Council Opinion

of 12 February 2002

on the updated stability programme of Italy, 2001-2005

(2002/C 51/05)

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 12 February 2002 the Council examined Italy's updated stability programme, which covers the period 2001-2005.

The new update broadly complies with the requirements of the revised "code of conduct on the content and format of stability and convergence programmes"(2), although some minor inconsistencies exist in the aggregation of expenditures and revenues in ESA 95 terms.

The Council welcomes Italy's commitment to continue to secure high primary surpluses throughout the programme period, while allowing for some easing in the tax burden. It further notes with satisfaction the confirmation of the previous updated programme's objectives for the general government balance in 2002 and 2003. It welcomes in particular the balanced budget in the latter year. Notwithstanding lower than expected growth and in compliance with the 2001 BEPGs, the projected deficit for 2001 only slightly exceeds the original objectives. While acknowledging the market. Related difficulties in meeting the privatisation objectives, the Council regrets, that the reduction of the debt ratio below 100 % of GDP is now postponed by one year in contrast with Italy's commitments since 1998.

The programme's macroeconomic scenario assumes an acceleration of real GDP growth already at the end of 2001, with a further strengthening in 2003 and beyond, when economic growth is expected to steady at around 3 %. This is supported by structural reforms. However, in the short term, the macroeconomic scenario is based on external assumptions which do not sufficiently reflect the deterioration in the global economic outlook observed during 2001. Hence, the Council observes that the risks to the macroeconomic scenario are mainly on the downside.

The budgetary targets in 2002 and 2003 rely heavily on one-off measures, in particular the sale of publicly-owned real assets, while few details are provided on the planned sizeable reduction in non-interest expenditure in percentage of GDP over the programme period. The Council remarks that the extensive recourse to one-off operations in a cyclical downturn should be complemented by measures aimed at restraining primary current expenditures, which need to be clarified.

The Council observes that the projected medium-term budgetary position of close to balance or in surplus from 2003 onwards is in line with the requirements of the stability and growth pact. The Council notes that there is a margin to avoid breaching the 3 % of GDP deficit threshold throughout the programme period.

The Council considers it essential that the balanced fiscal position over the medium term is achieved as planned and that the required high levels of primary surpluses in the order of 5 % of GDP are secured by measures aimed at a lasting reduction of primary current expenditures. The careful design and timely implementation of such measures is all the more important in the light of the challenges arising from the planned reform of taxation, which should result in a further significant reduction of the tax burden. The Council urges Italy to adopt rules allowing for a more effective monitoring and control of current outlays at all levels. It further recommends that Italy stand ready to keep fiscal consolidation on course after 2003 in the event that the programme's high trend growth assumptions are not supported by actual developments.

The Council observes that Italy's capacity to absorb age-related imbalances depends crucially on maintaining high primary surplus over the long term and large increases in labour force participation rates. Reforms of the pension system so far helped to contain the growth in pension expenditures. The Council encourages Italy to accelerate the implementation of the pension reform to control expenditure and to promote supplementary private pension provisions, as stated in the programme. Moreover it notes the key importance of labour market reforms and of accelerating the reduction in the debt ratio, in view of the necessity to increase participation ratios and provide in advance for competing claims on public resources.

(1) OJ L 209, 2.8.1997.

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