72 Stability and Growth Pact: excessive
deficit procedure
| (31734)
11325/10
COM(10) 329
| Commission Communication: Assessment of the action taken by Belgium, the Czech Republic, Germany, Ireland, Spain, France, Italy, the Netherlands, Austria, Portugal, Slovenia and Slovakia in response to the Council Recommendations of 2 December 2009 with a view to bringing an end to the situation of excessive government deficit
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| Legal base | —
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| Document originated | 15 June 2010
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| Deposited in Parliament | 25 June 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 26 July 2010
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| Previous Committee Report | None
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| Discussed in Council | 13 July 2010
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
72.1 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%.[307]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[308]
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.
72.2 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.
72.3 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.[309]
72.4 On 2 December 2009 the Council adopted excessive
deficit procedure Recommendations for Belgium, the Czech Republic,
Germany, Ireland, Spain, France, Italy, the Netherlands, Austria,
Portugal, Slovenia and Slovakia.[310]
The document
72.5 In this Communication the Commission presents
an assessment of the action taken by the Member States concerned
in response to the Recommendations of 2 December 2009. In the
document the Commission:
- warns against an undifferentiated
rush for strong fiscal consolidation and recommends a coordinated,
differentiating approach to enhance market confidence and contribute
to fiscal sustainability, in order to avoid jeopardising the recovery;
- says countries at risk should do more as the
cost of inaction could be larger than the short-term impact of
consolidation on growth;
- notes the developments leading to the extraordinary
ECOFIN Council of 9 May 2010[311]
and stresses the need for additional policy measures; and
- asks vulnerable countries to frontload consolidation
measures to reverse adverse debt dynamics.
The Commission's overall judgement is that all Member
States have taken action representing adequate progress and no
further steps in the excessive deficit procedure are needed.
72.6 The bulk of the document is taken up by two
annexes. The first outlines, for each Member State, the measures
taken to date and concludes that progress made so far is satisfactory.
Each assessment also identifies areas of concern originally identified
in the Recommendations on which governments still need to make
progress. In his Explanatory Memorandum the Financial Secretary
to the Treasury (Mr Mark Hoban) helpfully summarises the individual
assessments which we reproduce:
"Belgium
"Has taken effective taken action, in particular
by: (i) broadly implementing the deficit-reducing measures in
2010 as planned in the draft budget; and (ii) outlining in some
detail the consolidation strategy, by setting targets and indicating
a number of measures supporting them.
" Recommendations under Article 126(7) of TFEU
still to be addressed: (i) specify the measures underpinning the
envisaged consolidation path from 2011 onwards; and (ii) further
strengthen monitoring mechanisms to ensure that fiscal targets
are respected.
"No further steps in the EDP [excessive deficit
procedure] are needed at present.
"Czech Republic
"Has taken action representing adequate progress
towards correcting the excessive deficit by 2013. In particular,
the Czech authorities have: (i) implemented the deficit-reducing
measures in 2010 as planned; and (ii) taken some additional measures
to reach the 2010 deficit target.
"To meet the correction deadline the Czech Republic
should: (i) ensure "rigorous budgetary execution" in
2010, and if necessary adopt further measures to reach the deficit
target; (ii) adopt a budget for 2011 consistent with Council recommendations;
and (iii) specify in more detail the consolidation measures in
2012 and 2013.
"The Commission also find that some progress
has been made towards improving the monitoring of budget execution,
but that further measures to improve the enforcement of the budgetary
framework will be needed.
"No further steps in EDP are needed at present.
"Germany
"Has taken effective action, in particular by:
(i) implementing the fiscal stimulus measures in 2010 as planned,
including the additional tax relief measures introduced by the
Act to Accelerate Economic Growth; and (ii) outlining in some
detail a medium-term budgetary strategy to correct the excessive
deficit by 2013.
"The Commission acknowledges the additional
budgetary consolidation measures announced for the period 2011-2014,
but notes that the national budgetary rule is still to be transposed
to the sub-federal level.
"All recommendations under Article 126(7) of
TFEU have been addressed.
"No further steps in the EDP are needed at present.
"Ireland
"Has taken effective action, in particular by:
(i) implementing a significant savings package for 2010 of 2.5%
of GDP, broadly in line with the Council's recommendation; and
(ii) outlining in some detail a medium-term consolidation strategy
by laying out deficit targets and quantifying packages to reach
them with a view to correcting the excessive deficit by 2014.
"Recommendations under Article 126(7) of TFEU
still to be addressed: (i) spell out the measures underlying the
consolidation efforts; and (ii) address the downside risks to
the budgetary targets, also to ensure that the debt ratio would
embark on a downward path before the end of the programme period.
"Regarding the Council's previous recommendations
to limit the risks to long-term sustainability, the Commission
notes the efforts underway to: (i) strengthen the budgetary framework;
and (ii) reform the social security system, including government
proposals to reform the budgetary framework and pensions. The
Commission invites the authorities to further develop these.
"No further steps in the EDP are needed at present.
"Spain
"The Commission concludes that Spain has taken
action representing 'adequate progress' by undertaking measures
that represent an annual fiscal effort of more than 1½% of
GDP in both 2010 and 2011.
"Beyond 2010, Spain has outlined detailed plans
for a correction by 2013 by announcing a number of new measures
in mid-May 2010. This amounts to additional fiscal consolidation
effort of 1% of GDP in 2011.
"Spain should: (i) specify as soon as possible
the consolidation effort for reaching the 2011 target, estimated
at some 1¾ percentage points of GDP, in the context of the
2011 budget preparatory work; (ii) part of this consolidation
would be achieved by respecting the expenditure ceilings announced
on 28 May 2010; and (iii) for outer years, additional efforts
will be required for the debt ratio to embark on a downward path
by 2013. Efforts would have to be designed considering the fiscal
restraint might take a toll on economic growth over the short
and medium term, before the benefits of more sustainable public
finances and a sounder macroeconomic setting materialise.
"No further steps in the EDP are needed at present.
"France
"Has taken effective action, in particular by:
(i) broadly implementing the deficit-reducing measures in 2010
as planned, notably the partial withdrawal of the recovery plan
— the French deficit target for 2010 was also revised down
by 0.5% of GDP compared to the budget target, taking into account
a better outcome for 2009; and (ii) outlining in some detail the
consolidation strategy necessary to progress towards the correction
of the excessive deficit by 2013.
"Recommendations under Article 126(7) of TFEU
still to be addressed: (i) specify measures backing the consolidation
strategy; and (ii) given the risks related to the growth scenario
and assumptions as regards tax elasticities, the consolidation
strategy may have to be strengthened and further consolidation
measures backing this strategy may have to be taken to achieve
a correction of the excessive deficit by the deadline.
"No further steps in the EDP are needed at present.
"Italy
"Has taken effective action, in particular by:
(i) broadly implementing the consolidation measures for 2010,
taken in the context of the summer 2008 package for the period
2009-2011; and (ii) spelling out the budgetary strategy to reduce
the deficit below 3% of GDP by 2012, based on an additional consolidation
effort of 0.8% of GDP in 2011 and again in 2012.
"The Commission welcomes the adoption by the
Italian government of a decree law specifying the measures that
underpin these efforts.
"Recommendations under Article 126(7) of TFEU
still to be addressed: ensure a strict implementation of the planned
expenditure restraint and address possible tax revenue shortfalls.
"No further steps in the EDP are needed at present.
"The Netherlands
"Has taken effective action, in particular by:
(i) implementing the fiscal measures in 2010 as envisaged in the
2010 budget; and (ii) outlining in some detail the consolidation
strategy that is necessary to progress towards the correction
of the excessive deficit by 2013.
"The Commission notes that, with respect to
2011, there is a fully specified consolidation strategy leading
to a fiscal effort of ¾% of GDP, which is in line with the
annual fiscal effort as requested in the Council Recommendation.
"Recommendations under Article 126(7) of TFEU
still to be addressed: (i) outline the adjustment path and the
broad measures underpinning the envisaged consolidation in the
outer years will be needed; and (ii) strengthen the consolidation
effort to secure the required average annual fiscal effort for
the period 2011-2013.
"No further steps in the EDP are needed at present.
"Austria
"Has taken effective action, in particular by:
(i) implementing the fiscal stimulus measures as planned in 2010,
including relief for families with children and tax cuts for the
self-employed; and (ii) outlining in some detail a medium-term
budgetary strategy to correct the excessive deficit by 2013. For
the years 2011-2014, the authorities have set spending limits
for the main parts of the federal budget.
"Although all recommendations under Article
126(7) of TFEU have broadly been addressed, some further progress
will be needed in order to: (i) translate the spending limits
into concrete measures; and (ii) agree details concerning the
consolidation on the revenue side with the government coalition
partners.
"No further steps in the EDP are needed at present.
"Portugal
"The Commission concludes that Portugal has
taken action representing 'adequate progress' by taking measures
that represent an annual fiscal effort of significantly more than
1¼% of GDP in both 2010 and 2011.
"Portugal has announced with detail a number
of fiscal consolidation measures to underpin the consolidation
path up to 2013, for which implementation has already started
in some cases.
"Plans for correction crucially rely on quick
and effective implementation of measures announced in the March
2010 stability programme. Portugal should: (i) include further
corrective efforts in the 2011 Budget Law to attain the annual
deficit targets, and to ensure that the debt ratio is on a downward
path before 2013; and (ii) efforts will have to be designed considering
that fiscal restraint might take a toll on economic growth over
the short and medium term. The timing of additional measures can
only benefit from bearing in mind the need to bolster confidence
and credibility at early stages of the consolidation process.
Steps have been taken to strengthen the budgetary framework, notably
to develop its multi-annual elements.
"No further steps in the EDP are needed at present.
"Slovenia
"The Commission concludes that Slovenia has
taken action representing 'adequate progress' as: (i) consolidation
measures in the budget for 2010, estimated to generate expenditure
savings of around 1¼% of GDP in 2010; and (ii) adopted a
supplementary budget to reconfirm the targeted deficit ratio for
central government in cash terms in the light of worse economic
and budgetary developments.
"To achieve the targets Slovenia should: (i)
spell out and adopt the underlying measures in its 2011-2013 consolidation
strategy; and (ii) address possible expenditure slippages or revenue
shortfalls. To reduce the risks to the long-term sustainability
of public finances, a comprehensive two-step pension reform is
currently being negotiated.
"The Commission considers that no further steps
are needed at present.
"Slovakia
"The Commission concludes that Slovakia has
taken action representing 'adequate progress' by implementing
several deficit reducing measures in 2010.
"Slovakia has outlined in some detail a medium-term
consolidation strategy envisaging correction by 2012, a year ahead
of the deadline. To achieve this Slovakia should: (i) implement
the 2010 budget and stand ready to adopt additional measures if
necessary to reach the deficit target of 5.5% of GDP; and (ii)
the 2011 budget should include measures necessary to reach the
fiscal targets presented in the stability programme and avoid
cuts in public investment. Slovakia has initiated work to strengthen
the enforceability of the medium-term fiscal framework through
the introduction of expenditure ceilings, a limit on general government
debt, and stronger budget execution monitoring.
"The Commission considers that no further steps
are needed at present."
72.7 The 9 May 2010 ECOFIN Council:
- gave strong support to Spain
and Portugal's plans to carry out significant additional consolidation
measures in 2010 and 2011; and
- agreed that the adequacy of
these measures would be assessed by the Commission in this present
assessment.[312]
In the second annex the Commission presents that
assessment of Spain and Portugal's new targets and additional
measures. The Minister also summarises this:
"Spain
"Spain announced on 12 May a series of additional
consolidation measures. The fiscal targets are now a deficit of
9.3% of GDP for 2010 and one of 6% of GDP for 2011 (revised from
previous deficit targets of 9.8% and 7.5% of GDP for 2010 and
2011 respectively in the February 2010 stability programme).
"Expenditure cuts constitute all of the measures,
with the most significant being, for example, government wages,
a freeze on pensions and transfers to local and regional government.
Despite these announced measures, the conclusion is that they
might not suffice in reaching the revised targets for 2011. The
implementation of structural measures is key to increasing GDP
growth potential, and of particular importance to Spain are reforms
aimed at addressing labour-market segmentation. The assessment
states that it would be advised to announce details of reforms
without further delay, and Spain is expected to announce labour-market
measures shortly.
"Portugal
"In response to the agreement at the 9 May ECOFIN
Council, Portugal revised its deficit targets to 7.3% of GDP for
2010 and 4.6% of GDP for 2011 (revised from previous deficit targets
of 8.3% and 6.6% of GDP for 2010 and 2011 respectively in the
stability programme). They also announced additional consolidation
measures for 2010, mainly aimed at revenue raising including,
for example, increasing the rate of VAT and surcharges on personal
and corporate income tax.
"The variety of expenditure cuts includes introducing
tolls on some public-private partnership motorways and a freeze
in hiring by central government. As with Spain, the conclusion
is that Portugal might not suffice in reaching the revised targets
for 2011. Although the consolidation needs of Portugal are such
that they need to contain both revenue and expenditure measures,
it would be advisable that further consolidation is focused on
expenditure cuts.
"Also like Spain, Portugal is advised to carry
out structural measures to help address the drop in economic activity
that results from sizeable fiscal consolidation. Suggested measures
include reforms to the labour market.
"Finally, the assessment emphasises the need
for Portugal's consolidation efforts to urgently stabilise its
debt ratio before 2013. This is highlighted by the fact that in
2011 the debt ratio may increase by almost 4 percentage points
to over 88.5% of GDP."
The Government's view
72.8 The Minister tells us that the 17 June 2010
European Council agreed, in line with the view of the G20, on
a coordinated and differentiated exit strategy to ensure sustainable
public finances.[313]
And he comments that the Government believes that Member States
should take forward fiscal consolidation as a priority to reduce
their deficits and support recovery.
Conclusion
72.9 We are grateful to the Minister for his full
description of the Commission's Communication. We have no questions
to raise and clear the document.
307 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
308
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
309
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
310
(31385)-(31395) 15753/09-15764/09, (31397) 15758/09: see HC 5-xviii
(2009-10), chapter 10 (7 April 2010). Back
311
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/114324.pdf
. Back
312
Ibid. Back
313
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/115346.pdf.
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