Brussels, 13/02/2008 (Agence Europe) - On Wednesday 13 February, the day after the ECOFIN Council's examination of the budget programmes of 11 member states (see EUROPE 9600), the European Commission examined a new series of Stability and Convergence Programmes for nine other member states. The programmes will be examined by the EU finance ministers in March 2008, along with the programmes that the College of Commissioners will be deciding upon on 19 February (Denmark, Spain, Greece, Ireland and Lithuania). The programmes of Belgium and Poland will be examined at a later date. Like Cyprus, which has achieved remarkable budget consolidation, the Commission explains that Slovenia has also managed to meet its medium-term objective (MTO), adding that both countries will be able to continue to maintain healthy budget positions. Malta, where there are dangers, and Austria, which should be more ambitious, remain close to achieving their MTOs. Portugal brought its budget deficit below the 3% cut-off point in 2007, a year ahead of the deadline set by the Council, but achievement of its MTO of a structural deficit of 0.5% may require further measures to be brought in. Bulgaria's budget situation is sound and like Estonia, Bulgaria will easily overshoot its MTO over the programme period. The Czech programme is consistent with a correction of the excess deficit in 2008, but the adjustment trajectory could be more ambitious, in the Commission's view. Latvia should urgently adopt a tighter budget, according to the Commission.
Austria. Austria has enjoyed robust economic activity in recent years and the growth prospects remain good for 2008 (2.4% according to the updated Stability Programme for 2007-2010). This will mean Austria overshooting its MTO of a balanced budget by 2010, when it is forecasting a budget surplus of 0.4% of GDP. But with a deficit of 0.6% in 2008 (down from 1.4% in 2006 and 0.7% in 2007), Austria should take advantage of the good results to date to restore more rapid equilibrium to its public finances, says the Commission. The debt was reduced to below the 60% cut-off point in 2007 (to 59.9% of GDP) and is expected to fall to 55.4% at the end of the programme period.
Bulgaria. Bulgaria's Convergence Programme for 2007-2010 is aiming, the Commission explains, for 'ambitious but necessary budgetary surpluses,' adding that the surpluses recorded in recent years should continue in the future. Bulgaria is forecasting budget surpluses of 3% over the entire programming period, therefore easily achieving its revised MTO (of a surplus of 1.5% of GDP). Growth should remain strong (between 6.4% in 2007 and 6.9% in 2010) and debt should be brought down further (from 19.8% of GDP in 2007 to 16.9% in 2010). In a context of rising external imbalances and high inflation, a continuation of tight cyclical policies will be required and Bulgaria is urged to avoid pursuing a pro-cyclical strategy (in other words, it is urged not to spend all unexpected income) and to adopt policies to combat inflationary pressure (through a prudent public pay policy). The Commission recommends further efficiency in public spending through a strengthening of administrative capacity and reforming the healthcare system.
Cyprus. The assessment of Cyprus' first Stability Programme (it joined the eurozone on 1 January 2007 and therefore switched from a Convergence to a Stability Programme) shows a sound budget position throughout the programme period (2007-2011). After a budget surplus of 1.5% of GDP in 2007, Cyprus is expected to produce surpluses of 0.5 in 2008 and 2009 and 0.7% in 2010 and 2011). The new MTO of a balanced budget will therefore be overshot, but the budget position may become pro-cyclical in 2008 with growth of above 4% in the years to come. The Cypriot authorities are therefore urged to avoid pro-cyclical policies through better control of current expenditure while using revenue windfalls to further reduce debt. Debt is expected to fall from 70% of GDP in 2004 to 60% in 2007 and 40.5% in 2011, according to the updated programme. Cyprus is also urged to curtail public spending by reforming its pension system and through timely implementation of healthcare reforms, adds the Commission.
Estonia. The country will achieve surpluses of above the MTO of a balanced budget although the surpluses will fall from 2.6% of GDP in 2007 to 1.3% in 2008 and 0.8% in 2011. The Commission comments that the 'macroeconomic imbalances that have accumulated during the years of very high growth of close to 10% ore more - notably wage growth exceeding that of productivity, price pressures and high net borrowing vis-à-vis the rest of the world - are expected to moderate only gradually' and hover between 5% and 7%. With continued high growth levels, the budget policy may become pro-cyclical in 2008. In order to ensure sustainable convergence and harmonious participation in the European Exchange Rate Mechanism II, the Commission recommends that Estonia should aim for a broadly neutral fiscal stance in 2008 and beyond, 'complemented by appropriate public wage policy and further labour market reforms to contain inflationary pressures'.
Latvia. Latvia aims to produce modest surpluses between 2008 and 2010 (0.3% in 2007 to 1.2% at the end of the period). Although above the MTO, these targets could be more ambitious, says the Commission, which is concerned about inflationary pressures (Latvia's inflation rate of around 10% is the EU's highest). Riga should urgently adopt a more rigorous budgetary strategy, by saving all proceeds from any revenue over-performance and by observing spending ceilings, the Commission says. It also recommends the adoption of additional policies to contain inflationary pressures. Reduction of the growth of wages across the economy is needed to break the current cost-price dynamics and put an end to the rapid deterioration in Latvia's competitiveness, according to the Commission.
Malta. While Malta has announced continued progress towards its MTO of a balanced budget in 2010, there are considerable risks to the achievement of budgetary targets, the Commission says. With a 1.6% deficit in 2007, Malta is expected to record a 0.9% surplus in 2010 thanks to spending restrictions and sustained economic growth. There are risks, in particular due to reliance on volatile tax revenue items in 2008 and the recent decision to subsidise energy prices without compensating measures. The Commission feels that the macroeconomic outlook presented by Malta is favourable after 2008. The authorities forecast growth of 3.2% in 2009 and 3.4% in 2010. Wage restraint in the public sector must be maintained, so as not to encourage wage rises in the private sector or harm the country's competitiveness. Public debt, which still stood at 62.9% in 2007, is expected to fall below 60% in 2009 and continue to fall thereafter. Malta is invited to state the measures to support the announced adjustment, particularly on the expenditure side, and accelerate the design and implementation of a comprehensive healthcare reform plan.
Czech Republic. At less than 2% of GDP in 2007, the Czech budget deficit is likely to be less than previous estimates, coming in below the 3% in 2008 by a wider margin than expected. Continuing expenditure restraint and close monitoring of revenues (which could fall after the introduction of a flat rate in 2008) are, however, essential. Fiscal consolidation could also be more ambitious, according to the Commission, which notes risks related to the lack of information on consolidation measures after 2008. The Czech Republic is invited to exploit the 2007 budgetary outcome to bring the 2008 deficit below the 3% of GDP reference value by a larger margin. By exploiting the high level of growth (estimated at 5% in 2008 and beyond), the pace of adjustment should be increased to achieve the MTO in 2012 at the latest. The Commission recommends improving the long-term viability of public finances by implementing the necessary pension and healthcare reforms.
Slovenia. After achieving its MTO in 2007, two years earlier than planned, Slovenia now wants to exceed it by a growing margin and achieve balance in 2010. In 2008, budgetary policy could turn out to be pro-cyclical, according to the Commission, which says that the budgetary outcomes over the last years of the programming period could also be less good than anticipated. A tighter fiscal stance than currently planned for 2008 also seems to be warranted given current strong inflationary pressures, the Commission adds. While debt is low (from 25.6% of GDP in 2007, it will fall to 22.5% in 2010), there is still a risk to the long-term viability of public finances because of the ageing population. The Commission says that the country should establish more ambitious budget reduction targets for 2008 and beyond and avoid pro-cyclical policies. New measures to contain inflationary pressures could also prove necessary.
Portugal. With Portugal reducing its public deficit to 3% of GDP in 2007, compared with 3.9% the previous year, it is likely that the excessive deficit procedure against it will be closed in May. According to the updated 2007-2011 stability programme, the deficit is likely to fall to achieve the MTO of a 0.5% deficit by 2010. This will depend on the effective implementation of the measures announced and possible further measures if economic growth is not as strong as forecast. Public debt is predicted to fall from 64.4% in 2007 to below the reference value of 60% of GDP in 2010 (59.7%). This would further reduce the level of risk to the viability of long-term public finances, which, with the reforms to the pensions system adopted in 2006 and 2007, have moved from high to medium risk. The Commission invites Portugal to vigorously implement the fiscal consolidation envisaged in the programme and to carry out the planned adjustment towards the MTO, backing it up with reinforced measures if necessary. All better than expected budgetary revenues should be allocated to deficit reduction, the Commission adds, also recommending permanent expenditure moderation. (A.B.)