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Preventive arm of the Stability and Growth Pact needs to be made more effective
Reference:  IP/07/811    Date:  13/06/2007
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IP/07/811
Brussels, 13 June 2007

Preventive arm of the Stability and Growth Pact needs to be made more effective

As the number of countries running excessive budgetary deficits diminishes, it is of the utmost importance that national governments in the European Union take advantage of the good economic times to progress rapidly towards the objective of sound and sustainable budgetary positions. Under current policies, only 10 of the 27 EU countries will have reached their medium-term budgetary objective (MTO)[1] in 2008 despite three consecutive years of above-trend economic growth. To improve the functioning of the 'preventive arm' of the Stability and Growth Pact (SGP), therefore, the Commission today makes a number of proposals which build on the 2005 SGP reform. They deal with the way governments formulate and implement their budgetary strategies over the medium term and the strengthening of surveillance and coordination of economic and budgetary policies at EU level. The aim is to achieve sustainable budgetary policies that contribute to higher growth and employment.

"Although the budgetary situation has improved remarkably in the last few years, it is quite clear that most Member States need to improve their track record in implementing their budgetary targets. The benefits of sound fiscal policies are clear: reducing deficits and debts and generally improving the quality of budgets would enable Member States to free the necessary budgetary resources to encourage innovation, investment, education and employment which, in turn, would allow them to face more confidently the challenges posed by globalisation and an ageing population", said Joaquín Almunia, Economic and Monetary Affairs Commissioner

The Commission has adopted a Communication to Parliament and the Council on ensuring the effectiveness of the 'preventive arm' of the SGP that accompanies and builds on its eighth annual Report on Public Finances, published today. Surveillance and co-ordination of budgetary policies is a requirement of the Treaty, which sets a ceiling of 3% of GDP for public deficits and says that national debts must be below 60% of GDP or approaching that level at a satisfactory pace. The SGP includes a preventive arm designed to avoid excessive deficits through sound medium-term budgetary planning and delivery.

In 2006 the budgetary situation improved markedly. The EU's average deficit was reduced to 1.7% from 2.4% in 2005 (and to 1.6% from 2.5% in the euro area) and the debt ratio recorded its first decline since 2002 in both areas.

This development reflected continued progress in the correction of excessive deficits. After the abrogation, last week, of the excessive deficit procedure (EDP) on Germany, Greece and Malta, there are seven countries in EDP, as against 13 before the reform of the Pact. Since the reform, the procedure has also been closed for the Netherlands (2005), Cyprus (2006) and France (January 2007). The remaining seven are Italy and Portugal from among the euro-area countries, plus the United Kingdom, the Czech Republic, Hungary, Poland and Slovakia. According to the latest update of Stability and Convergence Programmes only two countries (Hungary and the Czech Republic) are expected to have deficits above 3% of GDP by the end of 2008[2].

But the Commission is concerned that the preventive arm of the Pact is not functioning as well as its corrective arm. Member States not yet at their MTO are generally not consolidating their finances quickly enough despite a favourable economic environment. In some countries, unexpected tax revenues are being partly used to finance increases in expenditure. This raises doubts as to whether the ongoing fiscal consolidation will be permanent.

The Commission’s spring forecasts show that unless policies are changed only 10 of the 27 EU countries will have reached their MTO in 2008 despite three consecutive years of above-trend economic growth.

In its Communication today the Commission therefore makes a number of proposals to improve the effectiveness of the preventive arm of the Pact.

  • The main thrust of the first set of proposals is to broaden the scope of the EU’s fiscal surveillance. The benefits of sound fiscal policy will be better understood if fiscal surveillance is put into a broader economic perspective, for instance by focusing more attention on internal and external imbalances that may pose a risk to fiscal and economic stability.
  • Secondly, the Commission proposes to enhance ownership of the budgetary targets set in the Stability and Convergence Programmes. There is considerable scope for strengthening the link between national budgets and the targets presented at the EU level, for instance by more closely involving national Parliaments and other sectors of government in the preparation and follow-up of the programmes.
  • The third avenue consists in strengthening the reliability and credibility of the medium-term budgetary targets. The recurrent deviations from plans risk, if continued, seriously undermining the credibility of those plans. More information about how budgetary targets are expected to be achieved in the light of expenditure trends would facilitate the assessment of national fiscal policies.
  • The fourth and last group of proposals relates to the overall aim of the preventive arm of the Pact, namely achieving sustainable fiscal positions in the medium term. This involves a better monitoring of the implementation of budgetary plans as well as a better understanding of which budgetary positions provide sufficient leeway to absorb the impact of ageing.

Report and Communication available on:
http://ec.europa.eu/economy_finance/news/hotissues/2007/public-finance-report/main_en.htm

[ Figures and graphics available in PDF and WORD PROCESSED ]

[1] Many EU countries aim to achieve a balanced budget ('zero deficit') in the medium term i.e. in the next three/four years. The others target a deficit of no more than 1% or a budgetary surplus. The individual medium-term objectives generally reflect a country's economic growth situation and prospects, its debt position and the projected increase in age-related expenditure.

[2] The Commission’s spring forecasts of 7 May were less optimistic and put the number at five: Portugal, Czech Republic, Hungary, Poland and Romania.