3. EURO AREA SPECIFIC CHALLENGES.
In 2003 the euro area recorded subdued growth for the third year in a row.
For a third consecutive year, economic performance disappointed. Average GDP growth declined gradually to a mere 0.4 per cent in 2003, the rate of unemployment increased by about half a percentage point to 8.9 per cent, while public finances deteriorated further. At the same time, inflation came down only sluggishly, fluctuating around 2 per cent in the course of 2003. However, survey indicators paint an increasingly optimistic picture and the recovery is likely to gain pace in 2004.
Against this background, the 2003-05 BEPGs recommended policy actors at national level to:
24. Contribute to a policy-mix that is compatible with price stability;
25. maintain budgetary positions of close to balance or in surplus throughout the economic cycle in cyclically-adjusted terms, and if needed, take all the necessary measures to ensure an annual improvement of at least 0.5 per cent of GDP. Countries with excessive deficits need to correct them;
26. analyse the causes of inflation differences to identify instances when they are undesirable;
27. deepen the analysis of economic developments and policy requirements, focus more on implementation, and strengthen the external representation of the euro area;
28. improve the efficiency of the existing co-ordination procedures in the area of structural reforms.
Policy mix appears supportive to growth
Macroeconomic policy was accommodative in 2003. The ECB cut interest rates two times in 2003, by a cumulative 75 basis points to a level of 2 per cent for the minimum bid rate. When assessed against the so-called Taylor rule [According to the so-called Taylor rule, the appropriate short-term interest rate is conditional on two variables, the actual rate of inflation and the size of the output gap. Any deviation of both variables from their target value should lead to adjustments of the short-term interest rate according to the weights of both variables in the Taylor rule], short-term interest rates have been accommodative to economic activity during the slowdown. The fiscal policy in the euro area was broadly neutral as the cyclically-adjusted primary balance remained unchanged. However, it can not be excluded that the public debate on the sustainability of public finances and an apparent reduced resolve to abide by the SGP has weighed on consumer confidence. The strong co-movement of the households' savings ratio with the budget deficit would appear to be a clear indication of that, and rising public consumption in the euro area went alongside weaker private spending. During 2003, the euro exchange rate appreciated by 8 per cent in nominal effective terms. This contributed to some losses in market shares of euro-area exporters on the world market, while the positive disinflationary impulse has not yet visibly fed through to consumer price inflation.
- For the table, please refer to the paper version -
Implementation of the guideline on fiscal policies is worrisome
In recent years the fiscal position in the euro area has deteriorated. The annual nominal budget deficit has increased by 3 percentage points of GDP since 2000 [The euro area net lending figure included one-off proceeds for telephone licences (UMTS) of 1.1 per cent of GDP in 2000] to a deficit of -2.8 per cent of GDP in 2003. The working of the automatic stabilisers explains most of this development. Another part of the slippage results from discretionary deficit-increasing measures. Overall, the cyclically-adjusted budget balance worsened by 0.4 percentage points between 2000 and 2003.
According to the Commission's economic forecast (autumn 2003) three of the four euro area Member States that had a cyclically-adjusted budget position of close to balance or in surplus in 2002, namely Belgium, Spain, and Finland, managed to maintain those in 2003 and will continue to do so in 2004. In view of the national budgets and on the assumption of unchanged polices in 2005, Ireland and Austria could achieve a sound position by 2005. However as regards Austria, it now appears unlikely that the forthcoming tax cuts (amounting to 1 per cent of GDP) will be accompanied by corresponding expenditure restraints, thereby causing the cyclically-adjusted balance to deteriorate considerably in 2005.
Among those euro area Member States that had not reached the above mentioned objective, only Ireland, the Netherlands, and Portugal are expected to have improved their cyclically-adjusted budget balance by at least 0.5 per cent of GDP in 2003. In 2004, France and the Netherlands would, according to the forecast, be able to comply with this Guideline. Although a certain improvement in the cyclically-adjusted deficit is expected for Germany, it would, just as the remaining Member States (EL, IT, LU, and PT), not achieve the required improvement in 2004. However, on the basis of the no-policy-change assumption, the cyclically-adjusted budgetary positions in Greece, Italy, Luxembourg and Portugal would seem to sharply deteriorate in 2004 and/or 2005. This clearly indicates the need for further policy measures in 2004.
- For the table, please refer to the paper version -
The three countries in an excessive deficit situation are having difficulties correcting it. Both Germany and Portugal have made considerable efforts in response to the recommendation to bring this situation to an end. According to the forecasts and following substantial one-off measures, the nominal deficit in Portugal is expected to stay below 3 per cent of GDP in 2003, but risks exceeding the limit again in 2004. In the German case, measures amounting to about 1 per cent of GDP have been taken in 2003, thereby fulfilling that part of the Council recommendation of January 2003. However, given the adverse cyclical conditions the measures taken appear inadequate in order to bring the excessive deficit situation to an end in 2004. France does not appear to have taken effective action to redress the budgetary imbalances, and given the current economic outlook, the excessive deficit situation is likely to persist with a continuation of a deficit well above 3 per cent of GDP in 2004.
In view of the developments outlined above, the Commission adopted recommendations to Germany and France in accordance with Treaty Articles 104 (8) and 104 (9) that no effective action has been taken (FR) or was inadequate (DE), and that both Member States should take measures to remedy the excessive deficit situation. However, in light of the weak economy, the Commission recommended to allow both Member States one additional year to bring down the deficit below 3 per cent of GDP, i.e. by 2005. On 25 November 2003, the Council rejected the Commission's recommendations and found an agreement outside the Treaty, de facto suspending its application for these articles. The Council took note of the commitments made by Germany and France to reduce their deficits to below 3 per cent of GDP by 2005.
Inflation differences remain wide
Over the first three quarters of 2003, inflation differences in the euro area, as measured by the difference between the Member State with the highest and the one with the lowest HICP inflation rates or by the unweighted standard deviation, have narrowed slightly compared to the situation last year, but they remain wider compared to the first year of EMU.
At the euro area level, the extent of inflation dispersion observed since the introduction of the euro does not appear to be significantly higher than that of other monetary unions. It is roughly comparable to that of cities in the USA, while it is somewhat above that of regions in the USA or that within some Member States. From a historical perspective, the inflation dispersion in the euro area seems low. The sui generis (or special) character of the euro area and the relatively short experience with it, however, call for a degree of caution in interpreting results from such comparisons.
- For the table, please refer to the paper version -
At the national level, it should be noted that since the start of Stage Three of EMU, some countries have registered persistent differentials relative to the euro area average, particularly in the main sectors that make up core inflation (HICP excluding energy and unprocessed food). On the one hand, inflation differences can be considered a normal adjustment mechanism in a monetary union. Given that, by definition, the nominal exchange rate instrument is no longer available for national purposes, required national adjustments in a monetary union fall on relative price and wage movements. On the other hand, the persistence of inflation differentials could indicate that structural rigidities are impeding a smooth adjustment, requiring policy action at the national level to prevent an unwarranted deterioration in competitiveness. The fact that the single monetary policy is geared to safeguarding price stability for the euro area as a whole, and hence cannot address country specific inflation differentials, underscores the importance of continuing with structural reforms. They raise growth potential, safeguard long-term competitiveness at the national level, and will also increase the flexibility of national economies thereby easing the adjustment process to common or country specific shocks and reducing the scope for protracted inflation differentials. However, it should be recognised that in the short-term, differences in the speed and magnitude of implementation of structural reforms may temporarily accentuate inflation dispersion among Member States.
The external representation of the euro area needs to be strengthened
Economic policy co-ordination has proven increasingly beneficial in e.g. the spring 2003 when the increased economic uncertainty related to the Iraq conflict demanded for a coherent policy approach. In contrast to the oil price hike in 2000, Member States abstained from isolated national measures and agreed on a common line in international fora. Also the discussions on the impact of the sizeable euro appreciation witnessed in 2003 took place in a more orderly form than when the euro depreciated, which has supported the credibility of EMU's policy framework.
Although the start of EMU constituted a major change for the international monetary system, this has, however, yet to result in a complementary upgrade of the international role of the euro area. The need to strengthen the external representation of the euro area in the relevant international institutions and fora was fully recognised by the Convention, in order to ensure that the area's political importance becomes commensurate to its economic weight. While the issue was discussed in several working groups, no clear conclusion has been reached and the text of the draft Constitution basically leaves the matter unchanged. Apart from the debate in the Convention, no actual and tangible improvements can be reported in respect of the euro area's representation on the international scene. Nevertheless, the preparations of euro area positions in e.g. the IMF has improved somewhat, at least as regards issues where a consensus can be reached and 'common understandings' adopted.
The Lisbon Strategy has reinforced the awareness of and interest in structural reforms
The Lisbon Strategy, which is at the centre of the structural reform process, has increased the awareness of, and interest in, medium term policies that simultaneously promote potential growth; full employment; improvements in the European social model; and a sustainable development. That has called for a 'streamlining' of the policy co-ordination processes, with a view to increase the coherence and complementarity between the various processes. The Broad Economic Policy Guidelines were thus adopted as a part of a “Guidelines Package” together with the Employment Guidelines and the Internal Market Strategy for the first time in 2003. A greater emphasis has also been given to the follow-up in terms of implementation, when the Council adopted conclusions on the 2003 Implementation Report for the first time, stating inter alia that it was a useful tool to monitor progress and give guidance for areas where further progress is particularly needed. The Italian Presidency has indicated that the Council will start holding regular implementation discussions throughout the year. A first working breakfast in November 2003 was devoted to the follow-up given to the 2003 05 BEPGs so far, notably with regard to the sustainability of public finances. While it appears too early for any firm conclusions on the efficiency of the existing co-ordination processes, the streamlining ought to have improved the consistency between the different sets of guidelines and should limit the reporting burden for Member States.
Looking ahead, the Lisbon Strategy will be subject to a mid-term review in 2005 with an eye to making it a more effective tool for achieving the objectives set out at the Lisbon and Gothenburg European Councils. In addition, decisions on the financial perspectives post-2006 will be taken on the basis of policy priorities and objectives identified within the context of the Lisbon strategy. The Open Method of Co-ordination (OMC), which was conceived with the launch of the Lisbon strategy, is increasingly being used to co-ordinate Member States' and Community policies in a number of areas, including R&D, education and social protection policies.
4. IMPLEMENTATION BY THE MEMBER STATES: A PRELIMINARY ASSESSMENT.
In the accompanying working document of the Commission Services more detailed information can be found on how economic policies in the Member States so far have responded to the identified challenges and the country-specific recommendations in the 2003 05 BEPGs. As this Communication provides a first, intermediate, look at the progress made and Member States have two more years to complete their follow up on the challenge and recommendations, a full assessment can only be made in two years time i.e. in the Implementation Report 2006. Nevertheless, a preliminary assessment of the degree of implementation at this moment can give a useful overview of which Member States have taken steps in the right direction towards adequately addressing the policy challenges. In a number of cases reforms undertaken or envisaged allow already a more in-depth assessment.
Since the number and the nature of challenges differ among Member States, a comparison of the follow-up between Member States is difficult. Some challenges are more demanding and often more difficult to fulfil than others. In the following summary of the progress made in the individual Member States, the indication 'fully addressed' is used when policy actions in response to a challenge going in the right direction have been adopted or proposed. The indication 'largely addressed' is used when actions have been taken but do not yet cover the whole challenge and all specific recommendations. The indication 'partially addressed' is used when policy actions have been adopted or proposed only relating to a small part of the challenge and the recommendations. When no follow-up has yet been given to the challenge and recommendations, the indication 'not yet started' is used.
It must be stressed that from the assessments on how well Member States responded to these recommendations, it cannot be inferred how Member States compare in terms of absolute performance and improvements therein. From this follows that a Member State can be performing relatively well compared to other Member States, but nevertheless has not implemented or planned measures to tackle the policy challenges and the country-specific recommendations. An indication of the absolute performance (both in terms of progress and in terms of level) of Member States on the basis of the shortlist of structural indicators can be found in the Commission's Spring Report 2004, see Annex 1 therein.
On the basis of the detailed information of the individual countries it appears that all Member States have started to address their challenges. While Belgium, Denmark, Germany, Ireland, the Netherlands, Austria, Portugal, Finland and the UK seem to be addressing, overall, the identified challenges in a satisfactory way, there seems, however, to be scope for improvement in the other Member States.
4.1 Belgium
Overall, Belgium seems to be addressing the three identified policy challenges. The challenge and the recommendations regarding public finance in the 2003 05 BEPGs appear largely addressed. The high debt ratio continues to decline steadily and primary surpluses, although decreasing, remain sizeable. Measures have been taken to limit the growth of real expenditure but the increase is still higher than recommended. Preparations for the budgetary implications of ageing continued in 2003, notably via stimulating employment, but more needs to be done to ensure long term sustainability.
Also the challenge and the recommendations on the labour market seem to be largely addressed. Some action has been taken to address the low employment rate among older workers. Progress is made on reducing distortions to work incentives in tax-benefit systems with a strong focus on the tax-side.
Finally, the challenge and recommendations on competition, public administration and the business environment appear partially addressed. Improvements were made in the regulatory framework in telecommunications, postal services and railways, and energy markets have been opened to competition in Flanders. However, no progress has been registered in stimulating competition in local services and the reform of the public administration has been suspended.
4.2 Denmark
Overall, Denmark seems to be addressing the two identified policy challenges. The challenge and recommendations regarding long term fiscal sustainability appear fully addressed. The tax reform, aimed at increasing labour supply, will be implemented in 2004. Regarding labour market reform some measures have been adopted to tighten eligibility rules. Achieving the targets for the growth of public consumption will require discipline in adhering to the budget agreements across all government levels, including the tax freeze.
The challenge and recommendations on enhancing competition and improving efficiency in the public sector seem largely addressed. Some measures have been taken in 2003 to increase competition and the regulatory barriers to competition are being identified, but weak competition persists in many sectors. Reforms in welfare services have increased competition and the government has presented plans to make further use of benchmarking and reduce administrative burdens.
4.3 Germany
Overall, Germany seems to be addressing the four identified policy challenges. Based on the measures adopted in parliament, the challenge and recommendations regarding the labour market appear largely addressed. Measures have been implemented and proposed to reform the tax-benefit system including a reduced eligibility of unemployment benefits and promotion of low-wage jobs. Some progress has been made in a more flexible system of wage formation but the authorities should go further to promote wage flexibility across skills and regions. Efforts to enhance the efficiency of active labour market policies have started, but there remains room for improvement.
Also the challenge and recommendations on increasing productivity and the efficiency of the education system appear largely addressed. An initiative to improve the business environment, through the reduction of red tape and overregulation was launched. In addition, the competition law will be brought in line with EU-rules and the law on unfair competition will be relaxed. Measures also have been proposed to improve primary and secondary education, but success hinges upon effective follow-up by the Länder.
The challenge and recommendations on public finances in the 2003 05 BEPGs seem only partially addressed. Despite the implementation of compensatory measures amounting to about 1 per cent of GDP, the government deficit is expected to have exceeded 4 per cent of GDP in 2003. Following the confirmation of the German authorities that the 2004 deficit will exceed the 3 per cent ceiling, the Commission made recommendations to decide that inadequate action has been taken and to allow, in light of the weak economy, to bring the government deficit below 3 per cent of GDP in 2005, which were rejected by the Council. The Council took note of the commitments made by Germany on 25 November 2003 to reduce the cyclically-adjusted deficit by 0.6 per cent in 2004 and at least 0.5 per cent of GDP in 2005 to ensure that the general government deficit is brought below 3 per cent of GDP in 2005.
Finally, the challenge and recommendations on long term sustainability appear being largely addressed. Measures have been proposed to address the ageing challenge notably the introduction of a sustainability factor in order to contain the increase in pension payments. Changes in the supervision of private pension schemes and adjustments to increases in pensions need however to be complemented with a structural reform of the pension system.
4.4 Greece
Overall, Greece does not yet seem to be addressing sufficiently all three identified policy challenges. The challenge and recommendations regarding public finance in the 2003 05 BEPGs appear partially addressed. As primary surpluses are decreasing, the reduction of the high debt ratio as requested depends to a great extent on the success of the announced privatisation programme. So far no sufficient measures have been implemented to effectively control government spending and no follow-up has been made or planned to continue reforms in the social security system.
The challenge and recommendations on increasing productivity seem largely addressed. The government has launched several initiatives to accelerate the transition towards the knowledge-based economy, to improve the business environment and to simplify the tax system. In the area of competition in the energy sectors, steps were taken in the right direction but still need to be strengthened in order to ensure effective competition.
Finally, the challenge and the recommendations on the labour market appear partially addressed. Some measures to improve work incentives have been implemented, in particular for women and low wage workers, but no progress is made in reducing non-wage costs as requested. No action has yet been taken to changing the wage bargaining process.
4.5 Spain
Overall, Spain does not yet seem to be addressing sufficiently all three identified policy challenges. The challenge and recommendations regarding the labour market appear being partially addressed. Measures have been implemented to increase female participation through tax incentives and a higher provision of care facilities. In addition, some progress has so far been made in the removal of fiscal distortions hampering the geographical mobility of workers. Nevertheless, no changes were made to the wage bargaining system including the use of indexation clauses whereas the requested reform of employment protection legislation to reduce the labour market segmentation is still pending.
The challenge and recommendations on raising the low level of productivity seem largely addressed. Several initiatives have been launched to strengthen the knowledge-based economy. Progress was also made in improving the business environment by tax incentives and a reduction of red tape. As regards competition, some progress has been made in the electricity market while effective competition in retail distribution has not been addressed.
Finally, the challenge and recommendation on the long term sustainability of public finances seem partially addressed. Some measures have been implemented so as to tackle the budgetary impact of ageing, namely actions to increase the employment rate while continuing to reduce public debt. In addition the Pension Reserve fund is planned to be further increased to 1.6 per cent of GDP. However, no measures strengthening the link between contributory effort and pension benefits have been adopted, which appears indispensable to ensure the long term sustainability.
4.6 France
Overall, France does not yet seem to be addressing sufficiently the four identified policy challenges. The challenge and recommendations regarding public finance in the 2003 05 BEPGs seem only partially addressed. Insufficient measures were taken to respect the recommendation issued by the Council in June in the context of the Excessive Deficit Procedure. Therefore the Commission made recommendations to decide that no effective action has been taken and to allow, in light of the weak economy, to bring the government deficit below 3 per cent of GDP in 2005, which were rejected by the Council. The Council took note of the commitments made by France on 25 November 2003 to reduce the cyclically-adjusted deficit by 0.8 per cent of GDP in 2004, and by 0.6 per cent of GDP or a larger amount in 2005 so as to ensure that the general government deficit is brought below 3 per cent of GDP in 2005.
By contrast, the challenge and recommendations on the long term sustainability of public finances appear largely addressed. A comprehensive reform of the pension system has been adopted increasing the contribution period entitling to a full pension and strengthening the financial incentives to remain active. The reform represents a major improvement of long run fiscal sustainability. Some measures have been introduced to control health spending, but a more comprehensive reform of the health insurance system is to be implemented in 2004.
The challenge and recommendations on the labour market appear partially addressed. In particular, specific measures were taken to encourage participation of older workers and to make work pay.
Finally, the challenge and recommendations on the business environment and competition seem partially addressed. Measures have been taken to reduce and simplify business regulations. Competition in energy markets has improved but the market is still dominated by incumbents. While the transposition rate of internal market directives (one of the lowest in the EU) has increased, the number of infringement increased too.
4.7 Ireland
Ireland seems to be addressing the single identified policy challenge. The challenge and recommendations regarding the management of the transition to lower, sustainable growth appear largely addressed. Efforts are being made to enhance the efficiency of public expenditure, notably by extending multi-annual budgeting and reorganising the health sector. Various measures are taken to improve capital spending and to increase the level of R&D. As regards competition, measures for several sectors are under review including full liberalisation of gas and electricity markets.
4.8 Italy
Overall, Italy does not yet seem to be addressing sufficiently all five identified policy challenges. The challenge and recommendations regarding public finance in the 2003 05 BEPGs appear partially addressed. Little progress has been made in achieving lasting budgetary consolidation and the Italian government has continued to rely on one-off measures. Primary expenditures continue to show a strong downward rigidity constraining the room for implementation of the tax reform.
The challenge and recommendations regarding the long term sustainability of public finance seem only partially addressed. An acceleration of the planned reduction of the high debt ratio would be warranted in the light of ageing. Proposals to reduce pension expenditures as of 2008 were presented to parliament.
Also the challenge and recommendations regarding the labour market seem partially addressed. Reform measures have been taken but important elements of labour market reform are either still pending in parliament (employment protection legislation) or were not tackled (wage differentiation).
The challenge and recommendations regarding the knowledge-based economy are being fully addressed. In particular, the primary and secondary education level system has been reformed and several measures have been taken to stimulate R&D and innovation.
The challenge and recommendations regarding the business environment and competition seem largely addressed. Administrative burdens on start ups and red tape affecting businesses have become less onerous. However, the liberalisation of the service and energy sector proceeds at a slow pace and the rate of transposition of internal market directives has further decreased.
4.9 Luxembourg
Overall, Luxembourg does not yet seem to be addressing sufficiently both identified policy challenges. The challenge and recommendations on the labour market seem partially addressed. No action has so far been taken to reduce incentives for early retirement. Some progress has been made to reduce the inflow in disability pension schemes by tightening eligibility.
Also the challenge and recommendations concerning the business environment and entrepreneurship seem partially addressed. Little progress has been made regarding the reform of the competition law but some measures have been taken to encourage entrepreneurship.
4.10 Netherlands
Overall, the Netherlands seem to be addressing the three identified policy challenges. The challenge and recommendation regarding public finance in the 2003 05 BEPGs appear fully addressed. The new government continued to limit expenditure growth under multi-annual ceilings defined in real terms. Additional efforts may be required to ensure that expenditure plans remain consistent with a budgetary position of close to balance or in surplus.
The challenge and recommendation on the labour market seem largely addressed. Whereas the envisaged reform to reduce the flow into the disability scheme seems adequate, additional efforts are needed to activate people that are already in this scheme. Progress has been made in reforming other benefit systems with the aim of enhancing incentives to work.
Finally, the challenge and recommendations on productivity growth seem fully addressed. The government plans to make improvements in the regulatory framework for competition by increasing the powers of the competition authority. Also progress is made in promoting a stronger technology oriented education and in improving the co-operation between research institutions and business.
4.11 Austria
Overall, Austria seems to be addressing the three identified policy challenges. The challenge and recommendations regarding public finance in the 2003 05 BEPGs appear largely addressed. Action to achieve structural expenditure savings has been taken but was partly offset by increases in discretionary expenditure. Most notable in Austria is the comprehensive overhaul of the pension system which leads to significant savings in the long run and should raise the participation rate of older workers.
The challenge and recommendation regarding the weak technology base appear largely addressed. Several measures have been implemented to increase and rationalise R&D and innovation support.
Finally, the challenges and recommendation regarding competition appear partially addressed. Although steps have been made to enhance effective competition in the retail sector, no measures have been made to address high concentration in some other sectors. The resources of the competition authority remain inadequate and the power of the telecom regulator continues to be insufficient.
4.12 Portugal
Overall, Portugal seems to be addressing the three identified policy challenges. The challenge and recommendations regarding public finance in the 2003 05 BEPGs seem largely addressed. Although the general government deficit rose in 2003 but stayed just below 3 per cent due to the effect of sizeable one-off measures, progress was made in curbing expenditure growth notably through a strong deceleration of public consumption outlays. Portugal has continued to implement reforms in several areas such as health-care and education with a direct impact on budgetary consolidation as requested.
The challenge and recommendations on productivity and business dynamism seem largely addressed. Measures have been taken to stimulate innovation and R&D, to improve the quality of education and to reduce the number of early school leavers. Steps in the right direction have been taken to enhance competition in the gas sector, but in the electricity sector effective competition is not yet secured. Finally, the transposition rate of internal market directives improved in 2003 but stays below the set target of 98.5 per cent. A quasi-wage freeze in the government sector has contributed strongly to overall wage moderation, possibly bringing to a halt the deterioration in price-competitiveness registered in recent years.
Finally, the challenge and recommendations on long term sustainability appear fully addressed. A comprehensive reform of the health-sector is proceeding at a rapid pace but it is yet too early to assess its impact. Reforms of the pension system for workers in the general government sector have so far only partly been implemented, but the government plans to introduce additional measures.
4.13 Finland
Overall, Finland seems to be addressing the two identified policy challenges. The challenge and recommendations regarding the labour market seem partially addressed. Tax reductions implemented and intended will lead to a reduction of the tax wedge for a low wage earner by 1 percentage point. Reform of eligibility criteria to improve work incentives are however lacking. There is little progress in allowing wages to reflect productivity differences.
The challenge and recommendations on competition and public sector efficiency appear largely addressed. Some steps toward improved competition in network industries and non-tradable services have been launched. Further efforts have been made to improve the efficiency of the public sector. The new government has introduced multi-annual spending limits for the period 2003-2007 in order to improve spending control, in line with the request in the recommendation.
4.14 Sweden
Overall, Sweden does not yet seem to be addressing sufficiently the two identified policy challenges. The challenge and recommendations regarding labour supply appear partially addressed. On the one hand, measures have been undertaken to retain older workers and to promote the participation of immigrants and young in the labour force. On the other hand, some planned measures could have a negative impact on labour supply. Furthermore, there are no detailed plans as to when the last step of the income tax reform will be implemented.
The challenge and recommendations on competition and public sector efficiency appear partially addressed. Efforts have been made to improve competition in some sectors, such as construction and food retail, but no further measures have been taken to open up the rental housing market. Steps have been taken to increase the efficiency of the public sector by increasing the use of benchmarking, but no major initiatives have been taken to improve framework conditions for increased competition for public services.
4.15 United Kingdom
Overall, the United Kingdom seems to be addressing the three identified policy challenges. The challenge and recommendations regarding productivity seem fully addressed. The competition authority is progressing in further improving competition in specific sectors such as professional bodies, although the government is taking a cautious line on the deregulation of pharmacies and the liberalisation of postal services. Furthermore a long term strategy has been set out to improve the basic skills in the work force containing clear quantitative targets.
The challenge and recommendation on the labour market also seem fully addressed. Pilot projects have been launched to address the issue of high sickness and disability benefits (Pathways to Work) and financial incentives (Working Tax Credit) have been improved. A growing number of workers is being targeted by the above policies.
Finally, the challenge and recommendation on quality and efficiency of public services appear fully addressed. Reforms have been made to ensure that increased public spending is allocated efficiently and effectively. The authorities plan to make an Efficiency Review and further improvements are made in the use of Public Service Agreements, which are considered central in the strategy for public sector reform and improved delivery.