On Wednesday, the European Commission examined the updated stability and convergence programmes (SCPs)Read More">¹ of Belgium, Bulgaria, Germany, Estonia, Ireland, Spain, France, Italy, the Netherlands, Austria, Slovakia, Sweden, Finland and the United Kingdom. These assessments have to be seen against the background of the sharp economic and financial crisis which has had a major impact on public finances. Reflecting the working of automatic stabilisers and discretionary stimulus measures implemented in line with the European Economic Recovery Plan (EERP)Read More">² to cope with the exceptional economic circumstances, a large majority of Member States is currently subject to the excessive deficit procedure following corresponding Council decisions in 2009. Of the countries assessed today, only Bulgaria, Estonia, plan to keep their general government deficits below the 3% of GDP reference value set in the Stability and Growth Pact over the programmes' period. Overall, for the majority of the fourteen programmes, the growth assumptions underlying the budgetary projections are assessed as rather optimistic, implying that budgetary outcomes might be worse than targeted. Furthermore, in several cases, the budgetary consolidation strategy is not sufficiently backed up by concrete measures from 2011 onwards.

"The programmes assessed today are marked by two milestones: the stimulus measures put in place to avert the economic downward spiral, and the fiscal exit strategy as agreed at the end of last year. Our assessment is that the exit strategy as agreed by the Council is being implemented: globally 2010 will still be a stimulus year followed by ambitious consolidation efforts in 2011. The main risks to consolidation stem from somewhat optimistic macroeconomic assumptions and the lack of specification of consolidating measures", said Economic and Monetary Affairs Commissioner Olli Rehn.

Belgium

After expansion in 2009 in line with the EERP, the Belgian stability programme plans a restrictive budgetary stance as from 2010, which would lead to a correction of the excessive deficit by 2012, in line with the Council recommendation of 2 December 2009. The government gross debt-to-GDP ratio which rose in 2008 and 2009 (to 98%), is expected to continue its upward movement up to 2011 and start declining again in 2012. However, the budgetary outcomes could turn out worse than projected, in particular as from 2011.

First, the measures underpinning the target for 2011 are only partly specified and there are no measures specified for 2012. In addition, the macroeconomic assumptions are slightly favourable. The Belgian government committed in the programme to take the necessary additional measures if economic growth is insufficient to achieve the 3% of GDP deficit target in 2012. The invitations to Belgium concern the specification of the budgetary strategy to correct the excessive deficit and reduce debt, and improvements to long-term sustainability and the fiscal framework.

Bulgaria

The update of Bulgaria's convergence programme aims at maintaining a sound budgetary position reflected in balanced planned general government budgets, which is considered adequate at the current economic juncture and in view of the need to sustain the on-going adjustment of external imbalances. After reaching a deficit of 1.9% of GDP in 2009, the general government budget is projected to be balanced in 2010 and to stabilize at a surplus of 0.1% of GDP in 2011-2012. The overall fiscal stance appears restrictive in 2010, broadly neutral in 2011, and provides for some fiscal relaxation in 2012. The undertaken consolidation measures and the strong political commitment to fiscal discipline are expected to partially compensate the risks stemming from the slightly favourable assumptions on growth and revenue collection. The programme foresees ambitious structural reforms that aim to strengthen the sustainability of public finances and at the same time to underpin the economic recovery. Given the need to ensure sustainable convergence, Bulgaria is invited to continue pursuing strict fiscal policies as well as to implement the planned structural reforms.

Germany

After a balanced position in 2008, the general government budget turned negative in 2009, reaching -3.3% of GDP in the wake of the global economic crisis due to lower revenue and higher expenditure linked to the downturn as well as stimulus measures adopted in line with the EERP. The debt-to-GDP ratio surged to 72½% of GDP, also as a result of financial market stabilisation measures. Based on a slightly favourable macroeconomic scenario, the programme envisages a further increase in the general government deficit to 5½% of GDP in 2010, the start of budgetary consolidation in 2011 and a correction of the excessive deficit by 2013 in line with the Council recommendation of 2 December 2009. However, budgetary outcomes could turn out worse than projected, given (i) the lack of specific consolidation measures beyond 2010, (ii) the need to reconcile the possible implementation of announced tax cuts with fiscal retrenchment, and (iii) the fact that implementation of the new budgetary rule also at sub-federal level is not ensured. Mounting debt, ad hoc changes to the pension formula and financing needs of the social security system underline the importance of safeguarding long-term sustainability. The budgetary strategy is not sufficient to bring the debt ratio back on a downward path. Invitations to Germany thus concern the specification of the budgetary strategy to correct the excessive deficit and to reduce debt, as well as the implementation of the new budgetary rule.

Estonia

The Estonian economy is currently emerging from a severe recession, which ended a period of years of above-potential growth and was aggravated by the global economic and financial crisis. The economy seems to have passed the trough in the second half of 2009 and positive quarterly growth emerged in the last quarter of the year, following seven consecutive quarters of contraction. However, average growth is projected to remain considerably lower over the medium term than in the upswing and peak years of the past cycle. The economic challenge is to restore sustainable growth while avoiding significant internal and external imbalances.

The Estonian authorities implemented in 2009 a decisive consolidation of public finances, which contributed to the ongoing adjustment in the economy and has helped bring public finances in line with the expected lower growth. Looking ahead, after an estimated deficit of 2.6% of GDP in 2009, the programme targets a return to a headline budgetary surplus by 2013, while the debt-to-GDP ratio is projected to remain low. The invitations to Estonia concern the attainment of set budgetary targets and further strengthening to the fiscal framework.

Ireland

Due to the interplay of a severe recession and significant consolidation efforts, the deficit widened further in 2009 but is now planned to stabilise in 2010, at 11.6% of GDP. Thereafter, the programme envisages a deficit reduction to below the 3% of GDP reference value by 2014 in line with the Council recommendation of 2 December 2009. Debt would peak at 84% of GDP in 2012 and then start to decline. Deficit and debt outcomes could be worse than targeted mainly due to (i) the lack of specification of the consolidation measures after 2010; (ii) the programme's favourable macroeconomic outlook after 2010; and (iii) the risk of expenditure overruns.Continuing to implement a credible consolidation strategy, facilitated by a stronger budgetary framework, should foster a return to sustainable economic growth. There is also a need to regain competitiveness through productivity-enhancing measures and adequate wage policies, and to limit the increase in long-term unemployment. To improve the long-term sustainability of public finances, further pension reforms will be important. The invitations to Ireland concern the specification of the budgetary strategy to correct the excessive deficit, and improvements to long-term sustainability and the fiscal framework.

Spain

The Stability Programme update of Spain reflects that the current crisis is severely affecting its public finances, with an estimated deficit of 11.4% of GDP for 2009 and a rapidly-rising government debt ratio. The Spanish update aims at sizeable continued fiscal consolidation from 2010 on, with a view to gradually reducing the government deficit to 3% of GDP by 2013 in line with the Council recommendation of 2 December 2009. However, the favourable macroeconomic assumptions after 2010 may imply a lower contribution of economic growth to fiscal consolidation than envisaged and the adjustment path after 2010 would still need to be backed up with measures. Public debt, which stood at below 40% of GDP in 2008, is expected to grow to 55% of GDP in 2009 and swell further to 74% of GDP by 2013. Based on this assessment, the invitations to Spain refer to the specification of the budgetary strategy to correct the excessive deficit and reduce debt, improvements to long-term sustainability and the old-age pension scheme, the fiscal framework and the quality of public finances.

France

The French general government balance deteriorated sharply in 2009, reflecting the working of automatic stabilisers during the economic downturn as well as the impact of fiscal stimulus measures in line with the EERP. According to the programme update, the deficit would start decreasing in 2011 and would reach 3% of GDP in 2013. While this would be in line with the Council recommendation of 2 December 2009, the assumptions underlying the programme scenario are assessed as rather optimistic and some expenditure-side measures are not specified. The strategy does not leave any safety margin if economic developments turn out worse than projected in the programme, which is considered to rely on markedly favourable macroeconomic assumptions (2½ % growth from 2011 onwards). The programme envisages the debt-to-GDP ratio to keep increasing until 2012, mainly on the back of the projected deficit path but also as a result of the issuance of a public loan to finance public investment. Against this background, the invitations to France concern the specification of the budgetary strategy to correct the excessive deficit and reduce debt.

Italy

Italy's stability programme plans a slight narrowing of the deficit-to-GDP ratio from 5.3% of GDP in 2009 to 5% in 2010, and further to below 3% by 2012, in line with the Council recommendation of 2 December 2009. The adjustment relies on expenditure-containing measures adopted in 2008 and additional although unspecified consolidation efforts of 0.4 pp. of GDP in 2011 and a further 0.8 pp. in 2012. The already high debt ratio is projected to peak at 117% of GDP in 2010 and then decrease to below 115% of GDP in 2012. The deficit and debt ratios could be higher than targeted, considering (i) the programme's favourable macroeconomic assumptions, (ii) the lack of specification of measures underpinning the additional consolidation in 2011-2012 and (iii) the possibility of expenditure overruns. Key challenges are the implementation of the reform of the budgetary process and the rules governing fiscal federalism with a view to ensuring fiscal discipline and efficiency. Besides fiscal consolidation, a swift and durable recovery in productivity growth should be pursued to raise Italy’s growth potential. The invitations to Italy concern the c budgetary strategy to correct the excessive deficit and reduce debt, and the implementation of the budgetary reform and rules governing fiscal federalism.

The Netherlands

After the strong budgetary deterioration in 2009 following the sharp economic contraction, the Dutch stability programme foresees a gradual decline in the deficit in 2011 and 2012. However, the deficit is projected to remain above the 3% of GDP threshold to the end year (2012) of the programme. 2013, the year by which according to the Council recommendation of 2 December 2009 the excessive deficit should be corrected, is not included in the programme. The debt ratio, which breached the 60% of GDP Treaty reference value in 2009, is set to increase substantially over the programme horizon. The programme's budgetary adjustment path is subject to downside risks, mainly linked to (i) the favourable macroeconomic scenario and (ii) the fact that 2013 is not covered by the programme. Therefore, it would be appropriate for the Netherlands to identify the consolidation measures from 2011 onwards to bring the deficit below 3% of GDP by 2013. The invitations to the Netherlands concern the specification of the budgetary strategy to correct the excessive deficit and reduce debt, and improvements to long-term sustainability.

Austria

Austria's public finances deteriorated significantly in the wake of the global economic and financial crisis. As a result of the operation of the automatic stabilizers and a sizeable stimulus package adopted by the Austrian authorities, the general government deficit and debt reached 3.5% and 66.5% of GDP, respectively, in 2009. As the bulk of the measures aimed at combating the economic downturn are of permanent nature, there is a need for consolidation as from 2011. According to the latest update of the Stability Programme, the deficit will widen further to 4.7% of GDP in 2010 before gradually decreasing to just below 3% of GDP in 2013, in line with the Council recommendation of 2 December 2009. However, budgetary outcomes could turn out worse than projected in the programme as the consolidation from 2011 onwards relies mostly on measures as yet unspecified. Many significant reforms to public expenditure have been undertaken in Austria in the recent past. Nevertheless, there is still room for improvement in areas such as health care and education. Substantial efficiency gains in these and other areas could be obtained by reforming the fiscal relations between the various layers of government. Accordingly, the invitations to Austria refer to the specification of the budgetary strategy to correct the excessive deficit and reduce debt, and improvements to the fiscal framework.

Slovakia

The programme envisages a sizeable, frontloaded fiscal consolidation with a view to bringing the deficit from 6.3% of GDP in 2010 to 3% of GDP by 2012, one year before the deadline of 2013 set by the Council on 2 December 2009. Nevertheless, the budgetary outcomes could turn out somewhat worse than projected in the programme, because they are based on favourable macroeconomic assumptions in 2011 and 2012. Moreover, some measures on the expenditure side may not yield the expected savings. The deterioration of public finances has also affected the long-term sustainability of government finances. The programme proposes a number of welcome measures to strengthen the current fiscal framework. Against this background, the invitations to Slovakia refer to backing up the consolidation path with specific measures, continuing reforms of the pension system, and further strengthening the fiscal framework.

Sweden

Large surpluses in good times allowed fiscal policy to play an active role in the downturn, not only by boosting demand in the short term but also by strengthening the economy's long-term growth potential. The fiscal stance outlined in the Swedish Programme update is appropriately continuing to be expansionary in 2010 with additional discretionary measures of about 1% of GDP contributing to a widening of the expected deficit to 3.4% of GDP. Thereafter, the deficit ratio is projected to gradually narrow to 2.1% of GDP in 2011 and 1.1% in 2012, albeit on the back of markedly favourable growth assumptions and without specifying consolidation measures over the programme period. A key challenge will be to avoid that a potentially rather job-anaemic recovery leads to permanently higher long-term unemployment and a permanent loss of labour supply. Another challenge for policy makers will be to carefully calibrate the withdrawal of stimulus measures so as to neither nip the recovery in the bud nor contribute to the build-up of potentially destabilising household-sector imbalances. Sweden is invited to ensure that the breach of the 3% deficit reference value in 2010 remains contained and temporary and to stand ready to adopt timely discretionary consolidation measures should budgetary outcomes fall short of expectations.

Finland

In response to the economic crisis and in line with the European Economic Recovery Plan, Finland provided a sizeable fiscal stimulus in 2009 and plans to maintain supportive fiscal policies also in 2010. Consequently, the general government balance has turned sharply into deficit, projected to temporarily exceed the 3%-of-GDP reference value set in the Stability and Growth Pact in 2010. The deficit is projected to gradually narrow to below the reference value thereafter, without specifying any consolidation measures.The programme relies on markedly favourable growth assumptions in the medium term. Therefore, budgetary outcomes could turn out worse than projected in the programme. The invitations to Finland refer to ensuring that the breach of the 3% deficit reference value in 2010 would remain contained and temporary, and to defining a medium term fiscal strategy with a view to restoring the long-term sustainability of public finances.

United Kingdom

Since the start of the economic crisis, the combination of the operation of automatic stabilisers, falls in asset prices and fiscal stimulus has provoked a considerable deterioration in UK public finances, with the general government deficit reaching 12.7% of GDP in the financial year 2009/10. The fiscal strategy outlined in the United Kingdom's convergence programme does not foresee the correction of the excessive deficit by the fiscal year 2014/15, as recommended by the Council on 2 December 2009. With the greater part of the projected reduction in the deficit in the medium term driven by the tight overall spending envelope between 2011/12 and 2014/15, the absence of detailed departmental spending limits is a source of uncertainty. The macroeconomic context may also be distinctly less favourable than envisaged throughout the programme period. The invitations to the United Kingdom refer to the need to avoid the deficit to increase further in 2010/11 and to strengthen the pace of medium-term consolidation in order to ensure that the deficit is brought below 3% of GDP by 2014/15 and the debt ratio is brought on a declining path.

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