# C_2005177EN.01001701.xml

| 19.7.2005 | EN | Official Journal of the European Union | C 177/17 |
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19.7.2005

EN

Official Journal of the European Union

C 177/17

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COUNCIL OPINION

COUNCIL OPINION

of 8 March 2005

on the updated convergence programme of Slovenia, 2004-2007

(2005/C 177/06)

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 8 March 2005 the Council examined the updated convergence programme of Slovenia, which covers the period 2004 to 2007. The programme partly complies with the data requirements of the ‘code of conduct on the content and format of stability and convergence programmes’. Government accounts do not fully abide by ESA95 standards evidenced in the high share of ‘other’ revenue and expenditure as percentage of GDP. Therefore, Slovenia is invited to achieve full compliance with the data requirements. |
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(1)

On 8 March 2005 the Council examined the updated convergence programme of Slovenia, which covers the period 2004 to 2007. The programme partly complies with the data requirements of the ‘code of conduct on the content and format of stability and convergence programmes’. Government accounts do not fully abide by ESA95 standards evidenced in the high share of ‘other’ revenue and expenditure as percentage of GDP. Therefore, Slovenia is invited to achieve full compliance with the data requirements.

| (2) | On the basis of currently available information, the macroeconomic scenario underlying the programme seems to reflect plausible growth assumptions. It envisages real GDP growth, estimated at 4,0 % in 2004, to continue growing at around that level throughout the rest of the programme period. The projections for inflation appear attainable but risks remain. |
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(2)

On the basis of currently available information, the macroeconomic scenario underlying the programme seems to reflect plausible growth assumptions. It envisages real GDP growth, estimated at 4,0 % in 2004, to continue growing at around that level throughout the rest of the programme period. The projections for inflation appear attainable but risks remain.

| (3) | The budgetary strategy underlying the programme aims at achieving sound public finances as defined by a budgetary position of close-to-balance, but not during the programme period. The programme envisages a gradual reduction of the general government deficit over the period covered, consistent with a sustained cut in the expenditure share as percentage of GDP. The revenue ratio, after falling steadily until 2006, rebounds towards the end of the programme period in view of the net positive budgetary impact of EU membership. According to the adjustment path, the deficit halves over the next four years, reaching just above 1 % in 2007. Compared with the previous programme, the current update broadly confirms the planned adjustment against a slightly more favourable macroeconomic scenario. |
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(3)

The budgetary strategy underlying the programme aims at achieving sound public finances as defined by a budgetary position of close-to-balance, but not during the programme period. The programme envisages a gradual reduction of the general government deficit over the period covered, consistent with a sustained cut in the expenditure share as percentage of GDP. The revenue ratio, after falling steadily until 2006, rebounds towards the end of the programme period in view of the net positive budgetary impact of EU membership. According to the adjustment path, the deficit halves over the next four years, reaching just above 1 % in 2007. Compared with the previous programme, the current update broadly confirms the planned adjustment against a slightly more favourable macroeconomic scenario.

| (4) | The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, a plausible macroeconomic scenario supports the deficit targets. Furthermore, it is at the government's discretion to refuse claims for further expenditure to safeguard the deficit target should it be threatened by unfavourable conditions, in the manner exercised in 2004. In addition, the yearly loss of VAT revenue at 0,3 % of GDP budgeted for 2005-2007 may be overestimated, rendering the tax revenue projections overly cautious. On the other hand, the level of direct tax revenues after the adopted tax reform could be uncertain. At the same time, the outcome for 2007 is partly due to the new EU financial perspective 2007-2013, anticipating a significant rise in the net budgetary inflows from the EU budget. Moreover, there is a risk of expenditure overruns, particularly regarding pension outlays should the review of the current pension indexation formula, announced for 2006, lead to a loosening of the parameters. |
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(4)

The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, a plausible macroeconomic scenario supports the deficit targets. Furthermore, it is at the government's discretion to refuse claims for further expenditure to safeguard the deficit target should it be threatened by unfavourable conditions, in the manner exercised in 2004. In addition, the yearly loss of VAT revenue at 0,3 % of GDP budgeted for 2005-2007 may be overestimated, rendering the tax revenue projections overly cautious. On the other hand, the level of direct tax revenues after the adopted tax reform could be uncertain. At the same time, the outcome for 2007 is partly due to the new EU financial perspective 2007-2013, anticipating a significant rise in the net budgetary inflows from the EU budget. Moreover, there is a risk of expenditure overruns, particularly regarding pension outlays should the review of the current pension indexation formula, announced for 2006, lead to a loosening of the parameters.

| (5) | In view of this risk assessment, the budgetary stance in the programme may not provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations except for the final year of the programme. It is also insufficient to ensure that the Stability and Growth Pact's medium-term objective of a budgetary position of close-to-balance is achieved by 2007. |
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(5)

In view of this risk assessment, the budgetary stance in the programme may not provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations except for the final year of the programme. It is also insufficient to ensure that the Stability and Growth Pact's medium-term objective of a budgetary position of close-to-balance is achieved by 2007.

| (6) | Gross government debt is relatively low: the debt ratio is estimated to have reached 30,2 % of GDP in 2004, well below the 60 % of GDP Treaty reference value, and to attain 29,7 % by 2007. |
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(6)

Gross government debt is relatively low: the debt ratio is estimated to have reached 30,2 % of GDP in 2004, well below the 60 % of GDP Treaty reference value, and to attain 29,7 % by 2007.

| (7) | Slovenia appears to be at some risk with regard to the long-term sustainability of the public finances, of which the projected budgetary cost of an ageing population is an important element. The ongoing pension reform has had a positive budgetary impact but the projected increase in pension expenditure beyond 2020 remains very high. In addition, despite the introduction of some rationalisation measures of the health-care system in 2004, a further, substantial reform of the health-care system would contribute to the improvement of the long-term sustainability of the public finances. |
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(7)

Slovenia appears to be at some risk with regard to the long-term sustainability of the public finances, of which the projected budgetary cost of an ageing population is an important element. The ongoing pension reform has had a positive budgetary impact but the projected increase in pension expenditure beyond 2020 remains very high. In addition, despite the introduction of some rationalisation measures of the health-care system in 2004, a further, substantial reform of the health-care system would contribute to the improvement of the long-term sustainability of the public finances.

In view of the above assessment, the Council is of the opinion that Slovenia should:

| (i) | seize all opportunities to accelerate the reduction of the general government deficit; |
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(i)

seize all opportunities to accelerate the reduction of the general government deficit;

| (ii) | undertake further measures to improve the long-term sustainability of the public finances, including the reforms of the pension and health-care systems. |
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(ii)

undertake further measures to improve the long-term sustainability of the public finances, including the reforms of the pension and health-care systems.

Comparison of key macroeconomic and budgetary projections

| | 2004 | 2005 | 2006 | 2007 |
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| Real GDP
  (% change) | CP January 2005 | 4,0 | 3,8 | 3,9 | 4,0 |
| COM October 2004 | 4,0 | 3,6 | 3,8 | n.a. |
| CP May 2004 | 3,6 | 3,7 | 3,8 | 3,9 |
| HICP inflation
  (%) | CP January 2005 (2) | 3,6 | 3,0 | 2,7 | 2,6 |
| COM October 2004 | 3,9 | 3,4 | 3,0 | n.a. |
| CP May 2004 (2) | 3,3 | 3,0 | 2,7 | 2,6 |
| General government balance
  (% of GDP) | CP January 2005 | – 2,1 | – 2,1 | – 1,8 | – 1,1 |
| COM October 2004 | – 2,3 | – 2,2 | – 1,9 | n.a. |
| CP May 2004 | – 1,9 | – 1,8 | – 1,5 | – 0,9 |
| Primary balance
  (% of GDP) | CP January 2005 | – 0,3 | – 0,4 | – 0,2 | 0,4 |
| COM October 2004 | – 0,3 | – 0,2 | – 0,1 | n.a. |
| CP May 2004 | – 0,3 | – 0,4 | – 0,2 | 0,4 |
| Government gross debt
  (% of GDP) | CP January 2005 | 30,2 | 30,7 | 30,9 | 29,7 |
| COM October 2004 | 30,9 | 30,8 | 30,6 | n.a. |
| CP May 2004 | 29,1 | 29,5 | 29,4 | 28,4 |
| Convergence programme (CP); Commission services autumn 2004 economic forecasts (COM) |

2004

2004

2005

2005

2006

2006

2007

2007

Real GDP

(% change)

CP January 2005

CP January 2005

4,0

4,0

3,8

3,8

3,9

3,9

4,0

4,0

COM October 2004

4,0

3,6

3,8

n.a.

CP May 2004

CP May 2004

3,6

3,7

3,8

3,9

HICP inflation

(%)

CP January 2005 (2)

CP January 2005 (2

3,6

3,6

3,0

3,0

2,7

2,7

2,6

2,6

COM October 2004

3,9

3,4

3,0

n.a.

CP May 2004 (2)

CP May 2004 (2

3,3

3,0

2,7

2,6

General government balance

(% of GDP)

CP January 2005

CP January 2005

– 2,1

– 2,1

– 2,1

– 2,1

– 1,8

– 1,8

– 1,1

– 1,1

COM October 2004

– 2,3

– 2,2

– 1,9

n.a.

CP May 2004

CP May 2004

– 1,9

– 1,8

– 1,5

– 0,9

Primary balance

(% of GDP)

CP January 2005

CP January 2005

– 0,3

– 0,3

– 0,4

– 0,4

– 0,2

– 0,2

0,4

0,4

COM October 2004

– 0,3

– 0,2

– 0,1

n.a.

CP May 2004

CP May 2004

– 0,3

– 0,4

– 0,2

0,4

Government gross debt

(% of GDP)

CP January 2005

CP January 2005

30,2

30,2

30,7

30,7

30,9

30,9

29,7

29,7

COM October 2004

30,9

30,8

30,6

n.a.

CP May 2004

CP May 2004

29,1

29,5

29,4

28,4

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

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

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(1)  OJ L 209, 2.8.1997, 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)  CPI inflation for the convergence programme

2

Sources:

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

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

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