EN Official Journal of the European Union C 55/1

COUNCIL OPINION

of 24 January 2006

on the updated stability programme of Finland, 2005-2009

(2006/C 55/01)

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 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 24 January 2006 the Council examined the updated stability programme of Finland, which covers the period 2005 to 2009.

(2) After recovering from an exceptionally deep recession in the beginning of the 1990s the Finnish economy expanded strongly over the period 1995–2004, reaching an average growth rate of 3,6 % p.a.. The strong pace of activity helped to raise the employment rate; nevertheless inflation remained below the euro-area average. The macroeconomic scenario underlying the programme envisages real GDP growth to ease from an annual average of 2,7 % in 2005-2006 to 2,3 % on average over the rest of the programme period. Assessed against currently available information, this scenario appears to be based on cautious growth assumptions. The programme's projections for inflation appear realistic.

(3) In its opinion of 17 February 2005 on the previous update of the Stability Programme, covering the period 2004-2008, the Council endorsed the budgetary strategy presented in the programme. The general government surplus for 2005 is estimated, based on the Commission services' forecast, at 1,9 % of GDP, which corresponds closely to the targeted surplus in the previous update of the programme.

(4) The updated programme broadly follows the model structure and data provision requirements of the stability and convergence programmes specified in the new code of conduct (2).

(5) The government's key objectives are achieving balanced central government finances under normal conditions of economic growth and securing the long-term sustainability of public finances. The general government surplus is projected to be on a slightly declining trend, to reach 1,5 % of GDP by 2008-2009; the decline in the primary surplus is somewhat steeper due to a projected drop in interest expenditure. The decline in the surplus is revenue-driven, reflecting the gradual enactment of tax cuts. Expenditure is projected to be kept in check by the government's budgetary spending ceilings and by a reduction in interest expenditure. Compared with the previous update, the surplus estimates for 2006-2009 have been revised downwards by around 0,5 % of GDP, due to the tax cuts and a more cautious outlook on the financial position of social security funds and local governments.

(6) Over the programme period, the structural surplus (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to weaken slightly in the next three years from around 2 % of GDP in 2005 to 1,75 in the period 2006-2008, but to rebound in 2009 reflecting an estimated widening of the output gap. The programme projects the structural surplus to reach around 1,5 % of GDP by the end of the programme period (3), which can be regarded as the programme's MTO as it is in line with the principles for MTOs specified in the Stability and Growth Pact and the code of conduct. As the programme's MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1 % of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. As regards appropriateness, the programme's 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 is significantly more demanding than implied by the debt ratio and average potential output growth in the long term. Having an MTO well above the minimum required level is motivated in the programme by the goal of ensuring the long-term sustainability of public finances and the fact that in Finland the impact of an ageing population kicks in at an early stage.

(7) The risks to the budgetary projections in the programme appear broadly balanced. Tax projections seem based on cautious assumptions and the expenditure ceiling framework has so far been very effective. The stability programme draws attention to the risk that the adverse effects on economic growth from population ageing and dwindling labour supply might be underestimated in the current calculations; however, as mentioned above, the economic growth projections in the update can be regarded as cautious.

(8) In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain the programme's MTO throughout the programme period, as envisaged in the programme. In addition, it provides a sufficient safety margin against breaching the 3 % of GDP deficit ceiling with normal macroeconomic fluctuations for the entire period.

(9) The debt ratio is estimated to have reached 42,7 % of GDP in 2005, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 2,6 percentage points over the programme period.

(10) Finland appears to be at low risk on grounds of the projected budgetary costs of ageing populations. The gross debt ratio is currently below the 60 % of GDP reference value, and is projected to remain below this value throughout most of the projection period which extends until 2050. The significant assets of social security and the currently favourable budgetary position contribute to limit the budgetary impact of ageing populations. However, in the long run, a risk to public finance sustainability could emerge, reflecting rising pension expenditure. Containing age-related expenditure over the long term, including the successful implementation of recent reform measures aimed at rising the effective retirement age, while maintaining sound budgetary positions would be key components in reducing risks to public finance sustainability (4).

(11) The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, the measures are geared towards ensuring economic and fiscal sustainability and towards promoting growth and job creation, such as a major pension reform that is currently being phased in.

(12) The National Reform Programme of Finland, submitted on 14 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: (i) the sustainability of public finances and (ii) the functioning of the labour market. The budgetary implications of the actions outlined in the National Reform Programme are fully reflected in the budgetary projections of the stability programme. The measures in the area of public finances envisaged in the stability programme are in line with the actions foreseen in the National Reform Programme. In particular, the stability programme outlines measures to improve the efficiency of both central and local governments, and confirms the intention to continue with applying central government budgetary spending limits beyond the current legislation period.

The Council is of the opinion that, overall, the budgetary position is sound and the budgetary strategy provides a good example of fiscal policies conducted in compliance with the Pact.

Comparison of key macroeconomic and budgetary projections

2004 2005 2006 2007 2008 2009 Real GDP (% change) SP Nov 2005 3,6 2,1 3,2 2,6 2,3 2,1 COM Nov 2005 3,6 1,9 3,5 3,1 n.a. n.a. SP Dec 2004 3,2 2,8 2,4 2,2 2,0 n.a. HICP inflation (%) SP Nov 2005 0,2 1,0 1,3 1,5 1,8 1,8 COM Nov 2005 0,1 1,0 1,4 1,3 n.a. n.a. SP Dec 2004 0,2 1,4 1,8 1,8 1,8 n.a. Output gap (% of potential GDP) SP Nov 2005 (5) 0,0 – 0,7 – 0,2 – 0,2 – 0,5 – 0,9 COM Nov 2005 (9) – 0,2 – 1,2 – 0,7 – 0,5 n.a. n.a. SP Dec 2004 (5) – 0,3 – 0,1 – 0,2 – 0,4 – 0,6 n.a. General government balance (% of GDP) SP Nov 2005 2,1 1,8 1,6 1,6 1,5 1,5 COM Nov 2005 2,1 1,9 1,9 1,8 n.a. n.a. SP Dec 2004 2,0 1,8 2,1 2,2 2,0 n.a. Primary balance (% of GDP) SP Nov 2005 3,7 3,4 3,1 2,9 2,8 2,8 COM Nov 2005 3,8 3,8 3,7 3,6 n.a. n.a. SP Dec 2004 3,7 3,4 3,8 3,9 3,7 n.a. Cyclically-adjusted balance = structural balance (6) (7) (% of GDP) SP Nov 2005 (5) 2,1 2,1 1,7 1,7 1,7 2,0 COM Nov 2005 (8) 2,3 2,7 2,3 2,1 n.a. n.a. SP Dec 2004 (5) 2,2 1,9 2,2 2,4 2,4 n.a. Government gross debt (% of GDP) SP Nov 2005 44,9 42,7 41,7 41,1 40,6 40,1 COM Nov 2005 45,1 42,8 41,5 40,6 n.a. n.a. SP Dec 2004 44,6 43,4 42,5 41,7 41,1 n.a. Stability programme (SP); Commission services' autumn 2005 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) The update has gaps in the compulsory and does not provide all optional data prescribed by the new code of conduct (especially data on external assumptions for the years 2007-2009 are missing).

(3) As calculated in the programme. Commission services' recalculations on the basis of the information in the programme according to the commonly agreed methodology give a structural surplus of 2 % of GDP in 2009.

(4) Details on long-term sustainability are provided in the technical assessment of the programme by the Commission services, to be published at the website:

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

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

(6) Cyclically-adjusted balance excluding one-off and other temporary measures.

(7) One-off and other temporary measures taken from the programme.

(8) One-off and other temporary measures taken from the Commission services' autumn 2005 forecast.

(9) Based on estimated potential growth of 2,9 %, 2,9 %, 2,8 % and 2,7 % respectively in the period 2004-2007.

Source:

Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations