# C_2007072EN.01001701.xml

| 29.3.2007 | EN | Official Journal of the European Union | C 72/17 |
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29.3.2007

EN

Official Journal of the European Union

C 72/17

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COUNCIL OPINION

COUNCIL OPINION

of 27 February 2007

on the updated convergence programme of Sweden, 2006-2009

(2007/C 72/05)

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 27 February 2007 the Council examined the updated convergence programme of Sweden, which covers the period 2006 to 2009. |
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(1)

On 27 February 2007 the Council examined the updated convergence programme of Sweden, which covers the period 2006 to 2009.

| (2) | The macroeconomic scenario underlying the programme envisages that real GDP growth will slow from 4,0 % in 2006 to 3,0 % on average over the rest of the programme period, although it will remain at close to potential. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions, with growth in 2006 having possibly been even higher. The programme's projections for inflation also appear realistic. |
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(2)

The macroeconomic scenario underlying the programme envisages that real GDP growth will slow from 4,0 % in 2006 to 3,0 % on average over the rest of the programme period, although it will remain at close to potential. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions, with growth in 2006 having possibly been even higher. The programme's projections for inflation also appear realistic.

| (3) | For 2006, the general government surplus is estimated at 2,8 % of GDP in the Commission services' autumn 2006 forecast, against a projected outturn of 0,9 % in the previous update of the convergence programme; the difference mainly reflects a base effect from the much higher-than-expected surplus in 2005. On the basis of available cash data it appears that, due both to lower primary expenditure and higher tax revenues, the 2006 surplus is likely to have been higher than the Commission services' forecast. |
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(3)

For 2006, the general government surplus is estimated at 2,8 % of GDP in the Commission services' autumn 2006 forecast, against a projected outturn of 0,9 % in the previous update of the convergence programme; the difference mainly reflects a base effect from the much higher-than-expected surplus in 2005. On the basis of available cash data it appears that, due both to lower primary expenditure and higher tax revenues, the 2006 surplus is likely to have been higher than the Commission services' forecast.

| (4) | The updated programme confirms that a budget surplus of 2 % of GDP on average over the cycle remains the key guiding fiscal rule, supported by multi-annual expenditure ceilings. In the spring 2007 Fiscal Policy Bill, the Government will re-evaluate the present target for the general government surplus to take into account Eurostat's decision on the classification of funded second-pillar pension schemes. (2) After the expiry of the transition period for implementing this decision (spring 2007), the surplus will be lower by approximately 1 % of GDP each year and the gross debt-to-GDP ratio will be revised upward by about 0,5 % of GDP. The budgetary strategy presented in the update foresees a decline in the surplus in 2007 (from 3,0 % of GDP in 2006 to 2,4 %) and thereafter projects a progressive recovery (to 3,1 % in 2009); the primary surplus follows a similar path. Both expenditure- and revenue-to-GDP ratios are on a gradually declining trend throughout the programme period. The strategy is somewhat backloaded, with significant tax cuts in 2007 being only partially financed. Compared with the previous update, the projected path for the surplus (an initial decline followed by gradual recovery) is similar, but with higher net lending positions throughout the programme period. |
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(4)

The updated programme confirms that a budget surplus of 2 % of GDP on average over the cycle remains the key guiding fiscal rule, supported by multi-annual expenditure ceilings. In the spring 2007 Fiscal Policy Bill, the Government will re-evaluate the present target for the general government surplus to take into account Eurostat's decision on the classification of funded second-pillar pension schemes. (2) After the expiry of the transition period for implementing this decision (spring 2007), the surplus will be lower by approximately 1 % of GDP each year and the gross debt-to-GDP ratio will be revised upward by about 0,5 % of GDP. The budgetary strategy presented in the update foresees a decline in the surplus in 2007 (from 3,0 % of GDP in 2006 to 2,4 %) and thereafter projects a progressive recovery (to 3,1 % in 2009); the primary surplus follows a similar path. Both expenditure- and revenue-to-GDP ratios are on a gradually declining trend throughout the programme period. The strategy is somewhat backloaded, with significant tax cuts in 2007 being only partially financed. Compared with the previous update, the projected path for the surplus (an initial decline followed by gradual recovery) is similar, but with higher net lending positions throughout the programme period.

2

| (5) | The structural surplus (i.e. the cyclically-adjusted surplus net of one-off and other temporary measures), calculated according to the commonly-agreed methodology, is projected to remain above 2 % of GDP throughout the programme period, referring to the need to ensure the long-term sustainability of public finances. As in the previous update of the convergence programme, the medium-term objective (MTO) for the budgetary position presented in the programme corresponds to the above-mentioned objective of a budgetary surplus of 2 % of GDP on average over the business cycle (i.e. in structural terms), which the programme plans to maintain throughout the programme period. As the MTO is significantly more demanding than the minimum benchmark (estimated at a deficit of around 1 % of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO is also significantly more demanding than implied by the debt ratio and average potential output growth in the long term. |
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(5)

The structural surplus (i.e. the cyclically-adjusted surplus net of one-off and other temporary measures), calculated according to the commonly-agreed methodology, is projected to remain above 2 % of GDP throughout the programme period, referring to the need to ensure the long-term sustainability of public finances. As in the previous update of the convergence programme, the medium-term objective (MTO) for the budgetary position presented in the programme corresponds to the above-mentioned objective of a budgetary surplus of 2 % of GDP on average over the business cycle (i.e. in structural terms), which the programme plans to maintain throughout the programme period. As the MTO is significantly more demanding than the minimum benchmark (estimated at a deficit of around 1 % of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO is also significantly more demanding than implied by the debt ratio and average potential output growth in the long term.

| (6) | The risks to the budgetary projections in the programme appear broadly balanced from 2007. The macroeconomic outlook and the tax revenue projections seem to reflect plausible assumptions, in spite of some uncertainty on the future performance of capital gains taxes. The expenditure targets are supported by a good track record owing to the above-mentioned expenditure ceilings. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced from 2007. The macroeconomic outlook and the tax revenue projections seem to reflect plausible assumptions, in spite of some uncertainty on the future performance of capital gains taxes. The expenditure targets are supported by a good track record owing to the above-mentioned expenditure ceilings.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO throughout the programme period, as envisaged in the programme. In addition, it provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations during the programme period. There is a risk, however, that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2007, during which good times are expected to continue. This would not be in line with the Stability and Growth Pact. |
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(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO throughout the programme period, as envisaged in the programme. In addition, it provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations during the programme period. There is a risk, however, that the fiscal policy stance implied by the programme may turn out to be pro-cyclical in 2007, during which good times are expected to continue. This would not be in line with the Stability and Growth Pact.

| (8) | Government gross debt is estimated to have fallen to 46,5 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio will continue following a downward path, falling by 13,5 percentage points over the programme period. |
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(8)

Government gross debt is estimated to have fallen to 46,5 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio will continue following a downward path, falling by 13,5 percentage points over the programme period.

| (9) | The long-term budgetary impact of ageing in Sweden is lower than the EU average, with pension expenditure projected to remain relatively stable as a share of GDP over the long term, influenced by the considerable expenditure-reducing impact of the reform of the pension system. The initial budgetary position with a high primary surplus contributes to the reduction of gross debt and the accumulation of assets. Maintaining sound government finances with continued surpluses as planned would contribute to limiting risks to the sustainability of public finances. Overall, Sweden appears to be at low risk with regard to the sustainability of public finances. |
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(9)

The long-term budgetary impact of ageing in Sweden is lower than the EU average, with pension expenditure projected to remain relatively stable as a share of GDP over the long term, influenced by the considerable expenditure-reducing impact of the reform of the pension system. The initial budgetary position with a high primary surplus contributes to the reduction of gross debt and the accumulation of assets. Maintaining sound government finances with continued surpluses as planned would contribute to limiting risks to the sustainability of public finances. Overall, Sweden appears to be at low risk with regard to the sustainability of public finances.

| (10) | The convergence programme contains a qualitative assessment of the overall impact of the November 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme and its budgetary projections seem to take into account the public finance implications of the actions outlined in the national reform programme. The measures in the area of public finances envisaged in the convergence programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage the implementation of measures to increase the labour supply. |
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(10)

The convergence programme contains a qualitative assessment of the overall impact of the November 2006 implementation report of the national reform programme within the medium-term fiscal strategy. In addition, it provides systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme and its budgetary projections seem to take into account the public finance implications of the actions outlined in the national reform programme. The measures in the area of public finances envisaged in the convergence programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage the implementation of measures to increase the labour supply.

| (11) | The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. |
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(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.

| (12) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (3). |
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(12)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (3).

3

The overall conclusion is that the medium-term budgetary position is sound and the budgetary strategy provides a good example of fiscal policies conducted in compliance with the Stability and Growth Pact. However, it will be important to contain the risk of pro-cyclicality by ensuring that a deterioration of the structural budgetary position in 2007, which is linked to structural reforms aimed at encouraging greater participation in the labour market, will not spill over to subsequent years.

Comparison of key macroeconomic and budgetary projections (4)

4

| | 2005 | 2006 | 2007 | 2008 | 2009 |
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| Real GDP
  (% change) | CP Dec 2006 | 2,7 | 4,0 | 3,3 | 3,1 | 2,7 |
| COM Nov 2006 | 2,7 | 4,0 | 3,3 | 3,1 | n.a. |
| CP Dec 2005 | 2,4 | 3,1 | 2,8 | 2,3 | n.a. |
| HICP inflation (5)

  (%) | CP Dec 2006 | 1,3 | 1,9 | 2,2 | 1,5 | 1,9 |
| COM Nov 2006 | 0,8 | 1,5 | 1,6 | 1,8 | n.a. |
| CP Dec 2005 | 1,5 | 1,5 | 2,0 | 2,0 | n.a. |
| Output gap
  (% of potential GDP) | CP Dec 2006
   (6) | – 0,7 | 0,0 | 0,3 | 0,3 | 0,3 |
| COM Nov 2006 (10) | – 0,5 | 0,2 | 0,5 | 0,6 | n.a. |
| CP Dec 2005
   (6) | – 0,4 | – 0,1 | 0,1 | – 0,1 | n.a. |
| General government balance
  (% of GDP) | CP Dec 2006 | 3,0 | 3,0 | 2,4 | 2,7 | 3,1 |
| COM Nov 2006 | 3,0 | 2,8 | 2,4 | 2,5 | n.a. |
| CP Dec 2005 | 1,6 | 0,9 | 1,2 | 1,7 | n.a. |
| Primary balance
  (% of GDP) | CP Dec 2006 | 4,6 | 4,5 | 4,1 | 4,2 | 4,6 |
| COM Nov 2006 | 4,6 | 4,5 | 4,1 | 4,3 | n.a. |
| CP Dec 2005 | 3,2 | 2,5 | 3,0 | 3,6 | n.a. |
| Cyclically-adjusted balance
  (% of GDP) | CP Dec 2006
   (6) | 3,4 | 3,0 | 2,2 | 2,5 | 3,0 |
| COM Nov 2006 | 3,3 | 2,7 | 2,1 | 2,1 | n.a. |
| CP Dec 2005
   (6) | 1,8 | 0,9 | 1,1 | 1,7 | n.a. |
| Structural balance (7)

  (% of GDP) | CP Dec 2006
   (8) | 3,0 | 3,0 | 2,2 | 2,5 | 3,0 |
| COM Nov 2006 (9) | 2,9 | 2,7 | 2,1 | 2,1 | n.a. |
| CP Dec 2005 | 1,8 | 0,9 | 1,1 | 1,7 | n.a. |
| Government gross debt
  (% of GDP) | CP Dec 2006 | 50,3 | 46,5 | 41,5 | 37,4 | 33,0 |
| COM Nov 2006 | 50,4 | 46,7 | 42,6 | 38,7 | n.a. |
| CP Dec 2005 | 50,9 | 49,4 | 47,8 | 46,0 | n.a. |
| Source:

  Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations |

2005

2006

2007

2008

2009

Real GDP

(% change)

CP Dec 2006

CP Dec 2006

2,7

2,7

4,0

4,0

3,3

3,3

3,1

3,1

2,7

2,7

COM Nov 2006

2,7

4,0

3,3

3,1

n.a.

CP Dec 2005

CP Dec 2005

2,4

2,4

3,1

3,1

2,8

2,8

2,3

2,3

n.a.

n.a.

HICP inflation (5)

5

(%)

CP Dec 2006

CP Dec 2006

1,3

1,3

1,9

1,9

2,2

2,2

1,5

1,5

1,9

1,9

COM Nov 2006

0,8

1,5

1,6

1,8

n.a.

CP Dec 2005

CP Dec 2005

1,5

1,5

1,5

1,5

2,0

2,0

2,0

2,0

n.a.

n.a.

Output gap

(% of potential GDP)

CP Dec 2006
   (6)

CP Dec 2006

6

– 0,7

– 0,7

0,0

0,0

0,3

0,3

0,3

0,3

0,3

0,3

COM Nov 2006 (10)

10

– 0,5

0,2

0,5

0,6

n.a.

CP Dec 2005
   (6)

CP Dec 2005

6

– 0,4

– 0,4

– 0,1

– 0,1

0,1

0,1

– 0,1

– 0,1

n.a.

n.a.

General government balance

(% of GDP)

CP Dec 2006

CP Dec 2006

3,0

3,0

3,0

3,0

2,4

2,4

2,7

2,7

3,1

3,1

COM Nov 2006

3,0

2,8

2,4

2,5

n.a.

CP Dec 2005

CP Dec 2005

1,6

1,6

0,9

0,9

1,2

1,2

1,7

1,7

n.a.

n.a.

Primary balance

(% of GDP)

CP Dec 2006

CP Dec 2006

4,6

4,6

4,5

4,5

4,1

4,1

4,2

4,2

4,6

4,6

COM Nov 2006

4,6

4,5

4,1

4,3

n.a.

CP Dec 2005

CP Dec 2005

3,2

3,2

2,5

2,5

3,0

3,0

3,6

3,6

n.a.

n.a.

Cyclically-adjusted balance

(% of GDP)

CP Dec 2006
   (6)

CP Dec 2006

6

3,4

3,4

3,0

3,0

2,2

2,2

2,5

2,5

3,0

3,0

COM Nov 2006

3,3

2,7

2,1

2,1

n.a.

CP Dec 2005
   (6)

CP Dec 2005

6

1,8

1,8

0,9

0,9

1,1

1,1

1,7

1,7

n.a.

n.a.

Structural balance (7)

7

(% of GDP)

CP Dec 2006
   (8)

CP Dec 2006

8

3,0

3,0

3,0

3,0

2,2

2,2

2,5

2,5

3,0

3,0

COM Nov 2006 (9)

9

2,9

2,7

2,1

2,1

n.a.

CP Dec 2005

CP Dec 2005

1,8

1,8

0,9

0,9

1,1

1,1

1,7

1,7

n.a.

n.a.

Government gross debt

(% of GDP)

CP Dec 2006

CP Dec 2006

50,3

50,3

46,5

46,5

41,5

41,5

37,4

37,4

33,0

33,0

COM Nov 2006

50,4

46,7

42,6

38,7

n.a.

CP Dec 2005

CP Dec 2005

50,9

50,9

49,4

49,4

47,8

47,8

46,0

46,0

n.a.

n.a.

Source:

Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

Convergence programme (CP); Commission services' autumn 2006 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)  See Eurostat News Releases No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004.

2

(3)  Missing required data include inter alia certain deflators, the tax burden and the growth of relevant foreign markets.

3

(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 according to the updated programme would be 2,0 % of GDP in 2005, 2,0 % in 2006, 1,3 % in 2007, 1,6 % in 2008 and 2,0 % in 2009, while government gross debt would be 50,9 % of GDP in 2005, 47,0 % in 2006, 42,0 % in 2007, 37,9 % in 2008 and 33,5 % in 2009.

4

(5)  The CP inflation figures are estimated on a December-December basis, whereas the Commission figures are annual averages. This explains the difference between the Commission and HICP figures for 2005 and 2006. The programme also assumes that the HICP will follow UND1X (national consumer price index excluding changes in indirect taxes, subsidies and mortgage interest expenditure) in 2008 and 2009. However, HICP is expected to be 0,5 pp. higher than UND1X inflation in 2007, thereby accentuating the programme's projected drop in HICP inflation in 2008.

5

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

6

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

7

(8)  One-off and other temporary measures taken from the programme (0,4 % of GDP in 2005; deficit-reducing).

8

(9)  One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (0,4 % of GDP in 2005; deficit-reducing).

9

(10)  Based on estimated potential growth of 2,6 %, 3,2 %, 3,1 % and 3,0 % respectively in the period 2005-2008.

10

Source:

Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

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