken action representing adequate
progress towards the correction of the excessive deficit—in
particular it implemented fiscal stimulus measures in 2010 and
started consolidation in 2011, in line with Council Recommendations;
and
- no further steps are needed at present.
14.11 On Finland the Commission says that:
- the Finnish authorities estimate
that the deficit ratio declined from a surplus of 4.2% of GDP
to a deficit of 2.5% in 2009;
- in April 2010 when an excessive deficit procedure
notification was issued they expected a further widening to 4.1%
of GDP;
- the Council recommended Finland take steps to
correct the excessive deficit by 2011 at the latest;
- the Commission latest forecast projects a deficit
of 3.1% of GDP for 2010—this improvement reflects a robust
rebound of economic activity since the second quarter of 2010
automatically boosting tax revenues;
- no new revenue or expenditure measures have been
announced;
- for 2011 the deficit outlook has improved considerably
since the February 2010 update of the Stability Programme that
projected a deficit of 3.0% of GDP;[76]
- the 2010 autumn forecast projects a deficit of
1.6% of GDP for 2011, slightly higher than the latest Finnish
forecast of 1.3%;
- no new measures have been announced, but there
is expenditure growth moderation, as fiscal stimulus investment
is gradually phased out, which is combined with continuing long
term programmes to improve public sector productivity;
- against this background, Finland has "taken
action representing adequate progress towards the correction of
the excessive deficit within the time limits set by the Council";
and
- no further steps are necessary are needed at
present.
The Government's view
14.12 The Financial Secretary to the Treasury (Mr
Mark Hoban) says that:
- the Council Recommendations
addressed to Bulgaria, Cyprus, Denmark and Finland have no policy
or budgetary implications for the UK;
- the Government believes that Member States should
take forward fiscal consolidation as a priority to reduce their
deficits and support recovery;
- while no policy implications arise for the UK,
in its overview of all ongoing excessive deficit procedures the
Commission notes that "the remaining effort needed to correct
the excessive deficit by [...] financial year 2014/15 for the
UK is in reach";
- this implies that, in the Commission's view,
the UK is on track to meet its excessive deficit procedure deadline;
and
- the Government is content with this assessment.
Conclusion
14.13 We are grateful to the Minister for his
description of the Commission's Communication. We have no questions
to raise and clear the document.
14.14 However, in relation to the Minister's Explanatory
Memorandum, we note that, although he signed it on 16 February
2010, he says "The Commission will present its assessment
to the ECOFIN Council on 15 February." We urge the Minister
to ensure this sort of error does not become habitual —
the timing of Council consideration of a document is often of
consequence to Parliament's scrutiny process.
71 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
72
The 17 Member States (Austria, Belgium, Cyprus, Germany, Greece,
Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia and Spain) that have
adopted the euro have Stability Programmes, whereas the other
10 Member States (including the UK) produce Convergence Programmes. Back
73
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/110889.pdf,
paragraph 27 and http://register.consilium.europa.eu/pdf/en/09/st14/st14765.en09.pdf.
Back
74
(31826) 11292/10, (31827) 11296/10, (31828) 11300/10, (31829)
11301/10, (31830) 11304/10, (31831) 11305/10, (31832) 11306/10,
(31835) 11307/10: see HC 428-viii (2010-11), chapter 12 (17 November
2010). Back
75
"Specifications on the implementation of the Stability and
Growth Pact and Guidelines on the format and content of Stability
and Convergence Programmes", endorsed by the ECOFIN Council
of 7 September 2010: see http://ec.europa.eu/economy_finance/sgp/pdf/coc/2010-09-07_code_of_conduct_(consolidated)_en.pdf. Back
76
(31544) 9086/10: see HC 428-i (2010-11), chapter 75 (8 September
2010). Back
|
