Council opinion

of 21 January 2003

on the updated stability programme of Italy, 2002 to 2006

(2003/C 26/05)

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:

On 21 January 2003 the Council examined Italy's updated stability programme, which covers the period 2002 to 2006.

The new update broadly complies with the data requirements of the revised Code of Conduct on the content and format of stability and convergence programmes. However, the lack of Information on the additional measures foreseen to achieve the budgetary targets beyond 2003 is not in line with the requirements of the code.

The Council considers that the economic policies as reflected in the planned measures in the updated programme complies partly with the recommendations of the 2002 Broad Economic Policy Guidelines.

The Council welcomes Italy's goal of keeping high primary surpluses throughout the programme period, while allowing for some easing in the tax burden. The Council notes that according to Commission forecasts, the cyclically-adjusted deficit improved by 0,6 percent of GDP in 2002, largely due to one-off measures. It notes that, following a much worse deficit in 2001 than estimated in last year's programme and the delayed recovery in the economy, and in spite of corrective measures adopted in the course of the year, the projected deficit for 2002 significantly exceeds the original objectives. In turn, this implies that the "close-to-balance" position would be reached, according to the Government's own projections, in 2004 rather than in 2003. The Council regrets that the decline in the debt ratio has slowed down considerably since 2001, in a context of weak growth and slower-than-envisaged progress in the privatisation programme due to the conditions in financial markets. The reduction of the debt ratio below 100 % of GDP is now envisaged by the Government to occur in 2005 two years later than in the commitment made by Italy in 1998.

The programme's macroeconomic scenario assumes a pick-up in economic activity, which in the short term reflects the expected recovery of the world economy and in domestic demand and then the assumption that the output gap will be closed. However, in light of the more recent developments, the recovery is likely to be slower than anticipated, and growth assumptions, both nominal and potential, appear to be optimistic. Also, in the medium-term, a growth assumption of 2,5 % per year seems to be more plausible, which, together with a downward revision of the potential growth rate to 2 %, would result in an underlying deficit of 1,1 % in 2006. This would imply that, under this scenario, the medium-term objective of close to balance or in surplus would not be reached in the programme period. However, the Council takes note of the commitment of Italy to reach the objective of close to balance in 2004.

The programme projects the cyclically-adjusted budget position in 2003 to improve by 0,7 %. The Council observes that the budgetary target for 2003 relies heavily, as in the previous year, on one-off measures. According to Commission calculations based on the Italian programme update, the cyclically-adjusted deficit will remain at 0,9 % of GDP in 2003, still not complying with the requirement of the Stability and Growth Pact to achieve a budget position close to balance or in surplus. Even assuming that such one-off measures yield the expected results, the cyclically-adjusted budget position may fail to improve as planned on account of the risks to the trend budgetary projections, thus putting in jeopardy the attainment of the minimum adjustment of 0,5 % of GDP. While the Council welcomes the recently introduced measures for stricter control on public expenditures, it urges Italy to ensure the full implementation of the measures planned for 2003, so that, as a minimum, an improvement in the underlying balance of 0,5 % of GDP is ensured. The Council notes that attainment of the budgetary targets for 2004 and beyond, including the achievement of the close-to-balance objective, hinges strongly on the replacement of the main one-off measures implemented in 2003 by measures of a more permanent character together with corrections in order to achieve the reduction of at least 0,5 % in underlying terms.

The Council considers that, in order to implement a sustained path of consolidation, Italy should replace one-off measures with structural ones on the expenditure side. The Council notes that Italy undertakes to set out as a matter of urgency in its 2003 medium-term budgetary planning process the broad measures of a permanent nature that would ensure that a minimum improvement in the cyclically-adjusted balance of 0,5 % of GDP per year until the close-to-balance objective can be considered achieved. Generally, the Council invites Italy to clarify its fiscal strategy, particularly in the light of the goal of reducing the tax burden, which the Council shares, but which can be safely and effectively achieved only within a comprehensive reform plan on both the expenditure and the revenue side.

The Council considers that in the light of Italy's very high debt ratio the pace of its reduction should be significantly faster than is the experience of the past years. It notes the slowdown in the rate of debt reduction projected toward the end of the programme period also in connection with some "below the line" operations. The Council is especially concerned that the risks to the programme deficit targets might imply too slow a pace of reduction in the debt ratio. The Council therefore urges Italy to act on all the factors under the Government's control to ensure that debt is sufficiently diminishing. In this respect, it recommends that measures of transitory nature, particularly sales of assets through securitisation operations, be considered as a means to accelerate the reduction of the debt and not as a substitute for corrective action on the deficit side.

The Council recalls that the achievement of a position of underlying budget balance in the medium term is critical to placing public finances on a sustainable footing. On the basis of current policies, the risk of unsustainable public finances in light of ageing populations cannot be excluded. Given Italy's high debt, primary surpluses in the order of 5 % of GDP will have to be maintained for many years. The Council notes that Italy's ability to cope with the budgetary consequences of ageing is based on implementation of the major pension reforms adopted in the 1990s and a large increase in the participation rate. In line with its Opinion on the previous updated programmes and the Broad Economic Policy Guidelines for 2002, the Council encourages Italy to adopt further measures to promote supplementary privately-funded pension schemes and to address the outstanding critical issue in the public pension system, namely, the long transition period to the new contributions-based system. This should be coupled with the measures necessary to raise participation rates and to control the evolution of age-related expenditures.

(1) OJ L 209, 2.8.1997.