European Scrutiny Committee Contents


75 Stability and Growth Pact

(a)

(31537)

9078/10


(b)

(31538)

9079/10


(c)

(31539)

9081/10


(d)

(31540)

9082/10


(e)

(31541)

9083/10


(f)

(31542)

9084/10


(g)

(31544)

9086/10


(h)

(31545)

9087/10


(i)

(31546)

9088/10


(j)

(31547)

9090/10


(k)

(31549)

9091/10


(l)

(31550)

9092/10


(m)

(31551)

9094/10


(n)

(31552)

9095/10


(o)

(31553)

9096/10


(p)

(31554)

9097/10


(q)

(31555)

9098/10


(r)

(31556)

9099/10


(s)

(31558)

9100/10


(t)

(31559)

9101/10



(u)

(31560)

9102/10


(v)

(31561)

9103/10


(w)

(31562)

9104/10


(x)

(31563)

9105/10


(y)

(31564)

9106/10


(z)

(31698)

10839/10


Council Opinion on the updated Stability Programme of Austria, 2009-2013


Council Opinion on the updated Stability Programme of Belgium, 2009-2012


Council Opinion on the updated Convergence Programme of Bulgaria, 2009-2012


Council Opinion on the updated Convergence Programme of the Czech Republic, 2009-2012


Council Opinion on the updated Convergence Programme of Denmark, 2009-2015


Council Opinion on the updated Convergence Programme of Estonia, 2009-2013


Council Opinion on the updated Stability Programme of Finland, 2009-2013


Council Opinion on the updated Stability Programme of France, 2009-2013


Council Opinion on the updated Stability Programme of Germany, 2009-2013


Council Opinion on the updated Convergence Programme of Hungary, 2009-2012


Council Opinion on the updated Stability Programme of Ireland, 2009-2014


Council Opinion on the updated Stability Programme of Italy, 2009-2012


Council Opinion on the updated Convergence Programme of Latvia, 2009-2012


Council Opinion on the updated Convergence Programme of Lithuania, 2009-2012


Council Opinion on the updated Stability Programme of Luxembourg, 2009-2014


Draft Council Opinion on the updated Stability Programme of Malta 2009-2012


Council Opinion on the updated Convergence Programme of Poland, 2009-2012


Council Opinion on the updated Stability Programme of Portugal, 2009-2013


Council Opinion on the updated Convergence Programme of Romania, 2009-2012


Council Opinion on the updated Stability Programme of Slovakia, 2009-2012



Council Opinion on the updated Stability Programme of Slovenia, 2009-2013


Council Opinion on the updated Stability Programme of Spain, 2009-2013


Council Opinion on the updated Convergence Programme of Sweden, 2009-2012


Council Opinion on the updated Stability Programme of the Netherlands, 2009-2012


Council Opinion on the updated Convergence Programme of the United Kingdom, 2009/10-2014/15


Council Opinion on the updated Stability Programme of Cyprus, 2009-2013

Legal baseArticle 126(5) TFEU; —; QMV (excepting the Member State concerned)
Documents originated
Deposited in Parliament(a)-(y) 25 May 2010

(z) 11June 2010

DepartmentHM Treasury
Basis of consideration(a)-(x) and (z) EM of 26 July 2010

(y) EM of 26 July 2010

Previous Committee ReportNone
Discussed in Council(a)-(y) 26 April 2010

(z) 6 June 2010

Committee's assessmentPolitically important
Committee's decisionCleared

Background

75.1 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%.[323] Each year the Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the updated stability or convergence programme of each Member State.[324] 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.

75.2 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.

The documents

75.3 These documents are the annual Council Opinions on the stability or convergence programmes of all the Member States except Greece. The conclusions of the Opinions can be grouped together by similarity:

  • Bulgaria, Estonia, Hungary, Romania, Slovenia and Sweden all received favourable conclusions, with their Opinions stating that the programmes were deemed adequate and that they had implemented an appropriate consolidation of public finances that were in line with the relevant Council Recommendation;
  • Belgium, the Czech Republic, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland and Slovenia all received generally satisfactory conclusions. For these Member States, the Opinions note that, although their programmes were appropriate overall and in line with the relevant Council Recommendation, risks still remain and in some examples more information is needed before a more conclusive judgement can be made;
  • for Austria, Cyprus, Denmark, Finland, France, Germany, Ireland and the Netherlands, the Opinions were less positive and stated that the public finances have deteriorated significantly. For these Member States major risks still remain and the introduction of further consolidation measures was essential; and
  • for Portugal and Spain, the Opinions were critical and highlighted high deficits and mounting debt levels. They reiterated the importance of further fiscal consolidation measures in achieving the aims of their ambitious programmes.

75.4 The recommendations of the Opinions can also be grouped together by similarity:

  • many Member States, including Austria, Germany, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Romania, Slovenia and the Netherlands, were asked to both refine and substantiate their consolidation measures;
  • Cyprus, Denmark, France, Ireland, Latvia, Lithuania, Portugal and Spain were recommended to take even more direct action and be on stand-by to adopt additional new consolidation measures;
  • all the Member States, bar Bulgaria, Denmark, Luxembourg, Slovenia and Sweden, were recommended to strengthen and improve their budgetary framework, focusing particularly on the medium-term;
  • some Member States whose public finances are deemed to be in the most severe state — Italy, Ireland and Spain — were advised to rigorously implement their budgetary and fiscal plans with urgency;
  • in a similar vein, Bulgaria was advised to implement a strict fiscal policy and Belgium was recommended to ensure a high primary surplus;
  • more indirect recommendations include Bulgaria, Malta, Portugal and Slovenia strengthening the efficiency of public spending and France, Poland and the Netherlands allocating windfall revenue to deficit reduction;
  • Austria, Belgium, Cyprus, Ireland, Italy, Portugal and Spain were advised to seize any opportunities beyond the fiscal effort, including from unexpected better economic conditions, to accelerate the reduction of the gross debt ratio back towards the 60% of GDP reference value;
  • recommendations on structural reform measures, including in areas such as education and employment, were made to Cyprus, the Czech Republic, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, Romania, Slovakia, Slovenia, Spain and the Netherlands;
  • Italy, Germany, Spain and Sweden were advised to improve their data compliance;
  • Austria and Germany were invited to submit in time for the assessment of the effective action under the excessive deficit procedure an addendum to the programme to report on progress made in the implementation of the relevant Council Recommendation; and
  • the Czech Republic, Denmark, France, Germany, Ireland, Italy, Malta, Poland and the Netherlands were asked to provide additional information in the next update of their convergence programmes.

75.5 As for the individual Opinions, in his first Explanatory Memorandum the Financial Secretary to the Treasury (Mr Mark Hoban) helpfully summarises all them, except that for the UK, document (y), which is the subject of his second Explanatory Memorandum. We reproduce these summaries:

"Austria — Council Opinion on the updated stability programme, 2009-2013

"After Austria's worst post-war recession, the programme has general government deficit reaching 3.5% of GDP (up from 0.4% of GDP in 2008) and public debt at 66.5% of GDP in 2009. The programme also predicts a pick up in real GDP growth from -3.4% in 2009 to 1.5% in 2010-11 and around 2% thereafter. The structural balance is expected to narrow from 3.9% of GDP in 2010 to 2.2% of GDP in 2013, corresponding to an average annual fiscal effort somewhat below ¾% of GDP over the period 2011- 2013. Government gross debt is estimated at 66.5% of GDP in 2009, up from 62.5% in the year before.

"Belgium — Council Opinion on the updated stability programme, 2009-2012

"The downturn has had a significant adverse impact on Belgian public finances, and the general government deficit deteriorated from 1.2% of GDP in 2008 to 5.9% of GDP in 2009. The programme also predicts that real GDP will grow by 1.1% in 2010 and accelerate to 1.7% in 2011 and then 2.2% in 2012. Annual GDP growth is expected to turn slightly positive in 2010 (0.6%) and to increase to 1½% in 2011. These projections are cautious given the better-than-expected outcome for the second half of 2009.

"Bulgaria — Council Opinion on the updated convergence programme, 2009-2012

"Prior to the crisis, Bulgaria had witnessed strong real GDP growth. The programme envisages that real GDP growth will improve from -5% in 2009 to 0.3% in 2010 before recovering to an average rate of 4¼% over the rest of the programme period. The revenue to-GDP ratio is expected to increase to almost 39¼% of GDP (from 37½% of GDP in the previous year), supported by higher indirect taxes and other revenue. The medium-term budgetary objective (MTO) adequately supports a surplus of ½% of GDP, which the programme aims to achieve from 2010 onwards. The government gross debt ratio is well below the Treaty reference value throughout the programme period and is estimated at around 15% of GDP in 2009.

"Cyprus — Council Opinion on the updated stability programme, 2009-2013

"In 2009 economic activity contracted by 1.7% of GDP — the first time Cyprus has experienced negative growth in the last thirty-five years. The programme envisages that real GDP growth will increase from -1.7% in 2009 to 0.5% in 2010 and will then recover to an average rate of around 2.6% over the rest of the programme period. The primary aim of the programme is to bring the general government balance below the 3% of GDP reference value by 2013. The programme projects the nominal budget deficit to decline to 4.5% of GDP in 2011 (from 6.1% in the previous year) and 3.4% in 2012 before it eventually reaches 2.5% in 2013. The government gross debt-to-GDP ratio is estimated at 56.2% of GDP in 2009, up from 48.4% in the year before. The debt ratio will breach the reference value of 60% of GDP in 2010 and is projected to remain above the reference value throughout the programme period. It is projected to increase to around 63% of GDP in 2011 and 2012, thereafter slightly declining.

"Czech Republic — Council Opinion on the updated convergence programme, 2009-2012

"After a three-year period of growth above 6%, real GDP grew by only 2.5% in 2008 and declined by 4% in 2009. The main challenge is to reduce the high structural government deficit, estimated at around 6% of GDP in 2009 to a sustainable level, and the programme projects the general government deficit at 5.3% of GDP in 2010 and then to 4.8% and 4.2% of GDP in 2011 and 2012 respectively. The programme also envisages real GDP growth at 1.3% in 2010, 2.6% in 2011 and 3.8% in 2012 and when assessing against currently available information, this seems plausible until 2011. Government gross debt is estimated at 35% of GDP in 2009, up from 30% in the year before. The debt ratio is projected to increase by further 7 percentage points over the programme period, reaching 42% of GDP in 2012.

"Denmark — Council Opinion on the updated convergence programme, 2009-2015

"The economic crisis hit the Danish economy hard in 2009, and resulted in the country's worst recession since the Second World War. The large fiscal stimulus packages that were implemented are expected to result in a deficit that is set to exceed the 3% of GDP reference value of the Stability and Growth Pact (SGP) between 2010 and 2012. Public debt is still expected to remain below 60% of GDP reference value. Real GDP growth in 2009 was -4.3% but is expected bounce back to 1.3% in 2010, and then accelerating at an average of 2.2% over the remainder of the programme period. General government deficit is expected to widen to 5.3% of GDP in 2010.

"Estonia — Council Opinion on the updated convergence programme, 2009-2013

"The programme predicts that real GDP growth, following a drop of around 14.5% in 2009, will be -0.1% in 2010, recovering to an average growth rate of 3.7% over the rest of the programme period. It also envisages the general government deficit in 2009 at 2.6% of GDP. The structural balance amounted to 3½% of GDP suggesting a significantly restrictive fiscal stance. Government gross debt ratio is 7.8% of GDP in 2009 and is projected to increase to 14.3% of GDP by the end of the programme period.

"Finland — Council Opinion on the updated stability programme, 2009-2013

"Government finances were weakened by over 6% of GDP on 2009. The programme envisages that after a sharp contraction by 7.6 % in 2009, real GDP growth will resume to 0.7% in 2010, accelerating to 2.4% and 3.5% in 2011 and 2012 respectively, before moderating to 3% in 2013. A general government deficit of 2.2% of GDP is expected for 2009 after a significant deterioration from a surplus of 4.4% of GDP in 2008. Government gross debt is estimated at 41.8% of GDP in 2009, up from 34.2% in the year before and the debt ratio is projected to increase by a further 14.6 percentage points over the programme period, up to 56.4% of GDP by 2013.

"France — Council Opinion on the updated stability programme, 2009-2013

"Economic activity in France lost its dynamism in the course of 2008, declining sharply in the fourth quarter of 2008 and in the first quarter of 2009. After a contraction by 2.2% in 2009 real GDP will grow again by 1.4% in 2010 before recovering to an average rate of 2.5% over the remainder of the programme. The programme estimates the general government deficit in 2009 at 7.9% of GDP. The major deterioration from a deficit of 3.4% of GDP in 2008 reflects to a large extent the impact of the crisis on government finances. The programme then expects the general government deficit in 2010 to deteriorate even more to 0.3% of GDP and reach 8.2% of GDP in 2010. The programme suggests that the government gross debt is on an increasing trend until 2012, estimated at 77.4% of GDP in 2009, up from 67.4% in 2008. A further increase by a 9.2 percentage points is projected over the programme period, reaching the level of about 87% of GDP, mainly driven by continued high government deficits.

"Germany — Council Opinion on the updated stability programme, 2009-2013

"The programme envisages that after a slump of 5% in 2009, real GDP growth will be restored, moving from 1.4% in 2010 to an average rate of 2% over the rest of the programme period. According to the programme, the nominal general government deficit will increase from 3.2% of GDP in 2009 to 5½% in 2010. Government gross debt is estimated at 72½% of GDP in 2009, up from 65.9% in the year before and the debt ratio is projected to increase by a further 9½ percentage points over the programme period up to 82% of GDP. This is mainly driven by continued government deficits and to a lesser extent by unspecified debt-increasing stock-flow adjustments of around ½% of GDP per annum between 2011 and 2013.

"Hungary — Council Opinion on the updated convergence programme, 2009-2012

"The programme envisages that after a contraction of 6.7% in 2009, real GDP will decline further by 0.3% in 2010 and then resume growth by 3¾% in 2011 and 2012. The programme estimates the general government deficit in 2009 at 3.9% of GDP in 2009, after 3.8% in 2008. The programme aims to reduce the general government deficit from 3.8% of GDP in 2010 to 2.8% by 2011 and then further to 2.5% in 2012. The 2011 and 2012 deficit targets result in a recalculated structural deficit of 1½% and 2½% of GDP, respectively. It means that a structural improvement by around 3 percentage points of GDP in 2009 is projected to be followed by a 0.1% of GDP improvement in the period 2010-2011 and in 2012 the structural balance would even deteriorate by 1% of GDP. Government gross debt is estimated at 78% of GDP in 2009, up from around 73% in the year before and a further rise to 79% of GDP in 2010 is projected before it would start declining to 77% and 73½% in 2011 and 2012, respectively.

"Ireland — Council Opinion on the updated stability programme, 2009-2014

"The programme envisages that after declines in real GDP by 7.5% in 2009 and 1.4% in 2010, the economy will return to positive growth averaging 4% over 2011-2014. The programme estimates the general government deficit in 2009 at 11.7% of GDP. The significant deterioration from a deficit of 7.2% of GDP in 2008 to a large extent reflects the substantial knock-on effect that the broad-based recession has had on the public finances. General government deficit widened further in 2009 but is planned to stabilise in 2010, at 11.6% of GDP. From 2011 onwards, the programme envisages a reduction of the deficit to below the 3% of GDP reference value by 2014. The government gross debt ratio is projected to be on an increasing trend until 2012. Specifically, the debt-to-GDP ratio soared to nearly 66% of GDP in 2009 from 44% of GDP in 2008. The programme projects a further steep increase in the debt ratio to a peak of nearly 84% of GDP in 2012, followed by a gradual decline to below 81% of GDP by the end of the programme period in 2014.

"Italy — Council Opinion on the updated stability programme, 2009-2012

"The programme envisages that real GDP will return to positive growth of 1.1% in 2010, from -4.8% in 2009 (-5% according to the statistical office's estimate released on 1 March 2010), and accelerate to a rate of 2% over the rest of the programme period. The programme estimates the general government deficit in 2009 at 5.3% of GDP with a significant deterioration from a deficit of 2.7% of GDP in 2008. The primary balance is planned at 1.3% of GDP in 2011, and 2.7% in 2012. The planned annual consolidation amounts to ½ percentage point of GDP in 2011 and ¾ percentage points in 2012 in structural terms. The general government gross debt-to-GDP ratio is projected to be on an increasing trend until 2010. After rising in 2008, the debt ratio is estimated in the programme to have increased by 9.3 percentage points, to 115.1% of GDP in 2009 (115.8% in the statistical office's estimate released on 1 March 2010), mainly due to the high interest burden and sharp contraction in real GDP. The debt ratio is then projected to follow a declining path in 2011 and 2012, to 114.6% of GDP, mainly thanks to the planned positive primary balances and the assumed acceleration in real GDP growth.

"Latvia — Council Opinion on the updated convergence programme, 2009-2012

"The programme envisages that after an estimated exceptionally severe 18.0% fall in output in 2009, real GDP will decrease by a further 4.0% in 2010 before growing by 2.0% in 2011 and 3.8% in 2012. The programme estimates the general government deficit in 2009 at 10.0% of GDP and a significant deterioration from a deficit of 4.1% of GDP in 2008. They want deficits limited to 6% and 3% of GDP in 2011 and 2012 and therefore consistent with the Council Recommendation of 7 July 2009 of correcting the excessive deficit by 2012 at the latest. Government gross debt is estimated at 34.8% of GDP in 2009, up from 19.5% in the year before. The debt ratio is projected to increase sharply by a further 22 percentage points over the programme period, driven by significant fiscal deficits, and consequently there are risks surrounding the programme projection showing the debt ratio peaking at slightly below 60% in 2011. The projection for the final programme year of 2012 is 56.8% of GDP.

"Lithuania — Council Opinion on the updated convergence programme, 2009-2012

"The programme envisages that real GDP, after dropping by 15.0% in 2009, grows by 1.6% in 2010, accelerating to 3.2% in 2011, but slowing back to 1.2% in 2012. The programme estimates the general government deficit in 2009 at 9.1% of GDP. The significant deterioration from a deficit of 3.2% of GDP in 2008 mainly reflects a substantial tax shortfall. Government gross debt is estimated at 29.5% of GDP in 2009, substantially up from 15.6% in the year before. The debt ratio is projected to increase by a further 11.5 percentage points over the programme period to 41% of GDP in 2012, mainly driven by continued high government deficits.

"Luxembourg — Council Opinion on the updated stability programme, 2009-2014

"The Luxembourgish economy was severely hit by the crisis: real GDP, after zero growth in 2008, dropped by 3.9% in real terms in 2009, according to the most recent estimates. The programme then envisages real GDP to grow by 2.5% in 2010, after a contraction by 3.9% in 2009, and by 2.9% a year on average over the rest of the programme period. On the deficit, the programme estimates the general government deficit in 2009 at 1.1% of GDP. This significant deterioration from a surplus of 2.5% of GDP in 2008 in due to a surge by almost 5 percentage points of GDP in public expenditure. The debt ratio doubled from 6.6% of GDP in 2007 to 13.5% in 2008, largely as a result of the financial support to the financial sector. The programme projects a further rise from 14.9% of GDP in 2009, to 37.4% in 2014. This increase will exceed the sum of the projected deficits, due to sizable transfers from central government to social security.

"Malta — Council Opinion on the updated stability programme, 2009-2012

"The impact of the downturn and some non-recurrent expenditure-increasing items in 2008 led to a significant widening of the general government deficit in 2008-2009 compared to 2007. The programme envisages that real GDP will return to positive growth in 2010, at 1.1%, after a 2% contraction estimated for 2009, followed by a further recovery, to an average rate of 2.6% over the rest of the programme period. The programme estimates the general government deficit in 2009 at 3.8% of GDP. In structural terms, the budgetary position would improve by ¾ pp. of GDP in 2011 but worsen again by ½ percentage points in 2012. The debt ratio is projected to remain above the Treaty reference value throughout the programme period. The programme estimates government gross debt at 66.8% of GDP in 2009, up from a level below 64% in 2008. The debt ratio is projected to increase further in 2010, by almost 2 percentage points, before declining to around 67% of GDP in 2012.

"The Netherlands — Council Opinion on the updated stability programme, 2009-2012

"After a severe contraction of 4% real GDP will grow again by 1½% in 2010 before further recovering to an average rate of 2% over the rest of the programme period. Assessed against currently available information, this opinion states that the scenario appears to be based on favourable growth assumptions for 2010 and 2011 and plausible assumptions for 2012. According to the programme the general government deficit deteriorated strongly from a surplus of 0.7% of GDP in 2008 to a deficit of 4.9% of GDP in 2009. The budgetary target for 2010 in the update of the programme is a deficit of 6.1% of GDP. The government gross debt-to-GDP ratio was above the Treaty reference value in 2009 and is on an increasing trend over the whole programme period. It is estimated at 62.3% in 2009, up from 58.2% in the year before. The debt ratio is projected to increase by a further 10% of GDP over the programme period to 72.5% in 2012, mainly driven by continued high government deficits.

"Poland — Council Opinion on the updated convergence programme, 2009-2012

"Poland was the only EU country that recorded positive growth in 2009 with real GDP estimated to have increased by 1.7%. The programme envisages that real GDP growth will accelerate from 1.7% in 2009 to 3% in 2010, 4.5% in 2011 and 4.2% in 2012. Assessed against currently available information, the opinion records that the assumption for real GDP growth in 2010 appears slightly favourable and the assumptions for 2011 and 2012 seem favourable. The programme presents an alternative, "risk scenario" with lower real GDP growth, at 2.7% in 2010, 3.7% in 2011 and 3.5% in 2012, which appears more plausible. The programme estimates the general government deficit in 2009 at 7.2% of GDP and the significant deterioration from a deficit of 3.6% of GDP in 2008 reflects to a large extent the impact of the crisis on government finances. The programme projects a slight decline in the government deficit to 6.9% of GDP in 2010. Government gross debt is estimated to have reached 50.7% of GDP in 2009, up from 47.2% in 2008. This ratio is projected to increase by 5 percentage points over the programme period reaching the level of around 56% of GDP in 2012 but remaining below the Treaty reference value, mainly driven by high government deficits.

"Portugal — Council Opinion on the updated stability programme, 2009-2013

"The programme assumes that real GDP growth will gradually improve from 0.7% in 2010 to 1.7% by 2013. The programme estimates the general government deficit in 2009 at 9.3% of GDP, which is a significant deterioration from a deficit of 2.8% of GDP in 2008. The main goal of the medium-term budgetary strategy is to bring the deficit below the 3% of GDP reference value by 2013 and government deficits of 6.6%, 4.6% and 2.8% of GDP for 2011, 2012 and 2013 respectively. Government gross debt is estimated at 77.2% of GDP at the end of 2009, up from 66.3% in 2008, reflecting both the sizeable increase in the deficit and the decline in nominal GDP. The debt ratio is projected to increase by a further 12½ percentage points over the programme period, to reach 90.7% of GDP in 2012, before declining slightly to 89.8% of GDP in 2013.

"Romania — Council Opinion on the updated convergence programme, 2009-2012

"With an average annual GDP growth rate of 6.8% between 2004 and 2008, Romania was one of the fastest growing EU Member States. The programme envisages that real GDP growth will return to positive in 2010 (1.3%) and gradually accelerate to 3.7% by 2012. Assessed against currently available information and in particular the worse-than-expected outcome for the fourth quarter of 2009, this scenario appears to be based on slightly favourable growth assumptions for 2010. The programme estimates that the general government deficit in 2009 equalled 8.0% of GDP, which is slightly above target (7.8%) due to an increase in government payment arrears and is a significant deterioration from the 5.5% of GDP deficit recorded in 2008. The 2010 budget targets a deficit of 6.3% of GDP. The programme sets out a gradual path for bringing down the headline deficit from 6.3% of GDP in 2010 to 4.4% of GDP in 2011 and 3.0% of GDP in 2012. Government gross debt is estimated at 23% of GDP in 2009, up from 13.6% the year before. While remaining well below the Treaty reference value, the debt ratio is projected to increase by a further 6.7 percentage points over the programme period, to 29.7% of GDP in 2012.

"Slovakia — Council Opinion on the updated stability programme, 2009-2012

"The programme projects real GDP growth at 1.9% in 2010, 4.1% in 2011 and 5.4% in 2012. The programme estimates the government deficit in 2009 at 6.3% of GDP, up from 2.3% of GDP in 2008. For 2010 the programme targets a general government deficit of 5.5% of GDP. The headline deficit is expected to fall from 5.5% of GDP in 2010 to 4.2% and 3.0% of GDP in 2011 and 2012, respectively. The government gross debt increased from 27.7% of GDP in 2008 to 37.1% of GDP in 2009. The increase reflects the high deficit and the significant contraction of real GDP in 2009. While remaining well below the Treaty reference value, the debt ratio is projected to increase further in 2010 and 2011, when it would reach 42.5% of GDP, and to slightly decline in 2012, to 42.2% of GDP.

"Slovenia — Council Opinion on the updated stability programme, 2009-2013

"The programme envisages that real GDP will return to positive growth in 2010, at 0.9%, from -7.3% in 2009 and accelerate to an average rate of 3.2% over the rest of the programme period. The programme estimates the general government deficit to have increased from 1.8% of GDP in 2008 to 5.7% in 2009. For 2010, the programme plans for the general government deficit to stabilise at 5.7% of GDP. The main aim of the programme's medium-term budgetary strategy is to reduce the deficit below the 3% of GDP deficit reference value by 2013, with deficit targets set at 4.2%, 3.1% and 1.6% of GDP for 2011, 2012 and 2013 respectively. Government gross debt is estimated in the programme to have increased markedly from 22.5% of GDP in 2008 to 34.4% of GDP in 2009. The debt ratio is projected to remain below the Treaty reference value throughout the programme period, but to increase by more than 8 percentage points by 2012, to almost 43% of GDP, mainly on the back of primary deficits and improving nominal GDP outlook, and to record a modest fall in 2013.

"Spain — Council Opinion on the updated stability programme, 2009-2013

"The programme assumes that GDP will contract by 0.3% in real terms in 2010 and recover thereafter to real GDP growth of 1.8% in 2011 and an average of 3% in 2012 and 2013. The programme estimates the general government deficit in 2009 at 11.4% of GDP with a significant deterioration from a deficit of 4.1% of GDP in 2008. According to the programme, the target for the general government deficit in 2010 stands at 9.8% of GDP, which is markedly higher than the deficit of 8.1% of GDP projected in the 2010 budget. This deterioration by 1.7 percentage points of GDP reflects a base effect from 2009. They also target a deficit of 7.5%, 5.3% and 3% of GDP for 2011, 2012 and 2013, respectively. Government gross debt is estimated at 55.2% of GDP in 2009, significantly up from 39.7% in the year before. The debt ratio is projected to increase by a further 19 percentage points over the programme period, to breach the Treaty reference value in 2010 and to reach 74% of GDP by 2013, mainly driven by a continued high government deficit.

"Sweden — Council Opinion on the updated convergence programme, 2009-2012

"The programme envisages that real GDP growth will pick up from -5.2% in 2009 to 0.6% in 2010 and to average 3.5% over the rest of the programme period. The programme estimates the general government deficit in 2009 to be 2.2% of GDP, which is a significant deterioration from a surplus of 2.5% of GDP in 2008. The budgetary projections are based on a no-policy change assumption for the period after 2010 and foresee the headline general government deficit to gradually narrow from 3.4% of GDP in 2010 to 2.1% of GDP in 2011 and 1.1% of GDP in 2012. The primary balance is expected to have a similar profile, going from a deficit of 2.2% of GDP in 2010 to a deficit of 0.8% in 2011, before swinging into a surplus of 0.4% of GDP in 2012. Government gross debt is estimated at 42.8% of GDP in 2009, up from 38.0% of GDP the year before. The debt ratio is then projected to increase by a further 2.4 percentage points over the programme period to 45.2% of GDP in 2012, mainly driven by continued government deficits."

75.6 The Council Opinion on the convergence programme of the UK (submitted in January 2010), document (y), was based on an assessment of its economic content with reference to the Commission's 2010 economic forecasts for the UK. The 2010 economic forecast and the Opinion, were both written prior to the formation of the present Government and subsequent announcements on fiscal consolidation, including in the June 2010 Budget. The Opinion says that:

  • the fiscal strategy set out in the January 2010 convergence programme is inconsistent with the Council Recommendation of 2 December 2009 and the UK's fiscal strategy is not sufficiently ambitious and needs to be significantly reinforced;
  • the UK's deficit was already at risk of breaching the 3% of GDP reference value before the economic and financial crisis ensued;
  • since then a combination of the operation of the automatic stabilizers, falls in asset prices and the fiscal stimulus have provoked a major deterioration in the public finances;
  • a restrictive fiscal policy in 2010/11 is appropriate, accompanied by a more ambitious consolidation plan for the near and medium term; and
  • with a greater part of the reduction in the deficit in the medium term driven by a tight spending envelope to 2014/15, the absence of detailed departmental spending limits is a source of uncertainty.

75.7 The Opinion then makes several recommendations for the UK:

  • avoid any further measures that will result in a further deterioration on public finances in 2010/11 and contain the deficit in 2010/11 to the level forecast in the convergence programme in the event of weaker than expected economic growth;
  • target a more ambitious reduction of the deficit to less than the 3% of GDP reference value by 2014/15, including strengthening the planned pace of consolidation from 2011/12 onwards;
  • capitalise on any further opportunities, such as favourable economic and market conditions, to accelerate the reduction of the gross debt ratio towards the 60% of GDP reference value;
  • publish in 2010 detailed departmental spending limits underlying the overall expenditure projections for at least a three-year period beyond 2010/11;
  • implement the expenditure efficiency savings identified;
  • improve compliance with data requirements; and
  • submit an addendum to the programme which details the progress made in the implementation of the Council Recommendation and outline a detailed consolidation strategy that will progress towards the correction of the excessive deficit.

The Government's view

75.8 In his Explanatory Memorandum on the 25 Opinions in documents (a)-(x) and (z) the Minister:

  • notes that, whilst the Council adopts Opinions and Recommendations based on the budgetary plans of national governments as set out in their updated stability or convergence programmes, this year the Opinions have also included progress updates on the fiscal consolidation efforts, which were implemented as part of the European Economic Recovery Plan;[325]
  • adds that many Member States have already begun withdrawing their financial stimulus measures;
  • recalls that in the June 2010 European Council Conclusions, in line with the view of the G20, Member States agreed on a coordinated and differentiated exit strategy to ensure sustainable public finances;[326] and
  • comments that the Government believes that Member States should take forward fiscal consolidation as a priority to reduce their deficits and support recovery.

75.9 In relation to the Council Opinion on the UK's convergence programme, document (y), the Minister says that:

  • the Government has made clear that deficit reduction and continuing to ensure economic recovery is its main priority and, independently of the Council, agrees that accelerated action to put the UK's public finances back on a sustainable path footing is required, as highlighted in the Opinion;
  • in its June 2010 Budget the Government announced a comprehensive set of policies to bring borrowing under control and place debt as a percentage of GDP onto a downward path;
  • that budget delivered additional consolidation of £40 billion on top of the plans set by the previous Government in the March 2010 Budget for the period to 2014-15;
  • it also introduced a new, forward looking "fiscal mandate" which will guide the Governments budgetary planning for the future;
  • this mandate is to achieve cyclically adjusted current balance by the end of the rolling, five year forecast period;
  • this results in plans for total consolidation of £128 billion a year by 2015-16 — 77% delivered by lower spending in 2015-16, the remainder through tax;
  • this additional tightening is forecast to reduce the deficit to 2.2% of GDP in 2014-15;
  • this is consistent with the December 2009 Recommendation to the UK to reduce the "Treaty Deficit" below the 3% of GDP Stability and Growth Pact threshold in 2014-15;
  • to guide fiscal policy decisions over the medium term the budget set out the Government's forward-looking fiscal mandate to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period, supplemented by a target for public sector net debt as a percentage of GDP to be falling at a fixed date of 2015-16; and
  • the Government has created the Office for Budget Responsibility, which introduces independence, greater transparency and credibility to the economic and fiscal forecasts on which fiscal policy is based.

Conclusion

75.10 We are grateful to the Minister for his full description of these Council Opinions. We have no questions to raise and clear the documents.





323   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

324   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

325   (30213) 16097/08: see HC 19-i (2008-09), chapter 4 (10 December 2008) and Hansard, 20 January 2009, cols 626-653. Back

326   See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/115346.pdf.  Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 22 September 2010