Council Opinion

of 12 February 2002

on the updated stability programme of Spain, 2001-2005

(2002/C 51/08)

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),

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 February 2002 the Council examined Spain's updated stability programme covering the 2001-2005 period. The information provided in the updated programme is broadly in line with the revised "Code of conduct on the content and format of stability and convergence programmes"(2). Nevertheless more complete information regarding long-term projections would have been desirable.

The Council notes with satisfaction that implementation of the previous update has been broadly on track despite weaker growth. After a deficit of 0,3 % of GDP in 2000, the target of a general government balanced budget in 2001 is expected to have been reached and the debt ratio objective over-achieved. The achievement of the fiscal targets for 2001 was helped by stronger than planned containment of expenditure and higher than expected nominal GDP. Taking into account the worsening in the international environment, the update centrally projects GDP growth slowing to 2,4 % in 2002 but to resume at a 3 % rate, close to potential, from 2003. Although somewhat optimistic in the short term, the medium-term outlook is plausible, given recent performance and the ongoing catching-up process. The inflation projection also seems attainable, helped by the recent agreement among social partners aimed at wage moderation, though it would be advisable to end indexation in wage bargaining in line with last year's Council Opinion.

Budgetary consolidation for the period 2002-2005 is based on primary current expenditure restraint and lower interest charges while government investment is set to increase and the tax burden to moderate slightly. Despite the current economic slowdown, the update extends a balanced budget target to 2002 (and 2003) and targets small surpluses in 2004 and 2005, of 0,1 % and 0,2 % of GDP respectively. The debt ratio is set to continue declining, reaching 50 % of GDP by 2005.

The medium-term budgetary projections overall appear prudent, with cautious estimates of revenue growth and reductions in interest charges, giving some room of manoeuvre in case less positive developments materialise; intentions on implementing the necessary control of primary current expenditure are not, however, detailed.

The targets in the programme, including their evaluation in cyclically adjusted terms, respect the "close-to-balance or surplus" objective of the stability and growth pact throughout the period. The Council therefore considers that the updated stability programme is in conformity with the provisions of the stability and growth pact, with the targets indicating respect of the objective with an increasingly comfortable margin. The fiscal stance, defined as the change in the cyclically adjusted balances, implies a mild tightening, broadly in line with the recommendations in the 2001 broad economic policy guidelines.

The Council welcomes important developments in Spain's institutional budgetary setting, notably the recently approved General Law of Budgetary Stability and the 2002 budget reforms which have transferred important tax and spending powers to regional authorities. Although the Council does not advocate any specific form regarding the necessary internal coordination between central and territorial governments, the involvement of all government subsectors in maintaining budgetary discipline is welcome, and it is important that the existing coordination should also operate efficiently under the new arrangements.

Structural reforms implemented in 2001 essentially stem from the package approved in June 2000 aiming at further deregulating markets and strengthening the competition authority.

The Council notes that the updated programme does not give more detailed information on measures to be taken to strengthen the long-term sustainability of the public finances. This is of particular concern given Spain's exposed demographic profile and the adverse budgetary consequences of ageing. The risk of serious imbalances in the long term cannot be excluded unless appropriate measures are implemented. The budgetary impact of ageing is not adequately reflected in the update's projections of pension expenditure and social security contributions which extend only to 2015. The announced intention to reform the pension system lacks a detailed calendar. The Council considers that the pension system measures adopted in April 2001 did not represent the significant positive reforms advocated in its Opinion on the previous update. The main measure recently adopted to deal with ageing is the social security fund created in 2000, assets of which are planned to reach at least 1 % of GDP by 2004.

Finally, the Council welcomes the important role to be played by other structural policies, particularly in the market for goods and services, in ensuring non-inflationary employment-oriented growth. These measures are consistent with the broad economic policy guidelines. Those implemented so far should be closely monitored and if necessary strengthened.

(1) OJ L 209, 2.8.1997.

(2) Revised Opinion of the Economic and Financial Committee on the content and format of the stability and convergence programmes, endorsed by the Ecofin Council on 10.7.2001.