EN Official Journal of the European Union C 320/3

COUNCIL OPINION

of 5 July 2004

on the Convergence Programme of Estonia, 2004-2008

(2004/C 320/02)

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 9(2) thereof,

Having regard to the recommendation of the Commission (2),

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 5 July 2004 the Council examined the convergence programme of Estonia, which covers the period 2004 to 2008. The programme largely complies with the data requirements of the revised ‘Code of Conduct on the content and format of stability and convergence programmes’.

The budgetary strategy underlying the programme aims at maintaining sound public finances as defined by a budgetary position of close-to-balance or in surplus. To this end, after a surplus of 2,6 % of GDP in 2003, the programme targets a small surplus of 0,7 % in 2004 and balanced budgets from 2005 onwards, accompanied by a gradual reduction in both the revenue and expenditure ratio, following a rise in both ratios in 2004 in connection with EU accession. Public investment is also expected to remain high with the Commission projecting public investment of 4,5 % of GDP in 2004 and 4,3 % of GDP in 2005. In particular, the programme incorporates reforms resulting in reduced direct taxes, combined with increased transfer payments and tax allowances. Strong growth, improved tax collection, savings on the expenditure side and changes to the spending structure along with increased VAT and excise duty revenues are projected to finance these reforms. The debt ratio, at 5,8 % of GDP in 2003, is very low and set to decline further to 3,2 % of GDP by 2008.

On the basis of currently available information, the macro-economic scenario underlying the programme seems to reflect plausible GDP growth assumptions of between 5 and 6 % over the programme period. The main sources of growth would be domestic demand (around 7 % p.a.), and accelerating export growth of up to 10 % annually. Private consumption is projected to grow at annual rates of 5 to 6 %. Investment is set to stay lively, expanding at 7 to 9 % per year, albeit no longer at rates above 10 % as was the case in recent years. The projection for inflation, which is set to increase to rates around 3 % starting in 2004, after a record low of 1,3 % in 2003, also appears realistic. The presently high current account deficit (13,7 % of GDP in 2003; 12,6 % according to the revised data) is projected to come down to levels around 8 % of GDP by 2008, still a high level.

The risks to the budgetary projections appear broadly balanced. On the one hand, Estonia has established a track record of prudent forecasting and repeated overshooting of fiscal targets over the past few years. On the other hand, unexpected revenue shortfall from the planned tax cuts, or adverse impacts on growth from exogenous shocks cannot be excluded altogether. Therefore the budgetary stance in the programme seems sufficient to maintain the Stability and Growth Pact's medium-term objective of budgetary position of close-to-balance; it should also provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations. However, the rapid reduction of surpluses as from 2004 over a period of continued buoyant growth, as envisaged in the programme, is likely to imply a distinct pro-cyclical fiscal stance. As a high external account deficit will continue to be the major macro-economic imbalance in Estonia over the programme period, strict fiscal discipline as well as careful monitoring of credit growth are even more important to ensure a sustainable correction of this external imbalance.

At less than 6 % of GDP, Estonia's debt-to-GDP ratio is almost the lowest in the EU and is expected to decline further by 2,6 percentage points over the programme period. The actual trend is likely to be even more favourable than projected given the recent National Accounts revision that will permanently increase GDP levels and thus the ratio's denominator.

Estonia is well placed to meet the budgetary costs of an ageing population. A low government debt level, considerable government financial reserves and a medium-term budgetary strategy that is fully consistent with the objective of a close-to-balance or in surplus budgetary position together with the reforms of the pension and health care systems which are meant to stem budgetary pressures in the longer term should ensure that public finances remain on a sustainable footing.

Key projections from the convergence programme of Estonia

2003 2004 2005 2006 2007 2008 Real GDP growth (%) (3) 4,7 5,3 5,8 5,6 5,9 5,8 Employment growth (%) 1,5 0,9 0,7 0,3 0,2 0,2 HICP inflation (%) 1,3 3,1 3,0 2,8 2,8 2,8 General government balance (% of GDP) (3) 2,6 0,7 0,0 0,0 0,0 0,0 Government gross debt (% of GDP) (3) 5,8 5,4 5,1 4,7 3,4 3,2

(1) 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

(2) OJ C […] […], p. […]

(3) These ratios do not take into account the National Accounts revision of 20 May 2004, which led statistically to a permanently higher GDP level. 2003 figures will be revised as follows: real GDP growth 5,1%, general government balance 2,4% of GDP, government gross debt 5,3% of GDP.