# C_2006055EN.01002101.xml

| 7.3.2006 | EN | Official Journal of the European Union | C 55/21 |
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7.3.2006

EN

Official Journal of the European Union

C 55/21

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COUNCIL OPINION

COUNCIL OPINION

of 24 January 2006

on the updated convergence programme of Sweden, 2005-2008

(2006/C 55/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

1

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

| (1) | On 24 January 2006 the Council examined the updated convergence programme of Sweden, which covers the period 2005 to 2008. |
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(1)

On 24 January 2006 the Council examined the updated convergence programme of Sweden, which covers the period 2005 to 2008.

| (2) | Annual real GDP growth in Sweden has been slightly below 3 % on average over the last decade. This growth performance has been characterised by strong productivity developments and positive net export contributions. However, over the last few years employment growth has been weak and employment rates reduced while unemployment has increased. The macroeconomic scenario underlying the programme envisages that real GDP growth will rise from 2,4 % in 2005 to 3,1 % in 2006 and average 2,5 % over the following two years of the programme period. In the first two years of the programme period the growth outlook implies an improvement of cyclical conditions, which then are projected to stay broadly neutral. Assessed against currently available information, this scenario appears to be plausible. The programme's projections for inflation appear realistic. |
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(2)

Annual real GDP growth in Sweden has been slightly below 3 % on average over the last decade. This growth performance has been characterised by strong productivity developments and positive net export contributions. However, over the last few years employment growth has been weak and employment rates reduced while unemployment has increased. The macroeconomic scenario underlying the programme envisages that real GDP growth will rise from 2,4 % in 2005 to 3,1 % in 2006 and average 2,5 % over the following two years of the programme period. In the first two years of the programme period the growth outlook implies an improvement of cyclical conditions, which then are projected to stay broadly neutral. Assessed against currently available information, this scenario appears to be plausible. The programme's projections for inflation appear realistic.

| (3) | On 18 January 2005, in its opinion the Council endorsed the budgetary strategy presented in the 2004 update of the convergence programme of Sweden. Regarding the 2005 budgetary implementation, the 2004 update targeted a 0,6 % of GDP general government surplus for 2005 while the current update forecasts a 1,6 % surplus despite a downward revision of 2005 growth. Overall, revenues have come in better than expected, partially explained by some one-off corporate taxes, but also expenditures have developed in a contained way. |
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(3)

On 18 January 2005, in its opinion the Council endorsed the budgetary strategy presented in the 2004 update of the convergence programme of Sweden. Regarding the 2005 budgetary implementation, the 2004 update targeted a 0,6 % of GDP general government surplus for 2005 while the current update forecasts a 1,6 % surplus despite a downward revision of 2005 growth. Overall, revenues have come in better than expected, partially explained by some one-off corporate taxes, but also expenditures have developed in a contained way.

| (4) | The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2). |
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(4)

The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2).

2

| (5) | The budgetary framework is geared at maintaining sound public finances in the context of full employment and sustainable growth. To this end it includes a general government surplus objective of 2 % of GDP on average over the cycle, multi-annual nominal ceilings for central government expenditures and a balanced budget balance requirement for local governments. This update foresees general government surpluses of 1,6 % in 2005, 0,9 % in 2006, 1,2 % in 2007 and 1,7 % in the final year, 2008. Both expenditure and revenue ratios are on a gradually declining trend over the projection period. The decline in the revenue ratio is front-loaded to 2006 due to tax cuts while the decline in the expenditure ratio is back–loaded, taking place against a forecast improvement in the labour market. Compared to the previous update, the current update broadly confirms a similar planned fiscal adjustment in the context of a more favourable macroeconomic scenario. |
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(5)

The budgetary framework is geared at maintaining sound public finances in the context of full employment and sustainable growth. To this end it includes a general government surplus objective of 2 % of GDP on average over the cycle, multi-annual nominal ceilings for central government expenditures and a balanced budget balance requirement for local governments. This update foresees general government surpluses of 1,6 % in 2005, 0,9 % in 2006, 1,2 % in 2007 and 1,7 % in the final year, 2008. Both expenditure and revenue ratios are on a gradually declining trend over the projection period. The decline in the revenue ratio is front-loaded to 2006 due to tax cuts while the decline in the expenditure ratio is back–loaded, taking place against a forecast improvement in the labour market. Compared to the previous update, the current update broadly confirms a similar planned fiscal adjustment in the context of a more favourable macroeconomic scenario.

| (6) | The programme presents the national surplus objective of 2 % on average over the cycle as the guiding medium-term reference in the update strategy. It is also the cornerstone in the Swedish national budgetary rule-based framework. Therefore, 2 % of GDP can be regarded as the programme's medium-term objective (MTO) as it is in line with the principles for MTOs specified in the Stability and Growth Pact and the code of conduct. Over the programme period, the structural balance calculated according to the commonly agreed methodology is planned to improve from about 1 % of GDP in 2006 to about 1,5-2 % of GDP in 2008. |
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(6)

The programme presents the national surplus objective of 2 % on average over the cycle as the guiding medium-term reference in the update strategy. It is also the cornerstone in the Swedish national budgetary rule-based framework. Therefore, 2 % of GDP can be regarded as the programme's medium-term objective (MTO) as it is in line with the principles for MTOs specified in the Stability and Growth Pact and the code of conduct. Over the programme period, the structural balance calculated according to the commonly agreed methodology is planned to improve from about 1 % of GDP in 2006 to about 1,5-2 % of GDP in 2008.

| (7) | As the MTO is more demanding than the minimum benchmark (estimated at a deficit of about 0,5 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. As regards appropriateness, the programme's MTO is significantly more demanding than implied by the debt ratio and the average potential output growth. However, its achievement remains central for ensuring long-term sustainability. |
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(7)

As the MTO is more demanding than the minimum benchmark (estimated at a deficit of about 0,5 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. As regards appropriateness, the programme's MTO is significantly more demanding than implied by the debt ratio and the average potential output growth. However, its achievement remains central for ensuring long-term sustainability.

| (8) | The budgetary outcome in 2005 is likely to be better than projected in the programme. In particular, recent cash-based information on tax revenues and quarterly national accounts support this assessment. |
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(8)

The budgetary outcome in 2005 is likely to be better than projected in the programme. In particular, recent cash-based information on tax revenues and quarterly national accounts support this assessment.

| (9) | In view of this risk assessment, the budgetary stance outlined in the programme seems broadly sufficient to ensure that the programme's MTO will be reached by the end of the programme period. Nevertheless, the 2006 budget makes the budget position diverge from the MTO by roughly 1 % of GDP in 2006 and 2007, putting at risk the achievement of the MTO within the programme period. Moreover, notwithstanding the fact that inflationary pressures are expected to remain subdued, there is a concern that the expansionary fiscal stance in 2006 may not be fully appropriate in the sense that this period may qualify as ‘good times’. However, as stated above the programme's MTO is significantly more demanding than required by the Stability and Growth Pact. In particular, over the whole programme period there is a sufficient safety margin against breaching the 3 % of GDP threshold for the deficit with normal cyclical fluctuations. This assessment would also seem to be robust to the reclassification in 2007 of the second-pillar funded pension schemes outside the general government accounts, as required by Eurostat. |
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(9)

In view of this risk assessment, the budgetary stance outlined in the programme seems broadly sufficient to ensure that the programme's MTO will be reached by the end of the programme period. Nevertheless, the 2006 budget makes the budget position diverge from the MTO by roughly 1 % of GDP in 2006 and 2007, putting at risk the achievement of the MTO within the programme period. Moreover, notwithstanding the fact that inflationary pressures are expected to remain subdued, there is a concern that the expansionary fiscal stance in 2006 may not be fully appropriate in the sense that this period may qualify as ‘good times’. However, as stated above the programme's MTO is significantly more demanding than required by the Stability and Growth Pact. In particular, over the whole programme period there is a sufficient safety margin against breaching the 3 % of GDP threshold for the deficit with normal cyclical fluctuations. This assessment would also seem to be robust to the reclassification in 2007 of the second-pillar funded pension schemes outside the general government accounts, as required by Eurostat.

| (10) | The debt ratio is estimated to have reached about 51 % of GDP in 2005, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline to 46 % of GDP by 2008. |
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(10)

The debt ratio is estimated to have reached about 51 % of GDP in 2005, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline to 46 % of GDP by 2008.

| (11) | With regard to the sustainability of public finances, Sweden appears to be at low risk on grounds of the projected budgetary costs of ageing populations. The level of gross debt is currently comfortably below the 60 % reference value and is projected to remain below the reference value throughout most of the programme period. The Swedish strategy of putting sustainability concerns at the heart of fiscal policy making, including the pension system reform which contains pension expenditure and involves accumulation of assets, contributes positively to the outlook for the public finances. The currently favourable budgetary position contributes to limiting the projected budgetary impact of ageing populations while the planned consolidation towards the 2 % MTO at the end of the programme period contributes to improve sustainability (3). |
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(11)

With regard to the sustainability of public finances, Sweden appears to be at low risk on grounds of the projected budgetary costs of ageing populations. The level of gross debt is currently comfortably below the 60 % reference value and is projected to remain below the reference value throughout most of the programme period. The Swedish strategy of putting sustainability concerns at the heart of fiscal policy making, including the pension system reform which contains pension expenditure and involves accumulation of assets, contributes positively to the outlook for the public finances. The currently favourable budgetary position contributes to limiting the projected budgetary impact of ageing populations while the planned consolidation towards the 2 % MTO at the end of the programme period contributes to improve sustainability (3).

3

| (12) | The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. While a sufficiently strong medium-term budgetary position is planned to be maintained, in line with the pact, the departure from the ambitious MTO in 2006-2007, as projected in the budget, may risk being pro-cyclical and also put at risk the achievement of the MTO at the end of the programme period. |
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(12)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. While a sufficiently strong medium-term budgetary position is planned to be maintained, in line with the pact, the departure from the ambitious MTO in 2006-2007, as projected in the budget, may risk being pro-cyclical and also put at risk the achievement of the MTO at the end of the programme period.

| (13) | Sweden's National Reform Programme (NRP), submitted on 21 October 2005 within the context of the renewed Lisbon strategy for growth and jobs, puts great emphasis on sustainable development and emphasises that the achievement and maintenance of high labour market participation and hours worked are important challenges, and will have a significant impact on public finances in the long term. The NRP incorporates the 2006 budget on which the programme update is also based and in this sense the two documents are consistent. |
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(13)

Sweden's National Reform Programme (NRP), submitted on 21 October 2005 within the context of the renewed Lisbon strategy for growth and jobs, puts great emphasis on sustainable development and emphasises that the achievement and maintenance of high labour market participation and hours worked are important challenges, and will have a significant impact on public finances in the long term. The NRP incorporates the 2006 budget on which the programme update is also based and in this sense the two documents are consistent.

The Council is of the opinion that, overall, the budgetary position is sound and the budgetary strategy provides an example of fiscal policies conducted in compliance with the pact.

Comparison of key macroeconomic and budgetary projections (4)

4

| | 2004 | 2005 | 2006 | 2007 | 2008 |
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| Real GDP
  (% change) | CP Nov 2005 | 3,6 | 2,4 | 3,1 | 2,8 | 2,3 |
| COM Nov 2005 | 3,6 | 2,5 | 3,0 | 2,8 | n.a. |
| CP Nov 2004 | 3,5 | 3,0 | 2,5 | 2,3 | n.a. |
| HICP inflation
  (%) | CP Nov 2005 | 0,9 | 1,5 | 1,5 | 2,0 | 2,0 |
| COM Nov 2005 | 1,0 | 0,7 | 1,4 | 1,8 | n.a. |
| CP Nov 2004 | 1,3 | 1,5 | n.a. | n.a. | n.a. |
| Output gap
  (% of potential GDP) | CP Nov 2005 (5) | – 0,3 | – 0,4 | – 0,1 | 0,1 | – 0,1 |
| COM Nov 2005 (9) | – 0,3 | – 0,4 | – 0,1 | 0,0 | n.a. |
| CP Nov 2004 (5) | – 0,1 | 0,1 | – 0,2 | – 0,4 | n.a. |
| General government balance
  (% of GDP) | CP Nov 2005 | 1,6 | 1,6 | 0,9 | 1,2 | 1,7 |
| COM Nov 2005 | 1,6 | 1,4 | 0,8 | 1,1 | n.a. |
| CP Nov 2004 | 0,7 | 0,6 | 0,4 | 0,9 | n.a. |
| Primary balance
  (% of GDP) | CP Nov 2005 | 3,2 | 3,2 | 2,5 | 3,0 | 3,6 |
| COM Nov 2005 | 3,4 | 3,2 | 2,6 | 2,9 | n.a. |
| CP Nov 2004 | 2,8 | 2,8 | 2,7 | 3,3 | n.a. |
| Cyclically-adjusted balance
  (% of GDP) | CP Nov 2005 (5) | 1,7 | 1,8 | 0,9 | 1,1 | 1,7 |
| COM Nov 2005 | 1,8 | 1,6 | 0,9 | 1,1 | n.a. |
| CP Nov 2004 (5) | 0,8 | 0,5 | 0,5 | 1,2 | n.a. |
| Structural balance (6)

  (% of GDP) | CP Nov 2005 (7) | 1,1 | 1,6 | 0,9 | 1,1 | 1,7 |
| COM Nov 2005 (8) | 1,2 | 1,4 | 0,9 | 1,1 | n.a. |
| CP Nov 2004 | n.a. | n.a. | n.a. | n.a. | n.a. |
| Government gross debt
  (% of GDP) | CP Nov 2005 | 51,1 | 50,9 | 49,4 | 47,8 | 46,0 |
| COM Nov 2005 | 51,1 | 50,6 | 49,4 | 47,8 | n.a. |
| CP Nov 2004 | 51,7 | 50,5 | 50,0 | 49,0 | n.a. |
| Convergence programme (CP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations |

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

Real GDP

(% change)

CP Nov 2005

CP Nov 2005

3,6

3,6

2,4

2,4

3,1

3,1

2,8

2,8

2,3

2,3

COM Nov 2005

3,6

2,5

3,0

2,8

n.a.

CP Nov 2004

CP Nov 2004

3,5

3,5

3,0

3,0

2,5

2,5

2,3

2,3

n.a.

n.a.

HICP inflation

(%)

CP Nov 2005

CP Nov 2005

0,9

0,9

1,5

1,5

1,5

1,5

2,0

2,0

2,0

2,0

COM Nov 2005

1,0

0,7

1,4

1,8

n.a.

CP Nov 2004

CP Nov 2004

1,3

1,3

1,5

1,5

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Output gap

(% of potential GDP)

CP Nov 2005 (5)

CP Nov 2005 (5

– 0,3

– 0,3

– 0,4

– 0,4

– 0,1

– 0,1

0,1

0,1

– 0,1

– 0,1

COM Nov 2005 (9)

9

– 0,3

– 0,4

– 0,1

0,0

n.a.

CP Nov 2004 (5)

CP Nov 2004 (5

– 0,1

– 0,1

0,1

0,1

– 0,2

– 0,2

– 0,4

– 0,4

n.a.

n.a.

General government balance

(% of GDP)

CP Nov 2005

CP Nov 2005

1,6

1,6

1,6

1,6

0,9

0,9

1,2

1,2

1,7

1,7

COM Nov 2005

1,6

1,4

0,8

1,1

n.a.

CP Nov 2004

CP Nov 2004

0,7

0,7

0,6

0,6

0,4

0,4

0,9

0,9

n.a.

n.a.

Primary balance

(% of GDP)

CP Nov 2005

CP Nov 2005

3,2

3,2

3,2

3,2

2,5

2,5

3,0

3,0

3,6

3,6

COM Nov 2005

3,4

3,2

2,6

2,9

n.a.

CP Nov 2004

CP Nov 2004

2,8

2,8

2,8

2,8

2,7

2,7

3,3

3,3

n.a.

n.a.

Cyclically-adjusted balance

(% of GDP)

CP Nov 2005 (5)

CP Nov 2005 (5

1,7

1,7

1,8

1,8

0,9

0,9

1,1

1,1

1,7

1,7

COM Nov 2005

1,8

1,6

0,9

1,1

n.a.

CP Nov 2004 (5)

CP Nov 2004 (5

0,8

0,8

0,5

0,5

0,5

0,5

1,2

1,2

n.a.

n.a.

Structural balance (6)

6

(% of GDP)

CP Nov 2005 (7)

CP Nov 2005 (7

1,1

1,1

1,6

1,6

0,9

0,9

1,1

1,1

1,7

1,7

COM Nov 2005 (8)

8

1,2

1,4

0,9

1,1

n.a.

CP Nov 2004

CP Nov 2004

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Government gross debt

(% of GDP)

CP Nov 2005

CP Nov 2005

51,1

51,1

50,9

50,9

49,4

49,4

47,8

47,8

46,0

46,0

COM Nov 2005

51,1

50,6

49,4

47,8

n.a.

CP Nov 2004

CP Nov 2004

51,7

51,7

50,5

50,5

50,0

50,0

49,0

49,0

n.a.

n.a.

Convergence programme (CP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations

Convergence programme (CP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations

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(1)  OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

1

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2)  The programme has gaps in the compulsory data and does not provide all optional data prescribed by the new code of conduct (especially compensation of employees is missing).

2

(3)  Details on long-term sustainability are provided in the technical assessment of the programme by the Commission services, to be published at the website:

3

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(4)  The budgetary projections exclude the impact of the Eurostat decision of 2 March 2004 on the classification of funded pension schemes, which needs to be implemented by the time of the spring 2007 notification. Including this impact, the general government balance would be 0,6 % in 2005, -0,1 % in 2006, 0,2 % in 2007 and 0,7 % in 2008, while government gross debt would be 51,4 % in 2005, 49,9 % in 2006, 48,3 % in 2007 and 46,5 % in 2008.

4

(5)  Commission services calculations on the basis of the information in the programme.

5

(6)  Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

6

(7)  The programme provides no explicit information on one-off and other temporary measures. However, the Swedish Ministry of Finance has provided an estimate of one-offs of 0,6 % of GDP in 2004 and 0,2 % of GDP in 2005.

7

(8)  One-off and other temporary measures taken from the Commission services' autumn 2005 forecast (0,6 % of GDP in 2004 and 0,2 % of GDP in 2005; deficit-reducing).

8

(9)  Based on estimated potential growth of 2,5 %, 2,6 %, 2,8 % and 2,7 % respectively in the period 2004-2007.

9

Source:

Convergence programme (CP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations

Convergence programme (CP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations

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