Brussels, 13 May 2009
"Many EU countries are presently facing budget deficits above 3% on account mostly of the economic recession, which brings about declining tax revenues and rising unemployment benefits. Malta and Poland have also adopted a number of measures to stimulate the economy, in line with the EU Recovery Plan. It is vital that we apply the Stability and Growth Pact with the flexibility introduced in 2005 and devise an adjustment path to correct deficits and debts in a timely way. This is key to preserve the sustainability of public finances in the medium-to-long term," said Economic and Monetary Affairs Commissioner Joaquín Almunia.
The general government deficit in Lithuania reached 3.2% of GDP in 2008, above, but close to the 3% of GDP reference value. The deterioration of the fiscal position in 2008 was mainly due to expansionary fiscal policy and, to a lesser extent, lower-than-budgeted tax revenue, reflecting the slowdown of the economy in the second half of the year. Growth in 2008, while decelerating significantly, still reached 3%. For this reason, the excess over the reference value cannot be qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact. Given the Commission services' spring forecast deficit projections for 2009 and 2010, the excess over the 3% ceiling cannot be regarded as temporary.
From 2009 onwards, in line with the EERP, Lithuania has adopted a budgetary policy that clearly aims at correcting external and internal imbalances. In December 2008, the government adopted a comprehensive tax reform and a wide range of expenditure-saving measures, including reductions in public wages in 2009. In view of a sharper than expected deterioration in the macroeconomic outlook at the beginning of 2009 and worse-than-planned revenue collection, the Lithuanian parliament adopted a restrictive supplementary budget in May 2009. Despite these welcome consolidation measures, the Commission's forecast projects the general government deficit in Lithuania to increase to above 5% and to around 8% of GDP in 2009 and 2010 respectively, well above and not close to the 3% of GDP reference value. This suggests that the deficit criterion in the Treaty is not fulfilled.
On 18 February 2009, the Commission adopted a report under Article 104(3) based on a planned deficit of 3.3% of GDP in 2008 and gross debt of 63.8% of GDP, according to data notified by the authorities in September 2008. The report highlighted that the excess of the deficit over the 3% reference value was small, and, albeit not resulting from exceptional economic circumstances, likely to be temporary as the Commissions' January 2009 interim forecast projected it to return below 3% already in 2009 and to further decline in 2010. It was concluded that no further steps under the excessive deficit procedure were necessary at that time.
However, according to data notified by the authorities in March 2009 and subsequently validated by Eurostat, the general government deficit in Malta was revised upward to 4.7% of GDP in 2008, thus largely exceeding the reference value, while general government gross debt stood at 64.1% of GDP. The 2008 figure is due in great part to specific developments on the expenditure side rather than to the impact of the economic downturn, as GDP growth in 2008 was still positive at 1.6%. In particular, the Maltese shipyards were reclassified inside the government sector (1.3 percentage point of GDP) and there have been unexpected delays in the payment of corporate taxes.
The Commission now concludes that the deficit is not close to the reference value, nor is it due to exceptional economic circumstances within the meaning of the Treaty and the SGP. Furthermore, it cannot be considered temporary as the spring forecast anticipates the deficit to remain above the 3% threshold in both 2009 and 2010. This suggests that the deficit criterion in the Treaty is not fulfilled. General government gross debt, which has been above the 60% of GDP Treaty reference value since 2001, is anticipated to increase over 2009-2010.
The general government deficit in Poland reached 3.9% of GDP in 2008, above and not close to the 3% reference value. The breach of the threshold mainly reflects the fact that good times were only to a certain extent used as an opportunity to consolidate public finances and undertake deep reforms on the expenditure side. Poland's general government deficit over the past five years averaged 4.3% of GDP, at the same time as GDP growth on average exceeded 5%.
The Polish authorities have revised their 2009 deficit target to 4.6% of GDP which shows that the excess over the reference value is not temporary. The Commission services' spring forecast projects the deficit to increase to 6.6% this year and, under unchanged policies, to further widen in 2010. The reduction in social contributions, an increase in personal income tax reliefs for families, and a generous indexation of pensions and social benefits increased the deficit in 2008. In addition, higher-than-planned intermediate consumption and investment, as well as a drop in revenues at the end of 2008 due to the economic slowdown, all resulted in a higher than expected deficit both at the central and local government level.
The excess over the reference value cannot be qualified as exceptional within the meaning of the Treaty and the SGP nor can it be considered temporary. This suggests that the deficit criterion in the Treaty is not fulfilled. General government gross debt remains below the 60% of GDP reference value.
The general government deficit reached 5.4% of GDP in Romania, in 2008. This figure mainly reflects significant slippages with respect to current spending, notably with public wages and social benefits as well as overly optimistic revenue projections and, to a lesser extent, a sudden drop in revenue collection in the last quarter of 2008 owing to the economic slowdown. Romania pursued a pro-cyclical fiscal policy during the 2005-2008 demand boom, with the headline deficit rising from 1.2% of GDP in 2005 to 5.4% in 2008, despite average real GDP growth of 6.5%. This evolution reflects to a large degree a weak budgetary planning and implementation.
From 2009 onwards, fiscal policy aims to correct the significant external and internal imbalances that have been allowed to develop in the economy. This is part of an economic programme adopted in April 2009 in response to the financial assistance granted to Romania by the European Union, the International Monetary Fund and others (see IP/09/611). Under the programme, Romania will limit the deficit to 5.1% in 2009. In 2010, under unchanged policies, the Commission's spring 2009 forecast projects the deficit at 5.6% of GDP in 2010 against a background of a significant economic slowdown.
The excess over the reference value cannot be qualified as exceptional within the meaning of the Treaty and the SGP, nor can it be considered temporary. This suggests that the deficit criterion in the Treaty is not fulfilled.
Background: the excessive deficit procedure
The Stability and Growth Pact requires the Commission to prepare a report whenever the deficit of a Member State exceeds the 3% of GDP reference value. The excessive deficit procedure is regulated by Article 104 of the Treaty and further clarified in Council Regulation (EC) No 1467/97, which is part of the Pact. Revised in 2005, the Pact allows for taking into account the economic situation when making recommendations on the pace of the correction.
The reports are addressed to the Economic and Financial Committee, which formulates an opinion within a fortnight. Taking into account the opinion of the Committee, the Commission will decide whether to recommend to the Council the existence of an excessive deficit (Articles 104.5 and 104.6) and a deadline for its correction (Article 104.7).
The Commission reports in accordance with Article 104.3 of the Treaty are available at:
 See brief background information on the excessive deficit procedure
 A deficit is considered to be exceptional if it results from a negative annual GDP volume growth rate or from an accumulated loss of output during a protracted period of very low annual GDP volume growth relative to potential.
 According to Council Regulation (EC) No 3605/93, Member States have to report to the Commission, twice a year, their planned and actual government deficit and debt levels.