# EUR-Lex - 52005SC0227 - EN

Important legal notice

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# 52005SC0227

**Recommendation for a Council opinion in accordance with the third paragraph of Art. 5 of Council Regulation (EC) No 1466/97 of 7 July 1997 On the updated stability programme of Spain, 2004-2008 /* SEC/2005/0227 final */ **

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Brussels, 16.2.2005

SEC(2005) 227 final

Recommendation for a

COUNCIL OPINION

in accordance with the third paragraph of Art. 5 of Council Regulation (EC) No 1466/97 of 7 July 1997 On the updated stability programme of Spain, 2004-2008

(presented by the Commission)

EXPLANATORY MEMORANDUM

Council Regulation (EC) No. 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies[1] stipulates that participating Member States, that is, those which have adopted the single currency, had to submit stability programmes to the Council and the Commission by 1 March 1999. In accordance with Article 5 of this Regulation, the Council had to examine each stability programme based on assessments prepared by the Commission and the Committee set up by Article 114 of the Treaty (the Economic and Financial Committee). On the basis of a recommendation from the Commission and after having consulted the Economic and Financial Committee, the Council delivered an opinion, following its examination of the programme. According to the Regulation, Member States need to submit annual updates of their stability programmes, which may also be examined by the Council in accordance with these same procedures.

The first stability programme of Spain, covering the period 1998-2002, was submitted on 30 December 1998 and assessed by the Council on 15 March 1999[2]. Updates were presented every following year. Spain submitted the most recent update of its stability programme on 23 December 2004. The Commission services have carried out a technical evaluation of this update, taking into account the results of the Commission services Autumn 2004 economic forecasts, and having regard to the code of conduct[3], the commonly agreed methodology for the estimation of potential output and cyclically-adjusted balances, the recommendations in the broad economic policy guidelines for the period 2003-2005 and the principles laid down in the Communication from the Commission to the Council and the European Parliament of 27 November 2002 on strengthening the coordination of budgetary policies[4]. This evaluation warrants the following assessment: Spain submitted its sixth updated stability programme, covering the period 2004-2008, on 23 December 2004. The information provided in the updated programme complies with the data requirements of the revised code of conduct on the content and format of stability and convergence programmes. However, the updated programme was presented three weeks after the 1 December deadline.

- The programme projects GDP growth of 2.6% of GDP in 2004, 2.9% in 2005 and 3.0% thereafter. These are relatively favourable projections for 2005 and 2006 as compared with the Commission services autumn 2004 forecast, which predicts growth at 2.6% and 2.7% respectively. For the outer years of the programme, growth also seems on the high side compared to estimates of trend GDP growth. The macroeconomic scenario in the update projects buoyant domestic demand coupled with a sizeable but narrowing negative contribution to GDP growth of net external demand. The programme’s GDP deflator projections are plausible. The update also includes a “moderate growth” scenario, which projects annual GDP growth of 0.5 percentage points lower than in the reference scenario. While the reference scenario seems on the high side, the moderate growth scenario is considered to be on the low side.

- The budgetary strategy of the Spanish authorities is summarised in the programme by the statement that “the general principle guiding fiscal policy is that of budgetary stability over the full economic cycle”. This general principle could imply the occurrence of budget deficits, in the event of a cyclical slowdown. In this line, the update provides a brief description of the upcoming reform of the General Law on Budgetary Stability that will redefine the concept of stability in terms of the full length of the business cycle. For 2004, a deficit outcome of 0.8% of GDP is estimated. This is due to one-off accounting adjustments consisting of the reclassification into the general government sector of RTVE (the public broadcasting company), as requested by Eurostat, with an impact on the deficit of 0.1% of GDP, and the assumption of RENFE’s (the railway network company) debt, decided by the new government in office since April 2004, with an impact of 0.7% of GDP in the 2004 deficit.

- Over the period 2005-2008, the update targets small, but rising surpluses; from 0.1% of GDP to 0.4% of GDP at the end of the projection period. Since interest payments are expected to decrease only slightly over the programme period (from 2.1% of GDP in 2005 to 1.9% in 2008), the primary surplus is projected to remain fairly stable (from 2.2% of GDP in 2005 to 2.3% in 2008). While the targets for the general government balance are broadly the same as in the previous update, the targeted primary surpluses are slightly less ambitious (by around 0.3 percentage points of GDP). Based on trend GDP calculated by the Commission services from the projected growth rates in the update, and after netting out the effect of the 2004 one-off accounting adjustments, the cyclically-adjusted budget balance remains at between 0.2% and 0.5% of GDP throughout the programme period.

- The risks attached to the budgetary targets seem broadly balanced. In particular, while the budgetary projections are built upon somewhat favourable growth assumptions, the size of the consolidation envisaged for the entire period is prudent and the update confirms the commitment of the current government to budgetary stability.

- In view of this risk assessment, the budgetary stance in the programme is sufficient to maintain the Stability and Growth Pact’s medium-term objective of a position of close-to-balance throughout the period. It also provides a sufficient safety margin against breaching the 3% of GDP deficit threshold with normal macroeconomic fluctuations in each year.

- According to the update, the debt ratio will decline steadily from 49% in 2004 to 40% in 2008, well below the 60% of GDP reference value. The pace of debt reduction is plausible compared with the Commission services autumn 2004 forecast. The main contribution to debt reduction stems from sustained primary surpluses. A persistent debt-increasing stock-flow adjustment, which adds around 0.7 percentage point to the debt ratio annually is not explained in the programme.

- The programme reviews the government’s structural reform programme which focuses on increasing productivity growth and strengthening social cohesion. Specifically, it aims to enhance productivity through increased expenditure on R&D, innovation, education and infrastructure. The programme also outlines measures to promote job creation and participation as well as to reduce labour market segmentation. The government plans a reform and simplification of personal and corporate income taxes, starting already this year, but the programme provides no details on this. The aim of this reform is to enhance the neutrality and efficiency of the tax system. In addition, the government wants to take steps towards a better match between contributory efforts and pension benefits while raising the lowest pensions. However, the impact of this potential reform on public finances in the long term, remains unclear.

- Spain appears to be in a relatively favourable position with regard to the long-term sustainability of the public finances, despite the projected budgetary cost of an ageing population. Reforms aimed at enhancing long-term sustainability are geared towards increasing labour market participation, maintaining a sound budgetary position which enables debt reduction, and making a more sustainable pension system that would reduce the budgetary impact of ageing. The strategy outlined in the programme is mainly based on the budgetary effects of the reforms, notably the “Pacto de Toledo”, and the planned debt reduction enabled by the target of sustaining budgetary surpluses. However, recommendations agreed within the “Pacto de Toledo”, especially the reform of the public pension system as also recommended in the broad economic policy guidelines, have not yet been fully translated into a reform agenda. Resolutely implementing such measures would prevent the emergence of unsustainable trends, in public finances in the long run, hence contributing to the achievement of sustainability of the public finances over the long-run.

- 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. In particular, as regards the recommended reform of the public pension system to ensure the long-term viability of the system, the reform agenda to align contributions and benefits more closely is not yet defined.

- In view of the above assessment, it would be appropriate for Spain to prevent the emergence of unsustainable trends in public finances in the long run, in particular through a major reform of the pension system.

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Based on this assessment, the Commission has adopted the attached recommendation for a Council Opinion on the updated stability programme of Spain and is forwarding it to the Council.

Recommendation for a

COUNCIL OPINION

in accordance with the third paragraph of Art. 5 of Council Regulation (EC) No 1466/97 of 7 July 1997 On the updated stability programme of Spain, 2004-2008

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[5], and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On [8 March 2005] the Council examined the updated stability programme of Spain, which covers the period 2004-2008. The programme complies with the data requirements of the “code of conduct on the content and format of stability and convergence programmes”. However, the updated programme was presented three weeks beyond the 1 December deadline set in the code of conduct.

The macroeconomic scenario underlying the programme envisages real GDP growth to pick up from 2.6% in 2004 to 2.9% in 2005 and to average 3.0% over the rest of the programme period. On the basis of currently available information, this scenario seems to reflect rather favourable growth assumptions. The update also considers a “moderate scenario” that projects annual GDP growth of 2.4% in 2005 and 2.5% thereafter. While the baseline scenario can be considered as relatively optimistic, the moderate growth scenario is on the low side. The programme’s projections for inflation (based on the GDP deflator) appear realistic.

According to the update, the general principle guiding fiscal policy is that of budgetary stability over the full economic cycle. This general principle could lead to budgetary deficits in the event of a cyclical slowdown, although the update does not target any deficit positions between 2005 and 2008 after the temporary deficit recorded in 2004, which reflected the impact of accounting adjustments. The update targets small, but rising surpluses; from 0.1% of GDP in 2005 to 0.4% of GDP at the end of the projection period. Since interest payments are expected to decrease only slightly over the programme period, the primary surplus is projected to remain fairly stable at around 21⁄4% of GDP. While the targets for the general government balance are broadly the same as in the previous update, the targeted primary surpluses are slightly less ambitious, which reflects higher interest payments projected in the 2003 update. Based on trend GDP calculated by the Commission services[6] from the projected growth rates in the update, and after netting out the effect of the 2004 one-off accounting adjustments, the cyclically-adjusted budget balance remains between 0.2% and 0.5% of GDP throughout the programme period.

The risks to the budgetary projections in the programme appear broadly balanced. In particular, although growth assumptions are somewhat favourable, the risk of sizeable deviations from the programme’s objectives is rather limited due to government‘s cautiousness when setting the targets, generally overachieved in the previous years.

In view of this risk assessment, the budgetary stance in the programme is sufficient to maintain the Stability and Growth Pact’s medium-term objective of a position of close-to-balance throughout the programme period (with a temporary deviation in 2004 related to the one-off accounting adjustments). It also provides a sufficient safety margin against breaching the 3% of GDP deficit threshold with normal macroeconomic fluctuations over the period covered in the update.

The debt ratio is estimated to have declined to 49.1% of GDP in 2004, well below the 60% of GDP Treaty reference value. The programme projects the debt ratio to further decline by 9 percentage points over the programme period, mainly on account of primary surpluses above 2% of GDP.

The budgetary strategy outlined in the programme puts Spain in a relatively favourable position with regard to long-term sustainability of the public finances, in spite of the projected budgetary costs of an ageing population. However, given the risks surrounding such long-term expenditure projections and the large increase of pension expenditure projected in the very long term, current policies need to be supplemented by measures to prevent the emergence of unsustainable trends in public finances in the long run, in particular through a comprehensive reform of the pension system in line with the recommendations of the multi-partisan agreement “Pacto de Toledo”.

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. In particular, as regards the recommended reform of the public pension system to ensure the long-term viability of the system has not been implemented yet.

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In view of the above assessment, the Council is of the opinion that Spain should adopt measures to prevent the emergence of unsustainable trends in public finances in the long run, in particular through a major reform of the pension system.

Comparison of key macroeconomic and budgetary projections

2004 | 2005 | 2006 | 2007 | 2008 |

Real GDP (% change) | SP Dec 2004 | 2.6 | 2.9 | 3.0 | 3.0 | 3.0 |

COM Oct 2004 | 2.6 | 2.6 | 2.7 | n.a. | n.a. |

SP Jan 2004 | 3.0 | 3.0 | 3.0 | 3.0 | n.a. |

HICP inflation2 (%) | SP Dec 2004 | 3.8 | 3.7 | 3.5 | 3.2 | 2.8 |

COM Oct 2004 | 3.1 | 2.9 | 2.5 | n.a. | n.a. |

SP Jan 2004 | 2.9 | 2.6 | 2.6 | 2.6 | n.a. |

General government balance (% of GDP) | SP Dec 2004 | -0.8 | 0.1 | 0.2 | 0.4 | 0.4 |

COM Oct 2004 | -0.6 | -0.1 | 0.0 | n.a. | n.a. |

SP Jan 2004 | 0.0 | 0.1 | 0.2 | 0.3 | n.a. |

Primary balance (% of GDP) | SP Dec 2004 | 1.5 | 2.2 | 2.2 | 2.3 | 2.3 |

COM Oct 2004 | 1.7 | 2.1 | 2.0 | n.a. | n.a. |

SP Jan 2004 | 2.6 | 2.5 | 2.6 | 2.6 | n.a. |

Cyclically-adjusted balance (% of GDP) | SP Dec 20041 | -0.7 | 0.2 | 0.3 | 0.5 | 0.4 |

COM Oct 2004 | -0.7 | -0.1 | 0.0 | n.a. | n.a. |

SP Jan 20041 | 0.1 | 0.1 | 0.2 | 0.3 | n.a. |

Government gross debt (% of GDP) | SP Dec 2004 | 49.1 | 46.7 | 44.3 | 42.0 | 40.0 |

COM Oct 2004 | 48.2 | 45.5 | 42.9 | n.a. | n.a. |

SP Jan 2004 | 46.6 | 47.7 | 45.7 | 43.8 | n.a. |

Note: 1 The commonly agreed methodology based on the production function approach is not yet applied to Spain, pending the resolution of estimation problems. Therefore, cyclically-adjusted balances are calculated by Commission services based on the Hodrick-Prescott filter methodology from the information provided in the programme. 2 Inflation based on the GDP deflator for the stability programmes. Sources: Stability programme (SP); Commission services autumn 2004 economic forecasts (COM); Commission services calculations. |

[1] OJ L 209, 2.8.1997. All the documents referred to in this text can be found at the following website:

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

[2] OJ C 124, 5.5.1999.

[3] Revised Opinion of the Economic and Financial Committee on the content and format of stability and convergence programmes, endorsed by the ECOFIN Council on 10.7.2001.

[4] COM(2002) 668, 27.11.2002.

[5] OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website:

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

[6] The commonly agreed methodology based on the production function approach is not yet applied to Spain, pending the resolution of estimation problems. Therefore, cyclically-adjusted balances are calculated based on the Hodrick-Prescott filter methodology.