# C_2005136EN.01002301.xml

| 3.6.2005 | EN | Official Journal of the European Union | C 136/23 |
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3.6.2005

EN

Official Journal of the European Union

C 136/23

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COUNCIL OPINION

COUNCIL OPINION

of 17 February 2005

on the updated convergence programme of Poland, 2004-2007

(2005/C 136/09)

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 17 February 2005 the Council examined the updated convergence programme of Poland, which covers the period 2004 to 2007. The programme complies partly with the data requirements of the ‘code of conduct on the content and format of stability and convergence programmes’. The quality of ESA95 data on the composition of the general government revenue and expenditure is not fully in line with ESA95 statistical standards. The programme also deviates from the data requirements specified in the code of conduct in the area of the long-term sustainability of public finances. Accordingly, Poland is invited to achieve full compliance with the data requirements. |
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(1)

On 17 February 2005 the Council examined the updated convergence programme of Poland, which covers the period 2004 to 2007. The programme complies partly with the data requirements of the ‘code of conduct on the content and format of stability and convergence programmes’. The quality of ESA95 data on the composition of the general government revenue and expenditure is not fully in line with ESA95 statistical standards. The programme also deviates from the data requirements specified in the code of conduct in the area of the long-term sustainability of public finances. Accordingly, Poland is invited to achieve full compliance with the data requirements.

| (2) | The macroeconomic scenario underlying the programme envisages real GDP growth to decelerate from 5.7 % in 2004 to 4.9 % on average in 2005 and 2006, before rebounding to 5.6 % in 2007. On the basis of currently available information, this scenario seems to reflect rather favourable growth assumptions. If the growth projections for 2005 and 2006 are plausible, the growth forecast for the last year of the programme appears on the high side. In particular, the projected acceleration in GDP growth in 2007 reflects rather optimistic assumptions about the growth of potential output and the strength of domestic demand. The programme's projections for inflation appear on the low side. |
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(2)

The macroeconomic scenario underlying the programme envisages real GDP growth to decelerate from 5.7 % in 2004 to 4.9 % on average in 2005 and 2006, before rebounding to 5.6 % in 2007. On the basis of currently available information, this scenario seems to reflect rather favourable growth assumptions. If the growth projections for 2005 and 2006 are plausible, the growth forecast for the last year of the programme appears on the high side. In particular, the projected acceleration in GDP growth in 2007 reflects rather optimistic assumptions about the growth of potential output and the strength of domestic demand. The programme's projections for inflation appear on the low side.

| (3) | On 5 July 2004, the Council decided that an excessive deficit existed in Poland and recommended that this be corrected by 2007. The budgetary strategy underlying the updated programme aims at reducing the general government deficit to below 3 % of GDP by 2007 and maintaining the debt ratio below 60 % of GDP including the contributions to the second pillar pension schemes (estimated impact of about 1.5 % of GDP per year) to be classified outside the general government by 2007 at the latest in accordance with the Eurostat decision. The update foresees a gradual reduction of the deficit to 2.2 % of GDP in 2007 from 5.4 % of GDP in 2004. Compared with the May 2004 programme, the most significant differences are the large downward revision of the debt-to-GDP ratios, which have been lowered, on average, by approximately 4.3 pp., and the upward revision of the general government deficit target in 2007 by 0.7 percentage points of GDP, despite the projected rebound in economic growth. |
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(3)

On 5 July 2004, the Council decided that an excessive deficit existed in Poland and recommended that this be corrected by 2007. The budgetary strategy underlying the updated programme aims at reducing the general government deficit to below 3 % of GDP by 2007 and maintaining the debt ratio below 60 % of GDP including the contributions to the second pillar pension schemes (estimated impact of about 1.5 % of GDP per year) to be classified outside the general government by 2007 at the latest in accordance with the Eurostat decision. The update foresees a gradual reduction of the deficit to 2.2 % of GDP in 2007 from 5.4 % of GDP in 2004. Compared with the May 2004 programme, the most significant differences are the large downward revision of the debt-to-GDP ratios, which have been lowered, on average, by approximately 4.3 pp., and the upward revision of the general government deficit target in 2007 by 0.7 percentage points of GDP, despite the projected rebound in economic growth.

| (4) | The fiscal consolidation over the period 2005-2007 would result from the implementation of a comprehensive set of measures contained in the Hausner plan, which, if fully implemented, would have an estimated total budgetary impact of 4.7 % of GDP (revised downwards by 0.6 percentage points compared with the previous programme). At the same time, a significant programme of public investment is being implemented, which lifts public investment from 3.4 % of GDP in 2003 to an average of 4.1 % over the programme period against an EU-average of 2.4 % of GDP in 2004. |
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(4)

The fiscal consolidation over the period 2005-2007 would result from the implementation of a comprehensive set of measures contained in the Hausner plan, which, if fully implemented, would have an estimated total budgetary impact of 4.7 % of GDP (revised downwards by 0.6 percentage points compared with the previous programme). At the same time, a significant programme of public investment is being implemented, which lifts public investment from 3.4 % of GDP in 2003 to an average of 4.1 % over the programme period against an EU-average of 2.4 % of GDP in 2004.

Hausner plan,

| (5) | There are risks that the budgetary outcome could be worse than projected in the programme aiming at reducing the deficit to below 3 % of GDP by 2007. The risk of a delayed or incomplete implementation of the envisaged measures of the Hausner plan, described in the assessment of the May 2004 programme, is already materialising. There is still uncertainty over the implementation of the remaining measures that require legislative procedures but contained already in the budget for 2005. Despite the rejection by Parliament of two important measures, the deficit targets remained unchanged. Almost half of measures aiming at additional revenue and expenditure savings described in the update are not clearly specified. Contingent liabilities constitute an additional risk which will be monitored accordingly in this context. The achievement of the deficit targets is also conditional on projected high GDP growth throughout the programme period. In addition, the funded pension scheme continues to be recorded inside the general government sector as allowed by the transition period granted by Eurostat. Starting with the March 2007 notification and the ensuing change in classification, the deficit level will have to be adjusted upwards by about 1.5 percentage points. This adjustment means that based on the update and in the absence of additional savings measures, Poland will not be able to bring the deficit below 3 % in the end year of the programme. |
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(5)

There are risks that the budgetary outcome could be worse than projected in the programme aiming at reducing the deficit to below 3 % of GDP by 2007. The risk of a delayed or incomplete implementation of the envisaged measures of the Hausner plan, described in the assessment of the May 2004 programme, is already materialising. There is still uncertainty over the implementation of the remaining measures that require legislative procedures but contained already in the budget for 2005. Despite the rejection by Parliament of two important measures, the deficit targets remained unchanged. Almost half of measures aiming at additional revenue and expenditure savings described in the update are not clearly specified. Contingent liabilities constitute an additional risk which will be monitored accordingly in this context. The achievement of the deficit targets is also conditional on projected high GDP growth throughout the programme period. In addition, the funded pension scheme continues to be recorded inside the general government sector as allowed by the transition period granted by Eurostat. Starting with the March 2007 notification and the ensuing change in classification, the deficit level will have to be adjusted upwards by about 1.5 percentage points. This adjustment means that based on the update and in the absence of additional savings measures, Poland will not be able to bring the deficit below 3 % in the end year of the programme.

Hausner plan

| (6) | In the updated programme the debt ratio is estimated to have reached 45.9 % of GDP in 2004, against 49 % forecast in the May 2004 Convergence Programme and below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to increase by a cumulative 1.8 percentage points over the period 2004-2007, with the increase coming to a halt only in the last year of the programme. |
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(6)

In the updated programme the debt ratio is estimated to have reached 45.9 % of GDP in 2004, against 49 % forecast in the May 2004 Convergence Programme and below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to increase by a cumulative 1.8 percentage points over the period 2004-2007, with the increase coming to a halt only in the last year of the programme.

| (7) | The lack of budgetary projections beyond 2020 makes it difficult to assess the long-term sustainability of the Polish public finances, as most of the budgetary impact of aging is likely to take place after 2020. However, on the basis of the available information, some risks cannot be ruled out. Uncertainties regarding the budgetary impact of policies aimed at strengthening the long-term budgetary trends remain. The resolute implementation of the planned budgetary consolidation in the medium term should contribute to a sustainable position in the longer term. |
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(7)

The lack of budgetary projections beyond 2020 makes it difficult to assess the long-term sustainability of the Polish public finances, as most of the budgetary impact of aging is likely to take place after 2020. However, on the basis of the available information, some risks cannot be ruled out. Uncertainties regarding the budgetary impact of policies aimed at strengthening the long-term budgetary trends remain. The resolute implementation of the planned budgetary consolidation in the medium term should contribute to a sustainable position in the longer term.

| (8) | Overall, the economic policies outlined in the update are partly consistent with the country-specific broad economic policy guidelines in the area of public finances. On the one hand, the programme is in line with the reduction of the general government deficit recommended by the Council and the reduction is based on the implementation of the Hausner plan. On the other hand, the measures of the programme may not be sufficient to safeguard the long-term sustainability of public finances. |
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(8)

Overall, the economic policies outlined in the update are partly consistent with the country-specific broad economic policy guidelines in the area of public finances. On the one hand, the programme is in line with the reduction of the general government deficit recommended by the Council and the reduction is based on the implementation of the Hausner plan. On the other hand, the measures of the programme may not be sufficient to safeguard the long-term sustainability of public finances.

Hausner plan

In view of the above assessment and in light of the recommendations made by the Council under Article 104(7), the Council is of the opinion that Poland should:

| (i) | strengthen the fiscal adjustment beyond 2005 and lower the deficit target for 2007; |
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(i)

strengthen the fiscal adjustment beyond 2005 and lower the deficit target for 2007;

| (ii) | ensure a full implementation of the structural measures contained in the Hausner plan and make further efforts to introduce alternative measures if implementation risks were to materialize. |
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(ii)

ensure a full implementation of the structural measures contained in the Hausner plan and make further efforts to introduce alternative measures if implementation risks were to materialize.

Comparison of key macroeconomic and budgetary projections

| | 2004 | 2005 | 2006 | 2007 |
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| Real GDP
  (% change) | CP Dec 2004 | 5,7 | 5,0 | 4,8 | 5,6 |
| COM Oct 2004 | 5,8 | 4,9 | 4,5 | n.a. |
| CP May 2004 | 5,0 | 5,0 | 5,6 | 5,6 |
| HICP inflation
  (%) | CP Dec 2004 | 3,5 | 3,0 | 2,7 | 2,5 |
| COM Oct 2004 | 3,5 | 3,3 | 3,0 | n.a. |
| CP May 2004 | 2,2 | 2,8 | <3 | <3 |
| General government balance (2)

  (% of GDP) | CP Dec 2004 | -5,4 | -3,9 | -3,2 | -2,2 |
| COM Oct 2004 | -5,6 | -4,1 | -3,1 | n.a. |
| CP May 2004 | -5,7 | -4,2 | -3,3 | -1,5 |
| Primary balance (2)

  (% of GDP) | CP Dec 2004 | -2,6 | -1,3 | -0,5 | 0,4 |
| COM Oct 2004 | -2,5 | -1,0 | -0,0 | n.a. |
| CP May 2004 | -2,8 | -1,1 | -0,3 | 1,3 |
| Government gross debt
  (% of GDP) | CP Dec 2004 | 45,9 | 47,6 | 48,0 | 47,3 |
| COM Oct 2004 | 47,7 | 49,8 | 49,3 | n.a. |
| CP May 2004 | 49,0 | 51,9 | 52,7 | 52,3 |
| Convergence programme (CP); Commission services autumn 2004 forecasts (COM) |

2004

2004

2005

2005

2006

2006

2007

2007

Real GDP

(% change)

CP Dec 2004

CP Dec 2004

5,7

5,7

5,0

5,0

4,8

4,8

5,6

5,6

COM Oct 2004

5,8

4,9

4,5

n.a.

CP May 2004

CP May 2004

5,0

5,0

5,0

5,0

5,6

5,6

5,6

5,6

HICP inflation

(%)

CP Dec 2004

CP Dec 2004

3,5

3,5

3,0

3,0

2,7

2,7

2,5

2,5

COM Oct 2004

3,5

3,3

3,0

n.a.

CP May 2004

CP May 2004

2,2

2,2

2,8

2,8

<3

<3

<3

<3

General government balance (2)

2

(% of GDP)

CP Dec 2004

CP Dec 2004

-5,4

-5,4

-3,9

-3,9

-3,2

-3,2

-2,2

-2,2

COM Oct 2004

-5,6

-4,1

-3,1

n.a.

CP May 2004

CP May 2004

-5,7

-5,7

-4,2

-4,2

-3,3

-3,3

-1,5

-1,5

Primary balance (2)

2

(% of GDP)

CP Dec 2004

CP Dec 2004

-2,6

-2,6

-1,3

-1,3

-0,5

-0,5

0,4

0,4

COM Oct 2004

-2,5

-1,0

-0,0

n.a.

CP May 2004

CP May 2004

-2,8

-2,8

-1,1

-1,1

-0,3

-0,3

1,3

1,3

Government gross debt

(% of GDP)

CP Dec 2004

CP Dec 2004

45,9

45,9

47,6

47,6

48,0

48,0

47,3

47,3

COM Oct 2004

47,7

49,8

49,3

n.a.

CP May 2004

CP May 2004

49,0

49,0

51,9

51,9

52,7

52,7

52,3

52,3

Convergence programme (CP); Commission services autumn 2004 forecasts (COM)

Convergence programme (CP); Commission services autumn 2004 forecasts (COM)

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(1)  OJ L 209, 2.8.1997, p. 1.

1

(2)  General government balance and primary balance do not include the revenue-decreasing and hence, ceteris paribus, deficit increasing effect of the funded pension pillar (estimated at about 1.5 % of GDP p. a.)

2

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