# C_2008075EN.01000501.xml

| 26.3.2008 | EN | Official Journal of the European Union | C 75/5 |
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26.3.2008

EN

Official Journal of the European Union

C 75/5

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COUNCIL OPINION

COUNCIL OPINION

of 4 March 2008

on the updated stability programme of Spain, 2007-2010

(2008/C 75/02)

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 4 March 2008, the Council examined the updated stability programme of Spain, which covers the period 2007 to 2010 (2). |
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(1)

On 4 March 2008, the Council examined the updated stability programme of Spain, which covers the period 2007 to 2010 (2).

2

| (2) | Spain has been enjoying a long period of sustained growth averaging 3,75 % over the last twelve years, well above the euro area (at around 2 %). Persistently low real interest rates and dynamic demographics have been feeding strong domestic demand and job creation as well as an unprecedented growth in the housing sector.
  Moreover, successive labour market reforms significantly reduced structural unemployment. In parallel, a number of imbalances have emerged or persist, such as a widening external deficit and the inflation differential with the euro area, while productivity growth was consistently low. Regarding public finances, a successful expenditure-based consolidation process took place since the mid-nineties, which improved the government balance from a deficit of around 6 % of GDP to a close-to-balance position in 2000 and a comfortable surplus since 2005. Total tax receipts have grown by about 4,25 percentage points of GDP since the mid-nineties boosted by a tax-rich growth pattern. Going forward, population ageing might negatively impact on the long-term sustainability of public finances, mainly as a result of increasing pressure from pension expenditure. |
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(2)

Spain has been enjoying a long period of sustained growth averaging 3,75 % over the last twelve years, well above the euro area (at around 2 %). Persistently low real interest rates and dynamic demographics have been feeding strong domestic demand and job creation as well as an unprecedented growth in the housing sector.

Moreover, successive labour market reforms significantly reduced structural unemployment. In parallel, a number of imbalances have emerged or persist, such as a widening external deficit and the inflation differential with the euro area, while productivity growth was consistently low. Regarding public finances, a successful expenditure-based consolidation process took place since the mid-nineties, which improved the government balance from a deficit of around 6 % of GDP to a close-to-balance position in 2000 and a comfortable surplus since 2005. Total tax receipts have grown by about 4,25 percentage points of GDP since the mid-nineties boosted by a tax-rich growth pattern. Going forward, population ageing might negatively impact on the long-term sustainability of public finances, mainly as a result of increasing pressure from pension expenditure.

| (3) | The macroeconomic scenario underlying the programme envisages that real GDP growth will decelerate from 3,8 % in 2007 to 3,1 % on average over the rest of the programme period. Assessed against currently available information (3), this scenario appears to be favourable throughout the programme period. In 2008, inflationary pressures, lower growth expectations, as well as the developments in the housing sector are expected to weigh on disposable income and point towards lower GDP growth than projected in the programme. Also the growth composition presented in the programme is favourable, in particular concerning the adjustment path of the residential construction sector. While the programme expects a deceleration of investment in dwellings, the Commission services' autumn 2007 forecast projects a contraction of the sector, starting already in 2008, implying a stagnation of total investment in 2009. However, due to lower imports the contribution of net exports to growth could improve compared to the programme. Finally, the programme's projections for inflation appear on the low side in the light of the most recent available information on food and oil prices. |
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(3)

The macroeconomic scenario underlying the programme envisages that real GDP growth will decelerate from 3,8 % in 2007 to 3,1 % on average over the rest of the programme period. Assessed against currently available information (3), this scenario appears to be favourable throughout the programme period. In 2008, inflationary pressures, lower growth expectations, as well as the developments in the housing sector are expected to weigh on disposable income and point towards lower GDP growth than projected in the programme. Also the growth composition presented in the programme is favourable, in particular concerning the adjustment path of the residential construction sector. While the programme expects a deceleration of investment in dwellings, the Commission services' autumn 2007 forecast projects a contraction of the sector, starting already in 2008, implying a stagnation of total investment in 2009. However, due to lower imports the contribution of net exports to growth could improve compared to the programme. Finally, the programme's projections for inflation appear on the low side in the light of the most recent available information on food and oil prices.

3

| (4) | For 2007, the general government surplus is estimated at 1,8 % of GDP in the Commission services' autumn 2007 forecast, against a target of 1 % of GDP set in the previous update of the stability programme. Half of the difference can be explained by the positive base effect from 2006. The other half results from higher-than-targeted revenue growth in 2007, which was however partly offset by higher-than-budgeted expenditure growth. Recent information points to the possibility of a better final outcome above 2 % of GDP, owing to even higher-than-expected revenues in 2007, especially from direct taxes, reflecting the high dynamism of corporate profits. The better-than-expected budgetary outcomes in 2006 were used to pursue more ambitious budgetary targets than those set in the end-2006 update of the stability programme, although some municipal and regional expenditure overruns were recorded. The Council notes that budgetary implementation in 2007 was broadly consistent with the April 2007 Eurogroup orientations for budgetary policies. |
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(4)

For 2007, the general government surplus is estimated at 1,8 % of GDP in the Commission services' autumn 2007 forecast, against a target of 1 % of GDP set in the previous update of the stability programme. Half of the difference can be explained by the positive base effect from 2006. The other half results from higher-than-targeted revenue growth in 2007, which was however partly offset by higher-than-budgeted expenditure growth. Recent information points to the possibility of a better final outcome above 2 % of GDP, owing to even higher-than-expected revenues in 2007, especially from direct taxes, reflecting the high dynamism of corporate profits. The better-than-expected budgetary outcomes in 2006 were used to pursue more ambitious budgetary targets than those set in the end-2006 update of the stability programme, although some municipal and regional expenditure overruns were recorded. The Council notes that budgetary implementation in 2007 was broadly consistent with the April 2007 Eurogroup orientations for budgetary policies.

| (5) | Within the broad goal of maintaining macroeconomic and budgetary stability, the most recent update of the stability programme aims at respecting the medium-term objective (MTO), which is a balanced position in structural terms (i.e. in cyclically-adjusted terms net of one-off and other temporary measures), by a comfortable margin. The headline general government surplus is targeted to decline from 1,8 % of GDP in 2007 to 1,2 % of GDP in 2008 and to remain stable thereafter. The deterioration in 2008 stems from a small increase in the expenditure ratio and a decline in the revenue ratio by 0,5 percentage point of GDP. Direct taxes are expected to fall by 0,25 percentage point of GDP in 2008 as a result of lower economic growth and the ongoing impact of the 2007 tax reform. After 2008, revenue and expenditure components are assumed to remain broadly stable. The primary balance is planned to decline from an estimated surplus of 3,4 % of GDP in 2007 to 2,7 % in 2008, remaining broadly stable thereafter. The structural balance calculated according to the commonly agreed methodology is projected to slightly decline from 2,25 % in 2007 to 1,75 % in 2008 and to increase to around 2 % in 2009 and 2010. Compared with the previous programme, the new update presents, building on the better-than-expected 2007 outturn, somewhat better targets for 2008 and 2009 against a broadly similar macroeconomic background. |
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(5)

Within the broad goal of maintaining macroeconomic and budgetary stability, the most recent update of the stability programme aims at respecting the medium-term objective (MTO), which is a balanced position in structural terms (i.e. in cyclically-adjusted terms net of one-off and other temporary measures), by a comfortable margin. The headline general government surplus is targeted to decline from 1,8 % of GDP in 2007 to 1,2 % of GDP in 2008 and to remain stable thereafter. The deterioration in 2008 stems from a small increase in the expenditure ratio and a decline in the revenue ratio by 0,5 percentage point of GDP. Direct taxes are expected to fall by 0,25 percentage point of GDP in 2008 as a result of lower economic growth and the ongoing impact of the 2007 tax reform. After 2008, revenue and expenditure components are assumed to remain broadly stable. The primary balance is planned to decline from an estimated surplus of 3,4 % of GDP in 2007 to 2,7 % in 2008, remaining broadly stable thereafter. The structural balance calculated according to the commonly agreed methodology is projected to slightly decline from 2,25 % in 2007 to 1,75 % in 2008 and to increase to around 2 % in 2009 and 2010. Compared with the previous programme, the new update presents, building on the better-than-expected 2007 outturn, somewhat better targets for 2008 and 2009 against a broadly similar macroeconomic background.

ratio

ratio

| (6) | The risks to the budgetary projections in the programme appear broadly balanced in 2008, but outcomes could be worse than projected in 2009 and 2010. Specifically, in 2008, the impact of possibly lower economic growth would be broadly offset by the positive base effect from higher revenues in 2007 than estimated in the programme. However, the favourable macroeconomic assumptions for 2009 and 2010 would not be compensated by other factors, which points to the risk of lower budgetary surpluses. In particular, tax revenue projections may turn out to be optimistic on the back of less buoyant corporate profits and housing market. On the other hand, Spain has a good track record of budgetary consolidation. |
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(6)

The risks to the budgetary projections in the programme appear broadly balanced in 2008, but outcomes could be worse than projected in 2009 and 2010. Specifically, in 2008, the impact of possibly lower economic growth would be broadly offset by the positive base effect from higher revenues in 2007 than estimated in the programme. However, the favourable macroeconomic assumptions for 2009 and 2010 would not be compensated by other factors, which points to the risk of lower budgetary surpluses. In particular, tax revenue projections may turn out to be optimistic on the back of less buoyant corporate profits and housing market. On the other hand, Spain has a good track record of budgetary consolidation.

| (7) | In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a large margin throughout the programme period. The fiscal policy stance implied by the update is in line with the Stability and Growth Pact throughout the period. The Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies for the year 2008. The projected weakening in the structural surplus in 2008 cannot be regarded as entailing a pro-cyclical stance but partly reflects a decline in the tax revenue as a percent of GDP resulting from a slowing of the economy and the fading housing boom. |
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(7)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the MTO by a large margin throughout the programme period. The fiscal policy stance implied by the update is in line with the Stability and Growth Pact throughout the period. The Council notes that it is also consistent with the April 2007 Eurogroup orientations for budgetary policies for the year 2008. The projected weakening in the structural surplus in 2008 cannot be regarded as entailing a pro-cyclical stance but partly reflects a decline in the tax revenue as a percent of GDP resulting from a slowing of the economy and the fading housing boom.

| (8) | Spain appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing 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 budgetary position in 2007, reflected in a strong primary surplus as well as a low and decreasing debt ratio, contributes to offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to fully cover future spending pressures. Maintaining high primary surpluses over the medium term and implementing further measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances. |
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(8)

Spain appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing 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 budgetary position in 2007, reflected in a strong primary surplus as well as a low and decreasing debt ratio, contributes to offsetting the projected long-term budgetary impact of ageing populations. However, this is not sufficient to fully cover future spending pressures. Maintaining high primary surpluses over the medium term and implementing further measures aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances.

ratio

| (9) | The stability programme is fully consistent with the October 2007 implementation report of the national reform programme (NRP). In particular, the update provides a qualitative assessment of the overall impact of the NRP within the medium-term fiscal strategy as well as sufficient information on the direct budgetary costs associated with some of the reforms envisaged in the NRP, e.g. R & D, education and infrastructures. |
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(9)

The stability programme is fully consistent with the October 2007 implementation report of the national reform programme (NRP). In particular, the update provides a qualitative assessment of the overall impact of the NRP within the medium-term fiscal strategy as well as sufficient information on the direct budgetary costs associated with some of the reforms envisaged in the NRP, e.g. R & D, education and infrastructures.

| (10) | The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy. |
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(10)

The budgetary strategy in the programme is broadly consistent with the country-specific broad economic policy guidelines and the guidelines for euro area Member States in the area of budgetary policies issued in the context of the Lisbon strategy.

| (11) | As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides almost all required data and has some gaps in the optional data (4). |
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(11)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides almost all required data and has some gaps in the optional data (4).

4

The overall conclusion is that the medium-term budgetary position is sound with high general government surpluses above the MTO and a relatively low debt ratio. However, given favourable economic growth assumptions and the end of the housing boom, the projected government revenue might turn out to be on the high side. In this context, a careful assessment of the impact on the general government balance of permanent tax cuts and/or expenditure increases will be crucial to maintain a strong budgetary position and to ensure the long-term sustainability of public finances, which is at medium risk. Fostering productivity-enhancing expenditure items, such as R & D, infrastructure and education, is important to underpin a smooth adjustment of the economy in the light of large external imbalances, the contraction of the housing sector and the existing inflation differential with the euro area.

ratio

In view of the above assessment, while maintaining a strong budgetary position, Spain is invited to further improve the long-term sustainability of public finances with additional measures to contain the future impact of ageing on spending programmes.

Spain is also invited to improve compliance with the submission deadline for stability and convergence programmes specified in the code of conduct.

Comparison of key macroeconomic and budgetary projections

| | 2006 | 2007 | 2008 | 2009 | 2010 |
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| Real GDP
  (% change) | SP Dec 2007 | 3,9 | 3,8 | 3,1 | 3,0 | 3,2 |
| COM Nov 2007 | 3,9 | 3,8 | 3,0 | 2,3 | n.a. |
| SP Dec 2006 | 3,8 | 3,4 | 3,3 | 3,3 | n.a. |
| HICP inflation
  (%) | SP Dec 2007 (8) | 3,4 | 2,7 | 3,3 | 2,7 | 2,8 |
| COM Nov 2007 | 3,6 | 2,6 | 2,9 | 2,7 | n.a. |
| SP Dec 2006 (8) | 3,5 | 2,7 | 2,6 | 2,5 | n.a. |
| Output gap (5)

  (% of potential GDP) | SP Dec 2007 | – 1,1 | – 0,9 | – 1,4 | – 1,9 | – 1,6 |
| COM Nov 2007 (6) | – 0,6 | – 0,5 | – 0,9 | – 1,8 | n.a. |
| SP Dec 2006 | – 0,9 | – 1,2 | – 1,5 | – 1,6 | n.a. |
| Net lending/borrowing vis-à-vis the rest of the world
  (% of GDP) | SP Dec 2007 | – 8,1 | – 9,0 | – 8,9 | – 8,8 | – 8,7 |
| COM Nov 2007 | – 8,1 | – 8,7 | – 9,1 | – 9,3 | n.a. |
| SP Dec 2006 | – 7,5 | – 8,2 | – 8,4 | – 8,7 | n.a. |
| General government balance
  (% of GDP) | SP Dec 2007 | 1,8 | 1,8 | 1,2 | 1,2 | 1,2 |
| COM Nov 2007 | 1,8 | 1,8 | 1,2 | 0,6 | n.a. |
| SP Dec 2006 | 1,4 | 1,0 | 0,9 | 0,9 | n.a. |
| Primary balance
  (% of GDP) | SP Dec 2007 | 3,4 | 3,4 | 2,7 | 2,6 | 2,6 |
| COM Nov 2007 | 3,5 | 3,4 | 2,7 | 2,1 | n.a. |
| SP Dec 2006 | 3,0 | 2,5 | 2,3 | 2,2 | n.a. |
| Cyclically-adjusted balance (5)

  (% of GDP) | SP Dec 2007 | 2,3 | 2,2 | 1,8 | 2,0 | 1,9 |
| COM Nov 2007 | 2,1 | 2,0 | 1,6 | 1,4 | n.a. |
| SP Dec 2006 | 1,8 | 1,5 | 1,6 | 1,6 | n.a. |
| Structural balance (7)

  (% of GDP) | SP Dec 2007 | 2,3 | 2,2 | 1,8 | 2,0 | 1,9 |
| COM Nov 2007 | 2,1 | 2,0 | 1,6 | 1,4 | n.a. |
| SP Dec 2006 | 1,8 | 1,5 | 1,6 | 1,6 | n.a. |
| Government gross debt
  (% of GDP) | SP Dec 2007 | 39,7 | 36,2 | 34,0 | 32,0 | 30,0 |
| COM Nov 2007 | 39,7 | 36,3 | 34,6 | 33,0 | n.a. |
| SP Dec 2006 | 39,7 | 36,6 | 34,3 | 32,2 | n.a. |
| Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations. |

2006

2007

2008

2009

2010

Real GDP

(% change)

SP Dec 2007

SP Dec 2007

3,9

3,9

3,8

3,8

3,1

3,1

3,0

3,0

3,2

3,2

COM Nov 2007

3,9

3,8

3,0

2,3

n.a.

SP Dec 2006

SP Dec 2006

3,8

3,8

3,4

3,4

3,3

3,3

3,3

3,3

n.a.

n.a.

HICP inflation

(%)

SP Dec 2007 (8)

SP Dec 2007 (8

3,4

3,4

2,7

2,7

3,3

3,3

2,7

2,7

2,8

2,8

COM Nov 2007

3,6

2,6

2,9

2,7

n.a.

SP Dec 2006 (8)

SP Dec 2006 (8

3,5

3,5

2,7

2,7

2,6

2,6

2,5

2,5

n.a.

n.a.

Output gap (5)

5

(% of potential GDP)

SP Dec 2007

SP Dec 2007

– 1,1

– 1,1

– 0,9

– 0,9

– 1,4

– 1,4

– 1,9

– 1,9

– 1,6

– 1,6

COM Nov 2007 (6)

6

– 0,6

– 0,5

– 0,9

– 1,8

n.a.

SP Dec 2006

SP Dec 2006

– 0,9

– 0,9

– 1,2

– 1,2

– 1,5

– 1,5

– 1,6

– 1,6

n.a.

n.a.

Net lending/borrowing vis-à-vis the rest of the world

vis-à-vis

(% of GDP)

SP Dec 2007

SP Dec 2007

– 8,1

– 8,1

– 9,0

– 9,0

– 8,9

– 8,9

– 8,8

– 8,8

– 8,7

– 8,7

COM Nov 2007

– 8,1

– 8,7

– 9,1

– 9,3

n.a.

SP Dec 2006

SP Dec 2006

– 7,5

– 7,5

– 8,2

– 8,2

– 8,4

– 8,4

– 8,7

– 8,7

n.a.

n.a.

General government balance

(% of GDP)

SP Dec 2007

SP Dec 2007

1,8

1,8

1,8

1,8

1,2

1,2

1,2

1,2

1,2

1,2

COM Nov 2007

1,8

1,8

1,2

0,6

n.a.

SP Dec 2006

SP Dec 2006

1,4

1,4

1,0

1,0

0,9

0,9

0,9

0,9

n.a.

n.a.

Primary balance

(% of GDP)

SP Dec 2007

SP Dec 2007

3,4

3,4

3,4

3,4

2,7

2,7

2,6

2,6

2,6

2,6

COM Nov 2007

3,5

3,4

2,7

2,1

n.a.

SP Dec 2006

SP Dec 2006

3,0

3,0

2,5

2,5

2,3

2,3

2,2

2,2

n.a.

n.a.

Cyclically-adjusted balance (5)

5

(% of GDP)

SP Dec 2007

SP Dec 2007

2,3

2,3

2,2

2,2

1,8

1,8

2,0

2,0

1,9

1,9

COM Nov 2007

2,1

2,0

1,6

1,4

n.a.

SP Dec 2006

SP Dec 2006

1,8

1,8

1,5

1,5

1,6

1,6

1,6

1,6

n.a.

n.a.

Structural balance (7)

7

(% of GDP)

SP Dec 2007

SP Dec 2007

2,3

2,3

2,2

2,2

1,8

1,8

2,0

2,0

1,9

1,9

COM Nov 2007

2,1

2,0

1,6

1,4

n.a.

SP Dec 2006

SP Dec 2006

1,8

1,8

1,5

1,5

1,6

1,6

1,6

1,6

n.a.

n.a.

Government gross debt

(% of GDP)

SP Dec 2007

SP Dec 2007

39,7

39,7

36,2

36,2

34,0

34,0

32,0

32,0

30,0

30,0

COM Nov 2007

39,7

36,3

34,6

33,0

n.a.

SP Dec 2006

SP Dec 2006

39,7

39,7

36,6

36,6

34,3

34,3

32,2

32,2

n.a.

n.a.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

Stability programme (SP); Commission services' autumn 2007 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://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm

(2)  The update was submitted more than 3 weeks beyond the 1 December deadline set in the code of conduct.

2

(3)  The assessment takes also into account the Commission services' autumn 2007 forecast and the Commission assessment of the October 2007 implementation report of the national reform programme.

3

(4)  In particular, table 1b (price developments), item 3 (HICP); table 1c (labour market developments), item 6 (compensation of employees) and the data on the functional classification of public expenditure are missing.

4

(5)  Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on the basis of the information in the programmes.

5

(6)  Based on estimated potential growth of 3,5 %, 3,7 %, 3,4 % and 3,2 % respectively in the period 2006-2009.

6

(7)  There are no one-off and other temporary measures in the most recent programme and Commission services' autumn forecast.

7

(8)  Private consumption deflator.

8

Sources:

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

Stability programme (SP); Commission services' autumn 2007 economic forecasts (COM); Commission services' calculations.

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