EN Official Journal of the European Union C 72/1

COUNCIL OPINION

of 27 February 2007

on the updated convergence programme of Slovakia, 2006-2009

(2007/C 72/01)

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,

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 Slovakia, which covers the period 2006 to 2009.

(2) The macroeconomic scenario underlying the programme envisages that real GDP growth will increase from 6,6 % in 2006 to 7,1 % in 2007 and then decrease to 5,5 % and 5,1 % in 2008 and 2009, respectively. Assessed against currently available information, this scenario appears to be based on cautious growth assumptions for 2006 and plausible growth assumptions for the rest of the programme period. The programme's projections for inflation also appear realistic.

(3) For 2006, the general government deficit is estimated at 3,4 % of GDP in the Commission services' autumn 2006 forecast, against a target of 4,2 % of GDP set in the previous update of the convergence programme. The better outturn is due to much stronger GDP and employment growth and lower interest expenditure and pension reform costs than expected. However, some of the additional revenues owing to the growth surprise were spent rather than devoted to faster deficit reduction.

(4) As in the previous update, the main goal of the new programme's medium-term budgetary strategy is to achieve long-term sustainability of public finances in 2010, notably by reaching the medium-term objective (MTO) for the budgetary position of a structural balance (i.e. cyclically-adjusted balance net of one-off and other temporary measures) of – 0,9 % of GDP. According to the programme the headline deficit should gradually decline from 3,7 % of GDP in 2006 to 1,9 % of GDP in 2009 and the primary deficit from 1,9 % of GDP in 2006 to 0,2 % of GDP in 2009. The envisaged fiscal consolidation relies on expenditure restraint with respect to both current and capital expenditure (decline in the expenditure ratio by around 3 percentage points of GDP), which is less than fully offset by a decline in the revenue ratio (1 percentage point). Compared with the previous update, the new programme confirms the planned adjustment against a more favourable macroeconomic scenario.

(5) The structural balance calculated according to the commonly agreed methodology is planned to improve from around – 3 % of GDP in 2006 to some -2 % of GDP in 2009. As in the previous update, the medium-term objective (MTO) for the budgetary position presented in the programme is a structural deficit of just below 1 % of GDP, which the programme does not aim to achieve within the programme period but by 2010. As the MTO is more demanding than the minimum benchmark (estimated at a deficit of around 2 % 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 adequately reflects 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. The risks from the macroeconomic scenario are broadly neutral, while tax projections seem on the whole based on prudent assumptions. The envisaged fiscal consolidation in the programme relies heavily on expenditure restraint, but the programme does not provide sufficient information on the measures supporting this (after 2007) nor is there a binding medium-term expenditure framework. On the other hand, Slovakia has built up a good track-record in recent years, although achieving the budgetary targets was facilitated by higher-than-expected growth and lower-than-expected absorption of EU funds.

(7) In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a correction of the excessive deficit by 2007 as recommended by the Council. However, the adjustment path in structural terms during the correction period should be strengthened given the upward revision of growth prospects and the good economic times. In the following years the budgetary stance in the programme does not seem to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations. Moreover, it seems insufficient to ensure that the MTO is achieved in 2010, as envisaged in the programme. In the years following the correction of the excessive deficit, the pace of the adjustment towards the MTO implied by the programme should be strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times. In particular, an improvement in the structural balance of only around % of GDP is anticipated between 2007 and 2009 when good times are expected to occur.

(8) Government gross debt is estimated to have reached 33,1 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 3,4 percentage points over the programme period.

(9) The long-term budgetary impact of ageing in Slovakia is lower than the EU average, with pension expenditure influenced by the recent pension reform showing a more limited increase than in many other countries. The initial budgetary position constitutes a risk to sustainable public finances even before considering the long-term budgetary impact of an ageing population. Consolidating the public finances would therefore contribute to reducing risks to the sustainability of public finances. Overall, Slovakia appears to be at medium risk with regard to the sustainability of public finances.

(10) The convergence programme does not contain a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. However, it provides some 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 do not seem to be fully consistent with those foreseen in the national reform programme. In particular, apart from education, expenditure priorities listed in the programme are different from the key challenges identified in the national reform programme. Moreover, the significant support for education indicated in the national reform programme is not evident in the 2007 budget or in the convergence programme.

(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. (2)

The Council considers that the programme is consistent with a correction of the excessive deficit by 2007 and envisages progress, but limited, towards the MTO thereafter.

In view of the above assessment, and also in the light of the recommendation under Article 104(7) of 5 July 2004, the Council invites Slovakia to:

i) exploit the strong growth prospects to strengthen the structural adjustment in order to ensure the correction of the excessive deficit in 2007 with a larger margin and to speed up the progress towards the MTO; and

ii) reinforce the binding character of the medium-term expenditure ceilings for central government.

Comparison of key macro economic and budgetary projections

2005 2006 2007 2008 2009 Real GDP (% change) CP Dec 2006 6,1 6,6 7,1 5,5 5,1 COM Nov 2006 6,0 6,7 7,2 5,7 n.a. CP Dec 2005 5,1 5,4 6,1 5,6 n.a. HICP inflation (%) CP Dec 2006 2,8 4,4 3,1 2,0 2,4 COM Nov 2006 2,8 4,5 3,4 2,5 n.a. CP Dec 2005 2,2 1,5 2,2 2,5 n.a. Output gap (% of potential GDP) CP Dec 2006 (3) – 2,2 – 0,9 1,0 1,6 1,9 COM Nov 2006 (7) – 2,0 – 0,7 1,1 1,6 n.a. CP Dec 2005 (3) – 1,6 – 1,1 0,1 0,8 n.a. General government balance (8) (% of GDP) CP Dec 2006 – 3,1 – 3,7 – 2,9 – 2,4 – 1,9 COM Nov 2006 – 3,1 – 3,4 – 3,0 – 2,9 n.a. CP Dec 2005 – 4,9 – 4,2 – 3,0 – 2,7 n.a. Primary balance (8) (% of GDP) CP Dec 2006 – 1,4 – 1,9 – 0,9 – 0,6 – 0,2 COM Nov 2006 – 1,4 – 1,7 – 1,1 – 0,9 n.a. CP Dec 2005 – 3,1 – 2,3 – 1,1 – 0,8 n.a. Cyclically-adjusted balance (8) (% of GDP) CP Dec 2006 (3) – 2,4 – 3,4 – 3,2 – 2,9 – 2,5 COM Nov 2006 – 2,5 – 3,2 – 3,3 – 3,3 n.a. CP Dec 2005 (3) – 4,4 – 3,9 – 3,0 – 2,9 n.a. Structural balance (4) (8) (% of GDP) CP Dec 2006 (5) – 1,6 – 3,5 – 3,2 – 2,9 – 2,5 COM Nov 2006 (6) – 1,7 – 3,3 – 3,3 – 3,3 n.a. CP Dec 2005 – 3,6 – 3,9 – 3,1 – 2,9 n.a. Government gross debt (8) (% of GDP) CP Dec 2006 34,5 33,1 31,8 31,0 29,7 COM Nov 2006 34,5 33,0 31,6 31,0 n.a. CP Dec 2005 33,7 35,5 35,2 36,2 n.a. Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

(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:

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

(2) In particular, the data on general government expenditure by function for 2009 are not provided.

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

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

(5) One-off and other temporary measures taken from the programme (0,8 % of GDP in 2005 — deficit-increasing; 0,1 % in 2006 — deficit- reducing).

(6) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (0,9 % of GDP in 2005 — deficit-increasing; 0,1 % in 2006 deficit-reducing).

(7) Based on estimated potential growth of 5,2 %, 5,3 %, 5,3 % and 5,2 % respectively in the period 2005-2008.

(8) Since October 2006, Slovakia has implemented the Eurostat decision of 2 March 2004 on the classification of the second pillar funded pension schemes. The general government data from the previous update have been adjusted accordingly so as to facilitate comparison with the new update and the Commission services' autumn 2006 forecast.

Source:

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