IP/08/214

Brussels, 13 February 2008

Commission assesses stability programmes of Austria, Cyprus, Malta, Portugal and Slovenia

Today the European Commission examined the stability programmes^[1] of Austria, Cyprus, Malta, Portugal and Slovenia. In 2007 both Cyprus and Slovenia reached the medium-term objective (MTO) for their public finances: a balanced budget in Cyprus’s case and a deficit of 1% of GDP in structural terms in Slovenia’s. The two countries should also be able to maintain sound budgetary positions throughout their programme periods. Malta envisages continued progress towards its MTO of a balanced budget. While there is also some progress towards a balanced budget in Austria, the planned consolidation is slower and relatively back-loaded. Taking into account the risks to the budgetary projections of both countries, the achievement of their MTOs by 2010 might not be secured. The Portuguese programme is consistent with a correction of the excessive deficit by the deadline agreed by the Council. It aims at further fiscal consolidation over the medium term, achieving its MTO of a structural deficit of 0.5% of GDP by 2010. However, this will depend on the measures announced in the programme being effectively implemented, and may even require additional measures. With regard to the long-term sustainability of their public finances, Portugal and Malta are at medium risk, while Cyprus and Slovenia are at high risk. Only Austria is considered to be at low risk.^[2]

“Austria's macroeconomic and budgetary position is amongst the soundest in the EU in both the short- and the long-term. It should, however, aim for more ambitious budgetary targets and achieve a balanced budget earlier than currently planned.

“Cyprus has achieved a remarkable consolidation in the last few years which resulted in a budgetary surplus in 2007 and a debt reduced to 60% of GDP. However, it should learn from past mistakes and restrain public expenditure, reform the pension system and enforce the health care reforms to improve the sustainability of its public finances in the long run.

“The Commission encourages Malta to reach its objective of a balanced budget in 2010, which should be possible given the estimated outcome for 2007 and the growth outlook. It should also speed up the reform of the health care system and generally pay attention to staying competitive.

“Portugal is to be praised for bringing its deficit to 3%, and possibly less, in 2007, one year before the deadline. The recent pension reforms also significantly improve the long-term outlook of its finances. It is encouraged to pursue its budgetary strategy to help put the Portuguese economy back on a sustainable and dynamic catching-up path.

“Slovenia's budgetary position is healthy as it is estimated to have achieved its medium-term objective in 2007 and its debt is below 30%. However, it should take advantage of the good growth it is enjoying and aim for higher primary surpluses given the strong inflationary pressures and the projected increase in age-related expenditure", said Economic and Monetary Affairs Commissioner Joaquín Almunia.

Today the Commission assessed the updated Stability Programmes of Austria, Cyprus, Malta, Portugal and Slovenia. It also assessed the Convergence Programmes of Bulgaria, the Czech Republic, Estonia and Latvia (see IP/08/213). Two groups of countries were already assessed in January and discussed at the 12 February EU Finance Ministers Council. On 19 February the Commission will examine a fourth group of programmes. The programmes from the third and fourth group are expected to be then discussed at the 4 March EU Finance Ministers Council.

AUSTRIA

Austria submitted a new update of its stability programme on 21 November 2007, covering the period 2007-2010.

The country enjoyed robust economic activity over the past few years and the growth prospects remain good for 2008 and the following years at close to potential. In 2007 the general government deficit is expected to have been reduced to below 1% of GDP from -1.4% the year before. But although this brings Austria close to its medium-term objective (MTO) of a balanced budget^[3], it is not expected to reach it before the end of the programme and even then hinges on further information regarding expenditure restraint plans and the financing of tax cuts announced for 2010. (see tables attached for growth and budgetary projections of Austria and the other countries concerned).

In 2007 the Austrian debt fell below the 60% reference value set in the EU Treaty from a peak of 66% of GDP in 2001. It is expected to fall further, to nearly 55%, in 2010. In terms of long-term sustainability of public finances, Austria is assessed to be at low risk.

In view of the present economic and budgetary situation, the Commission invites the government to take advantage of the slightly better-than-expected outcome in 2007 to achieve a balanced budget more quickly than currently planned.

CYPRUS

Cyprus joined the euro area on 1 January 2008 and submitted its first stability programme on 7 December 2007, covering the period 2007-2011.^[4]

The overall budgetary strategy should be sufficient to maintain a sound budgetary position and macroeconomic stability throughout the period.

Cyprus has set itself an MTO of a balanced position in structural terms. This is more ambitious than in the previous programme (-0.5%) and was already surpassed in 2007 thanks to an unexpected increase in total revenues by over 3 percentage points of GDP. The programme projects a return to historical tax trends in the coming years.

Although the planned reduction of the general government surpluses in 2008 and 2009 reflects this normalisation of tax revenues, and the outcomes may be better than expected, there is a risk that the budgetary stance in 2008 may turn out to be pro-cyclical.

Thereafter, achievement of the budgetary targets will depend on the economic growth projections being met, which appears fairly likely at this stage.

The Cypriot debt is also expected to have reached 60% of GDP in 2007 and to rapidly fall to 40% in 2011 from 70% in 2004. This is a welcome step since the long-term sustainability of the Cypriot public finances is at high risk on account of the projected increase in age-related spending.

In view of the Commission assessment, Cyprus is invited to: (i) avoid pro-cyclical fiscal polices by better controlling current expenditures, while using revenue windfalls to further reduce debt; (ii) contain public expenditure, notably by reforming the pension system and timely implementing the adopted reforms in health care in order to improve the long-term sustainability of the public finances.

MALTA

Malta also joined the euro area on 1 January 2008 and submitted its first stability programme on 30 November 2007, covering the period 2007-2010.

The stability programme envisages continued progress towards the MTO of a balanced budget, which Malta plans to achieve in 2010 through a combination of expenditure restraint and sustained economic growth.

However, there are risks to the achievement of the budgetary targets, in particular due to the reliance on volatile tax revenue items in 2008; the recent decision to subsidise energy prices without compensating measures; the favourable macroeconomic outlook after 2008; and the lack of information about the underlying measures, especially as regards the envisaged continued restraint in the public wage bill.

These may hinder the achievement of the MTO by the target year 2010. In addition, Malta's competitiveness within the euro area may be at risk in the event of a departure from wage moderation in the public sector, which may spill over to the private sector.

The reduction of the general government gross debt is planned to proceed at a satisfactory pace and is expected to fall below the 60% of GDP reference value by 2009. In terms of the long-term sustainability of public finances, Malta is at medium risk.

In view of the Commission assessment, Malta is invited to: (i) pursue further fiscal consolidation as envisaged in the programme so as to reach the MTO by 2010 and ensure that the debt-to-GDP ratio is reduced accordingly, by spelling out the measures supporting the planned consolidation, especially on the expenditure side; and (ii) enhance the efficiency and flexibility of public spending, including by accelerating the design and implementation of a comprehensive healthcare reform.

PORTUGAL

Portugal submitted a new update of its stability programme on 14 December 2007, covering the period 2007-2011.

The programme is consistent with a correction of the excessive deficit by the 2008 deadline agreed by the Council.

It projects the 2007 general government deficit at 3.0% of GDP, down from 3.9% the year before, and aims to reduce it further to achieve its MTO of a deficit of 0.5% by 2010.

However, this will depend on the measures announced in the programme being effectively implemented, and may require additional efforts if economic growth turns out lower than projected.
Regarding the national debt, the programme anticipates reaching the 60% reference value in 2010, bringing it down from an estimated 64.4% in 2007.

The long-term sustainability of the public finances moved from high to medium risk on account of the 2006 and 2007 reforms of the pension system which will contain age-related costs in the future.

Overall, the programme should help address the external imbalances and improve the prospects for long-term sustainability of public finances. The envisaged improvements in the quality and efficiency of public expenditure, including the public administration and the budgetary framework, should also have a favourable impact on potential GDP growth and thereby help Portugal resume its catching-up process.

In view of the Commission assessment, and also in the light of the recommendation under Article 104(7) of 20 September 2005 and the April 2007 Eurogroup orientations for fiscal policies, Portugal is invited to (i) vigorously implement the fiscal consolidation envisaged in the programme so as to secure the correction of the excessive deficit; (ii) carry out the planned adjustment towards the MTO, backing it up with reinforced measures if necessary; and, also in view of the risks to the sustainability of public finances, ensure a rapid reduction in the debt-to-GDP ratio, notably by continuing to allocate any better-than-expected budgetary results to deficit reduction; (iii) ensure that expenditure moderation is permanently maintained and enhance the quality of public expenditure, including by pursuing the ongoing reform of public administration and further improving the budgetary framework as outlined in the programme.

SLOVENIA

Slovenia submitted a new update of its stability programme on 30 November 2007, covering the period 2007-2010.

Slovenia met its MTO in 2007, two years ahead of previous plans. The programme aims to continue to respect the MTO and indeed exceed it by a growing margin over the programme period. For 2007, the most recent available information points to a better-than-planned budgetary outturn, indeed possibly a slight surplus. The risks to the budgetary projections are broadly balanced in 2008. In the outer years, budgetary outcomes might be slightly worse than targeted, mainly due to risks associated with the envisaged reliance on expenditure restraint. The expansionary stance in 2008 may turn out to be pro-cyclical. A tighter fiscal stance than presently envisaged for 2008 appears to be warranted also given the current strong inflationary pressures. The high projected increase in public sector wage settlements is also a concern for the inflation outlook.

In spite of the current low debt level, Slovenia is assessed to be at high risk with regard to the long-term sustainability of public finances due to the significant projected budgetary impact of ageing.

In view of the Commission assessment and also in the light of the April 2007 Eurogroup orientations for fiscal policies, Slovenia is invited to: (i) build on a likely better-than-expected outturn in 2007, aim for stronger budgetary positions than planned in the programme in 2008 and beyond, thereby avoiding pro-cyclical policies; (ii) stand ready to adopt further measures to tame inflationary pressures, complementing the recommended fiscal stance with appropriate wage, labour market and competition policies; (iii) in view of the projected increase in age related expenditure, improve the long-term sustainability of public finances, in particular by further reforming the pension system.

The country-specific Commission recommendations for a Council opinion on each programme are available at:

http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/sg_programmes9147_en.htm

MALTA

Comparison of key macroeconomic and budgetary projections

AUSTRIA

Comparison of key macroeconomic and budgetary projections
[ Figures and graphics available in PDF and WORD PROCESSED ]

CYPRUS

Comparison of key macroeconomic and budgetary projections
[ Figures and graphics available in PDF and WORD PROCESSED ]

SLOVENIA

Comparison of key macroeconomic and budgetary projections

PORTUGAL

Comparison of key macroeconomic and budgetary projections

^[1] According to Council Regulation (EC) No 1466/97 on the strengthening of budgetary surveillance and the surveillance and coordination of economic policies (as amended by Regulation No 1055/2005), Member States must submit updated macroeconomic and budgetary projections every year. Such updates are called stability programmes in the case of countries that have adopted the euro, and convergence programmes in the case of those that have not yet done so. This regulation is also referred to as the 'preventive arm' of the Stability and Growth Pact.

^[2] The analysis of long-term sustainability of public finances takes into account the current level of debt, the current budget deficit/surplus and the expected costs arising from an ageing population assuming no policy changes.

^[3] The MTO is always defined in structural terms, i.e. adjusted for cyclical swings and net of one-off measures

^[4] The submission is in accordance with Article 4 of Council Regulation (EC) No 1466/97, which stipulates that a Member State adopting the single currency must submit a stability programme within six months of the Council decision on its participation in the euro area.