Today the European Commission examined the updated stability and convergence programmes (SCPs) of the Czech Republic, Denmark, Hungary, Lithuania, Luxembourg, Latvia, Malta, Poland, Romania and Slovenia. In line with the Commission’s assessments of a first group of fourteen Member States last week, the evaluation must be seen against the background of the economic and financial crisis which has led to a sharp deterioration of public finances since 2009 and triggered the Council decisions to open Excess Deficit Procedures (EDP) for a large majority of Member States.
Within the batch of countries assessed today, only Denmark and Luxemburg have kept their general government deficits below 3% in 2009, although their fiscal situation is set to deteriorate markedly in 2010. For most countries this year will mark a fiscal consolidation process consistent with the recommendation set out in the EDPs and, in the case of Latvia, Hungary and Romania, with the conditions set out in the international financial assistance programmes.
As to the budgetary targets set out in the programmes, the growth assumptions underlying these projections are in several cases optimistic especially in outer years, while the budgetary consolidation strategy is often not sufficiently backed up by concrete measures from 2011 onwards.
"The economic and financial crisis has taken its toll on public finances. Fiscal stimulus was necessary to support the recovery but the past two years have wiped out 20 years of fiscal consolidation. This means that we have to come back gradually to budgetary rigour next year at the latest ", said Economic and Monetary Affairs Commissioner Olli Rehn.
Malta
According to the stability programme the deficit ratio should broadly stabilise in 2010, at 3.9% of GDP, followed by a drop below 3% in 2011, in line with the Council recommendation of 16 February 2010, and stabilising thereafter. The debt ratio is projected to peak at almost 69% in 2010. The deficit and debt ratios could be higher than planned throughout the programme period. On the one hand, the programme does not adequately specify the measures needed to achieve the deficit targets, while on the other hand additional consolidation measures could be needed should the economic growth and revenue increases turn out lower than projected or should expenditure slippages materialises.
In addition to achieving a sound budgetary position and improving long-term sustainability, Malta faces the challenge of strengthening competitiveness to improve the economy’s resilience. Against this background, the invitations addressed to Malta and Gozo concern the budgetary strategy to correct the excessive deficit and move to a medium-term sustainable position and improvements to long-term sustainability as well as to the budgetary framework.
Czech Republic
The programme foresees a reduction of the headline deficit from 6.6% of GDP in 2009 to 3% of GDP in 2013, in line with the Council recommendation of 2 December 2009. The authorities have started implementing a sizeable consolidation package already in 2010, with a planned budgetary adjustment of around 2% of GDP in structural terms. Despite the expected economic recovery, the improvement in the structural balance is however projected to slow down markedly in 2011 and 2012. The fiscal adjustment in these years relies on expenditure cuts which however are not supported by concrete measures. Moreover, the programme does not provide information on how to achieve the reduction of the deficit projected for 2013.
Finally, weaknesses in the fiscal framework and high risks to the long-term sustainability of public finances remain causes for concern. Against this background, the invitations to the Czech Republic refer to the need for the budgetary strategy to correct the excessive deficit to support the consolidation programme for 2011-2012 by a more concrete package of measures, improving enforcement of the fiscal framework and implementing reforms with a view of improving the long-term sustainability of public finances.
Denmark
In response to the economic crisis and in line with the EERP, Denmark provided a sizeable fiscal stimulus in 2009 and plans to maintain supportive fiscal policies also in 2010. The general government balance has thus turned sharply into deficit in 2009 and will further deteriorate in 2010 to over 5% of GDP. The deficit is projected to gradually narrow to below the 3% of GDP reference value by 2013, but the programme does not specify measures needed to attain the consolidation path. The budgetary outcomes could be worse than projected in the programme in the medium term due to the markedly favourable growth assumptions beyond 2011. In order to ensure a sustainable development of public finances, a key challenge will be to ensure continued reform to increase labour supply. Denmark is invited to reinforce efforts ensuring that the planned breach of the 3% of GDP reference value would remain contained and to specify the measures to underpin fiscal consolidation.
Hungary
Hungary’s budget balance remained broadly stable in 2009 in comparison with one year earlier. The strong economic deterioration associated with the global economic downturn and its negative effects on fiscal balance were broadly compensated by expenditure cuts. For 2010, the programme targets a similar headline deficit at 3.8% of GDP. For 2011 and 2012, the budget deficit is expected to decline to 2.8% and 2.5%, respectively, although relying on measures that have not been fully specified in the programme. This deficit reduction path would allow the country to abrogate its excessive deficit in 2011, in line with the Council recommendation of 7 July 2009. Government debt should peak in 2010 at almost 80% of GDP and then decline to 73% by 2012. In the outer years, the budgetary outcomes could be worse than projected, due to slightly optimistic growth projections. Additionally, due to the lack of specific decisions backing the necessary consolidating measures, expenditure targets are also subject to considerable risks. As for the deficit figures, debt developments could be less favourable. Hungary is invited to correct the excessive deficit, to improve the quality of public finances and moderate expenditures through a further reform of public administration and structural reforms addressing loss-making enterprises.
Latvia
Following a period of economic overheating, the global financial crisis compounded a sharp reversal of the domestic cycle and financial sector difficulties, prompting a request for international financial assistance. After years of pro-cyclical policy, a strong fiscal adjustment was needed: the 2009 supplementary budget implied a consolidation effort of 4.4% of GDP, and the 2010 budget entails a further effort of over 4.2%. This last step is consistent with the 2010 deficit target previously agreed with international lenders, as are the 2011 and 2012 deficits planned in the programme. Risks for the programme, related to economic developments and the size of the remaining consolidation appear sizeable but overall balanced.
Against this assessment, Latvia is invited to take necessary steps to correct the excessive deficit in compliance with both the Council recommendation of 7 July 2009 and with the conditions attached to EU balance of payments assistance, by fully implementing the 2010 budget and preparing options for consolidation measures to be included in the 2011 budget. Other policy invitations relate to fiscal governance and transparency, reform of the social benefits and measures to foster economic growth.
Lithuania
Lithuania envisages a continuation of sizeable fiscal consolidation measures with a view to bringing the deficit from 9.1% of GDP in 2009 to 3% of GDP by 2012, as recommended by the Council on 16 February 2010. Yet, the budgetary outcomes could turn out worse than projected, given the reliance on favourable growth assumptions for 2010 and the limited information on measures to underpin the achievement of the targets in outer years. The Lithuanian economy is currently emerging from a severe recession. Average growth is projected to remain considerably lower over the medium-term than in the upswing of the previous cycle. The current economic challenge is to restore sustainable growth while avoiding any relapse into significant internal and external imbalances. Ambitious structural reforms that aim to strengthen the sustainability of public finances and to underpin the economic recovery are needed, as foreseen in the programme. Against this background, the invitations to Lithuania refer to strengthening the budgetary strategy to correct the excessive deficit and backing up the consolidation path with specific measures, implementing structural reforms, and improving the medium-term fiscal framework.
Luxembourg
The general government balance turned into a deficit in 2009, reflecting the working of automatic stabilisers as well as the impact of fiscal stimulus measures in line with the EERP. According to the programme, the deficit will increase from 1.1% of GDP in 2009 to 3.9% of GDP in 2010, while the debt to GDP ratio will remain low. The deficit will be slowly returning to 3.1% of GDP in 2014 under a no-policy-change scenario. This pace of consolidation does not represent a sufficient progress towards the medium-term objective of 0.5% of GDP surplus in structural terms. In view of the projected deficit path under the no-policy-change scenario and the large increase in age-related public spending projected for the coming decades, the invitations to Luxembourg refer to the need to start fiscal consolidation as from 2011, to specify the consolidation measures, and to reform its pension system with the aim of improving the long-term sustainability of its public finances.
Poland
The programme envisages bringing the deficit from 7.2% of GDP in 2009 to 2.9% of GDP by 2012, in line with the Council recommendation of 7 July 2009. However, fiscal consolidation is heavily back loaded as most of the deficit reduction is projected to take place in 2012. Moreover, the budgetary outcomes could turn out worse than projected in the programme. The projections are based on favourable macroeconomic assumptions and the planned expenditure savings in 2011 and 2012 are not supported by sufficiently concrete measures. In view of the recovery projected by the authorities from 2010, and of the large structural government deficit, a more front loaded fiscal consolidation strategy would be appropriate. The programme sets out measures to strengthen the current fiscal framework, but more ambitious reforms are needed. The invitations to Poland address the need to correct the excessive deficit by front loading the fiscal adjustment, back up the consolidation path with specific measures and seek more ambitious reforms to improve the fiscal framework.
Romania
Romania aims at the reduction of the general government deficit form 8% of GDP in 2009 to 3% of GDP in 2012, in line with the Council Recommendation of 16 February 2010. The planned fiscal adjustment is front loaded with a greater consolidation effort envisaged for 2010 and 2011 than for 2012. A full implementation of the consolidation measures foreseen for 2010 is essential to reach the 6.3% of GDP deficit target set for that year. However, the convergence programme does not sufficiently specify the consolidation measures to be taken in 2011 and 2012 although additional information is expected to be included in the forthcoming 2011-2013 Medium-Term Budgetary Framework. Moreover, implementation of the fiscal governance reforms decided upon within the context of the EU balance of payments assistance programme to Romania should help in achieving the budgetary targets for these years. Adoption and implementation of the draft pension reform will be crucial in improving the long-term sustainability of public finances. The invitations to Romania concern the specification and implementation of fiscal consolidation measures to correct the excessive deficit, improvements of the fiscal framework, and the adoption and implementation of the draft pension law.
Slovenia
The programme estimates the general government deficit to have increased from 1.8% of GDP in 2008 to 5.7% in 2009, and that it will stabilise in 2010. The deficit ratio is then targeted to return below the 3% of GDP threshold in 2013, in line with the 2 December 2009 Council recommendation, thanks to an expenditure-based consolidation effort. From 34.4% of GDP in 2009, the gross debt ratio is planned to increase further until 2011 to then broadly stabilise at some 42% of GDP. The deficit and debt ratios could turn out higher than targeted in light of the optimistic revenue projections in 2010 followed by favourable growth assumptions after 2011, the possibility of expenditure overruns and the fact that the measures underpinning the envisaged consolidation have not yet been fully specified and adopted.
There remain high risks with regard to the long-term sustainability of public finances as a result of a high projected increase in pension expenditure over the coming decades. Invitations to Slovenia concern the budgetary strategy to correct the excessive deficit, improvements to the fiscal framework and quality of public finances as well as a further reform of the pension system and a more ambitious medium-term budgetary strategy.