# C_2007089EN.01000701.xml

| 24.4.2007 | EN | Official Journal of the European Union | C 89/7 |
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24.4.2007

EN

Official Journal of the European Union

C 89/7

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COUNCIL OPINION

COUNCIL OPINION

of 27 March 2007

on the updated stability programme of Spain, 2006-2009

(2007/C 89/03)

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 5(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 March 2007 the Council examined the updated stability programme of Spain, which covers the period 2006 to 2009 (2). |
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(1)

On 27 March 2007 the Council examined the updated stability programme of Spain, which covers the period 2006 to 2009 (2).

2

| (2) | The macroeconomic scenario underlying the programme envisages that real GDP growth will decrease from 3,8 % in 2006 to 3,3 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. The programme's projections for inflation also appear realistic. The projected inflation differential with the euro area, although decreasing, is still significant. While there may be some upside risks in the short term, there might also be some downside risks to this scenario in the medium term, associated to the imbalances of the economy, namely the increasing household indebtedness, the widening current account deficit and the possibility of the extended residential construction boom coming to an end more rapidly than foreseen in the programme. |
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(2)

The macroeconomic scenario underlying the programme envisages that real GDP growth will decrease from 3,8 % in 2006 to 3,3 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. The programme's projections for inflation also appear realistic. The projected inflation differential with the euro area, although decreasing, is still significant. While there may be some upside risks in the short term, there might also be some downside risks to this scenario in the medium term, associated to the imbalances of the economy, namely the increasing household indebtedness, the widening current account deficit and the possibility of the extended residential construction boom coming to an end more rapidly than foreseen in the programme.

| (3) | For 2006, the Commission services' autumn 2006 forecast estimated the general government surplus at 1,5 % of GDP, fully in line with the updated stability programme, but against a target of 0,9 % of GDP set in the previous update of the stability programme. This positive outcome is the result of higher-than-expected revenues stemming from strong job creation and buoyant corporate profits, which are estimated to have boosted direct tax revenues well above nominal GDP growth. |
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(3)

For 2006, the Commission services' autumn 2006 forecast estimated the general government surplus at 1,5 % of GDP, fully in line with the updated stability programme, but against a target of 0,9 % of GDP set in the previous update of the stability programme. This positive outcome is the result of higher-than-expected revenues stemming from strong job creation and buoyant corporate profits, which are estimated to have boosted direct tax revenues well above nominal GDP growth.

| (4) | The update aims at (i) maintaining macroeconomic and budgetary stability and (ii) fostering productivity by increasing infrastructure, human and technological capital. The general government surplus is envisaged to decline from 1,4 % of GDP in 2006 to about 1 % in 2009. The time profile of the primary surplus is similar, falling from 3 % of GDP in 2006 to 2

  % in 2009. While revenues should decline by 0,2 % of GDP over the programme period, primary expenditures should increase by around 0,5 % of GDP, partly offset by a decline in the interest burden. The previous update projected smaller surpluses against a broadly similar macroeconomic outlook. The difference between the two updates is to be found in a much better 2006 surplus outcome than projected one year earlier, which is projected to have favourable carryover effects over the programme period. |
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(4)

Formula

| (5) | The structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to marginally decline from around 1

  % of GDP in 2006 to 1

  % at the end of the programme period. As in the previous update of the stability programme, the medium-term objective (MTO) for the budgetary position presented in the programme is a balanced position in structural terms, which the programme plans to maintain by a large margin throughout the programme period. As the MTO is 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 lies within the range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the code of conduct and is more demanding than implied by the debt ratio and average potential output growth in the long term. |
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(5)

Formula

Formula

Formula

| (6) | The risks to the budgetary projections in the programme appear broadly balanced. The macroeconomic scenario underlying the update is plausible and revenue projections seem to reflect cautious assumptions. On the expenditure side, there is a risk of some expenditure overruns (at the level of regional authorities) if past trends in education and health care are confirmed. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced. The macroeconomic scenario underlying the update is plausible and revenue projections seem to reflect cautious assumptions. On the expenditure side, there is a risk of some expenditure overruns (at the level of regional authorities) if past trends in education and health care are confirmed.

| (7) | In view of this risk assessment, the budgetary stance 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 in every year. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact. |
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(7)

In view of this risk assessment, the budgetary stance 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 in every year. The fiscal policy stance implied by the programme is in line with the Stability and Growth Pact.

| (8) | Government gross debt is estimated to have declined below 40 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The update projects the debt ratio to further decline by 8 percentage points over the programme period. |
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(8)

Government gross debt is estimated to have declined below 40 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The update projects the debt ratio to further decline by 8 percentage points over the programme period.

| (9) | The long-term budgetary impact of ageing in Spain is well above the EU average, mainly as a result of a relatively high increase in pension expenditure as a share of GDP over the coming decades. The initial budgetary position, improved compared with 2005, contributes to easing the projected long-term budgetary impact of ageing populations, but is not sufficient to fully cover the substantial increase in expenditure due to the ageing of the population. Maintaining high primary surpluses over the medium term and implementing further measures aimed at curbing the significant increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances. Overall, Spain appears to be at medium risk with regard to the sustainability of public finances. |
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(9)

The long-term budgetary impact of ageing in Spain is well above the EU average, mainly as a result of a relatively high increase in pension expenditure as a share of GDP over the coming decades. The initial budgetary position, improved compared with 2005, contributes to easing the projected long-term budgetary impact of ageing populations, but is not sufficient to fully cover the substantial increase in expenditure due to the ageing of the population. Maintaining high primary surpluses over the medium term and implementing further measures aimed at curbing the significant increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances. Overall, Spain appears to be at medium risk with regard to the sustainability of public finances.

| (10) | The stability programme contains a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. It provides some information, although not in a systematic manner, 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 stability programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage the gradual increase of public R&D expenditures and of infrastructure investments. |
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(10)

The stability programme contains a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. It provides some information, although not in a systematic manner, 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 stability programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage the gradual increase of public R&D expenditures and of infrastructure investments.

| (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 provides all required and most of the 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 provides all required and most of the optional data (3).

3

The Council considers 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. Maintaining a strong budgetary position, thus avoiding an expansionary fiscal stance, is important in the light of large and rising external imbalances and the existing inflation differential with the euro area.

In view of the above assessment and in particular the projected increase in age-related expenditure, the Council invites Spain to further improve the long term sustainability of public finances with additional measures to contain the future impact of ageing on spending programmes.

Comparison of key macro economic and budgetary projections

| | 2005 | 2006 | 2007 | 2008 | 2009 |
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| Real GDP
  (% change) | SP Dec 2006 | 3,5 | 3,8 | 3,4 | 3,3 | 3,3 |
| COM Nov 2006 (10) | 3,5 | 3,8 | 3,4 | 3,3 | n.a. |
| SP Dec 2005 | 3,4 | 3,3 | 3,2 | 3,2 | n.a. |
| HICP inflation  (9)(%) | SP Dec 2006
   (9) | 3,4 | 3,5 | 2,7 | 2,6 | 2,5 |
| COM Nov 2006 | 3,4 | 3,6 | 2,8 | 2,7 | n.a. |
| SP Dec 2005
   (9) | 4,2 | 3,5 | 3,3 | 3,2 | n.a. |
| Output gap
  (% of potential GDP) | SP Dec 2006
   (4) | 0,9 | 0,9 | 1,2 | 1,5 | 1,6 |
| COM Nov 2006 (8) | 0,8 | 0,9 | 1,1 | 1,3 | n.a. |
| SP Dec 2005
   (4) | 0,5 | 0,8 | 1,1 | 0,7 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2006 | 1,1 | 1,4 | 1,0 | 0,9 | 0,9 |
| COM Nov 2006 | 1,1 | 1,5 | 1,1 | 0,9 | n.a. |
| SP Dec 2005 | 1,0 | 0,9 | 0,7 | 0,6 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2006 | 2,9 | 3,0 | 2,5 | 2,3 | 2,2 |
| COM Nov 2006 | 2,9 | 3,1 | 2,7 | 2,3 | n.a. |
| SP Dec 2005 | 2,8 | 2,6 | 2,2 | 2,0 | n.a. |
| Cyclically-adjusted balance
  (% of GDP) | SP Dec 2006
   (4) | 1,5 | 1,8 | 1,5 | 1,6 | 1,6 |
| COM Nov 2006 | 1,5 | 1,9 | 1,6 | 1,4 | n.a. |
| SP Dec 2005
   (4) | 1,2 | 1,2 | 1,2 | 0,9 | n.a. |
| Structural balance (5)

  (% of GDP) | SP Dec 2006
   (6) | 1,5 | 1,8 | 1,5 | 1,6 | 1,6 |
| COM Nov 2006 (7) | 1,5 | 1,9 | 1,6 | 1,4 | n.a. |
| SP Dec 2005 | 1,2 | 1,2 | 1,2 | 0,9 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2006 | 43,1 | 39,7 | 36,6 | 34,3 | 32,2 |
| COM Nov 2006 | 43,1 | 39,7 | 37,0 | 34,7 | n.a. |
| SP Dec 2005 | 43,1 | 40,3 | 38,0 | 36,0 | n.a. |
| Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations |

2005

2006

2007

2008

2009

Real GDP

(% change)

SP Dec 2006

SP Dec 2006

3,5

3,5

3,8

3,8

3,4

3,4

3,3

3,3

3,3

3,3

COM Nov 2006 (10)

10

3,5

3,8

3,4

3,3

n.a.

SP Dec 2005

SP Dec 2005

3,4

3,4

3,3

3,3

3,2

3,2

3,2

3,2

n.a.

n.a.

HICP inflation  (9)(%)

9

SP Dec 2006
   (9)

SP Dec 2006

9

3,4

3,4

3,5

3,5

2,7

2,7

2,6

2,6

2,5

2,5

COM Nov 2006

3,4

3,6

2,8

2,7

n.a.

SP Dec 2005
   (9)

SP Dec 2005

9

4,2

4,2

3,5

3,5

3,3

3,3

3,2

3,2

n.a.

n.a.

Output gap

(% of potential GDP)

SP Dec 2006
   (4)

SP Dec 2006

4

0,9

0,9

0,9

0,9

1,2

1,2

1,5

1,5

1,6

1,6

COM Nov 2006 (8)

8

0,8

0,9

1,1

1,3

n.a.

SP Dec 2005
   (4)

SP Dec 2005

4

0,5

0,5

0,8

0,8

1,1

1,1

0,7

0,7

n.a.

n.a.

General government balance

(% of GDP)

SP Dec 2006

SP Dec 2006

1,1

1,1

1,4

1,4

1,0

1,0

0,9

0,9

0,9

0,9

COM Nov 2006

1,1

1,5

1,1

0,9

n.a.

SP Dec 2005

SP Dec 2005

1,0

1,0

0,9

0,9

0,7

0,7

0,6

0,6

n.a.

n.a.

Primary balance

(% of GDP)

SP Dec 2006

SP Dec 2006

2,9

2,9

3,0

3,0

2,5

2,5

2,3

2,3

2,2

2,2

COM Nov 2006

2,9

3,1

2,7

2,3

n.a.

SP Dec 2005

SP Dec 2005

2,8

2,8

2,6

2,6

2,2

2,2

2,0

2,0

n.a.

n.a.

Cyclically-adjusted balance

(% of GDP)

SP Dec 2006
   (4)

SP Dec 2006

4

1,5

1,5

1,8

1,8

1,5

1,5

1,6

1,6

1,6

1,6

COM Nov 2006

1,5

1,9

1,6

1,4

n.a.

SP Dec 2005
   (4)

SP Dec 2005

4

1,2

1,2

1,2

1,2

1,2

1,2

0,9

0,9

n.a.

n.a.

Structural balance (5)

5

(% of GDP)

SP Dec 2006
   (6)

SP Dec 2006

6

1,5

1,5

1,8

1,8

1,5

1,5

1,6

1,6

1,6

1,6

COM Nov 2006 (7)

7

1,5

1,9

1,6

1,4

n.a.

SP Dec 2005

SP Dec 2005

1,2

1,2

1,2

1,2

1,2

1,2

0,9

0,9

n.a.

n.a.

Government gross debt

(% of GDP)

SP Dec 2006

SP Dec 2006

43,1

43,1

39,7

39,7

36,6

36,6

34,3

34,3

32,2

32,2

COM Nov 2006

43,1

39,7

37,0

34,7

n.a.

SP Dec 2005

SP Dec 2005

43,1

43,1

40,3

40,3

38,0

38,0

36,0

36,0

n.a.

n.a.

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

Stability programme (SP); 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)  The update was submitted 3 weeks beyond the 1 December deadline set in the code of conduct.

2

(3)  In particular, the data on HICP as well as on general government expenditure by function are not provided.

3

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

4

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

5

(6)  One-off and other temporary measures taken from the programme.

6

(7)  One-off and other temporary measures taken from the Commission services' autumn 2006 forecast.

7

(8)  Based on estimated potential growth of 3,9 %, 3,8 %, 3,6 % and 3,6 % respectively in the period 2005-2008.

8

(9)  Private consumption deflator instead of HICP.

9

(10)  According to first estimates, growth was 3,9 % in 2006. The Commission services' interim forecast of 16 February 2007 projects growth of 3,7 % in 2007.

10

Source:

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

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