Various Documents considered by the Committee - European Scrutiny Committee Contents

14 Stability and Growth Pact: excessive deficit procedure



+ 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 originated27 January 2011
Deposited in Parliament4 February 2011
DepartmentHM Treasury
Basis of considerationEM of 16 February 2011
Previous Committee ReportNone
Discussed in Council15 February 2011
Committee's assessmentPolitically important
Committee's decisionCleared


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.


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, paragraph 27 and  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 Back

76   (31544) 9086/10: see HC 428-i (2010-11), chapter 75 (8 September 2010). Back

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