Council Opinion

of 28 February 2000

on the updated stability programme of Germany for the period 1999 to 2003

(2000/C 98/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EEC) 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,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 28 February 2000 the Council examined the updated stability programme of Germany which covers the period 1999 to 2003. The Council notes with satisfaction that the deficit outcomes both for 1998 and 1999 were clearly better than expected in the initial programme. This achievement in conditions of lower-than-expected economic growth has significantly advanced the objective of attaining a medium-term budgetary position of close to balance or in surplus, as required by the Stabiblity and Growth pact. The Council notes, however, that the better results in 1998 were almost exclusively due to the difficult-to-predict development of regional and local government finances. These developments, therefore, tend to underline the importance of an efficient cooperation on government finances at national level to facilitate the planning and monitoring of the budgetary consolidation process.

The Council notes that the information provided in the updated stability programme, as was the case for the previsous programme, does not in all respects comply with the code of conduct on the content and format of stability and convergance programmes. In particular, the programme lacks detailed information on the components of government revenue and expenditure and on the factors determining the debt ratio. The Council, therefore, repeats the request made in its opinion on the previous stability programme(2) that the German authorities provide this additional information, at the latest, in the next update of the stability programme.

The macroeconomic scenario of the updated programme(3)assumes that the German economy will enjoy average annual grown of som 2,5 % over the programme period. The Council considers this scenario realistic, provided that wage moderation and structural reforms on product and labour markets continue.

The updated programme foresees a decline in the general government deficit to 0,5 % of gross domestic product (GDP) by 2003, while the gross debt ratio is expected to decrease to 58,5 % of GDP over the same period. The Council considers it appropriate that the budgetary consolidation envisaged in the programme is achieved by a decrease in the expenditure ratio which is only partially offset by a decline in the revenue ratio. The Council commends, in particular, the envisaged approach of controlling government expenditure by limiting its overall nominal increase to less than the expected nominal GDP growth. The Council recognises that the planned expenditure savings will create some room for tax relief in the framework of the reforms of income and corporate taxation which are welcome as they will lead to a desirable reduction in the high overall tax burden in Germany. The Council recommends, however, that the reforms be implemented with greatest caution so as to minimise the risk of a lasting deterioration of the structural geovernment deficit.

The Council considers that the envisaged medium-term deficit objective of 0,5 % of GDP in 2003 is in conformity with the provisions of the Stability and Growth Pact, as is the objective for 2002. Moreover, Germany's budget balance will remain close to the minimum benchmark position, which allows the automatic stabilisers to work without risk of the deficit breaching the 3 % of GDP reference value, already from 1999 on. The Council recommends, however, that in the event of higher growth than expected the fiscal gains be used to reduce the deficit below the targeted level with a view to widening the safety margin and creating additional room for the desirable further tax reductions planned beyond the programme's horizon. Furthermore, available privatisation opportunities should be used at all levels of government in order to make sure that the debt ratio is firmly kept on a downward trend.

The Council notes that, despite the programme's intentions of a restructuring of the budget in favour of government investment, the federal government plans to reduce investment spending in nominal terms from its current level. The Council reiterates its recommendation that the German Government review its investment plans without, however, joepardising the budgetary targets of the programme.

The Council welcomes the reform measures announced in the programme, in particular in the domains of the pension and health systems and in public administration, which are key to sustainable public finances and employment growth. A determined implementation of the reforms, in combination with measures aimed at increasing the flexibility of product and labour markets, as recommended by the Broad Economic Policy Guidelines and envisaged in the German structural progress report for the Cardiff process, would be conducive to the achievement of the objectives of the stability programme.

(1) OJ L 209, 2.8.1997, p. 1.

(2) OJ C 124, 5.5.1999, p. 3.

(3) In its revised version as of 1 February 2000, i.e. including the addendum to the updated stability programme.