Council opinion

of 21 January 2003

on the updated convergence programme of Sweden, 2002 to 2004

(2003/C 26/06)

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 9(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 Sweden's updated convergence programme, which covers the period 2002 to 2004. This update provides detailed information, including the analysis of the long-term sustainability of public finances, which is broadly in line with code of conduct. The lack of detailed information for 2005 in the programme is not in line with the code of conduct. However, the Council recognises that the Government's Budget Bill for 2003 did not include budgetary plans for 2005 as a result of prolonged negotiations with respect to forming a government in autumn 2002.

The Council considers that the updated programme is consistent with the previous Council Opinion(2) and the Broad Economic Policy Guidelines.

The Council notes with satisfaction that the updated programme envisages continued government surpluses throughout the period to 2004 as Sweden maintains its medium term objective of a budget surplus of 2 % of GDP on average over the business cycle. The strategy of maintaining sound public finances is supported by a commitment to continue to adhere to the ceilings for central government expenditure, which has been instrumental in strengthening the credibility of sound public finances in recent years, and a balanced budget constraint for local governments. This has been accompanied by tax cuts, of which the third step out of four was implemented in 2002. The Council further notes with satisfaction that the debt ratio remains below the reference value of 60 % of GDP, and is projected to continue on a downward trend over the remainder of the programme period.

The macroeconomic scenario presented in the programme, with GDP growth of 2,1 % in 2002 and 2,5 % in 2003 appears somewhat optimistic and the Council considers that there are downside risks to growth. Indeed, the Commission's autumn forecast is for growth of 1,6 % in 2002 and 2,2 % in 2003, suggesting a more subdued economic recovery, as there are signs of some fragility both externally and domestically. Economic growth can therefore be expected to return only gradually to the potential growth rate.

The Council considers that Sweden continues to fully respect the Stability and Growth Pact's requirement of a fiscal position "close to balance or in surplus" over the programme period. Indeed, continued surpluses in the underlying budgetary position in each year over the period underpin that the public finances should remain sound. However, the Council notes that, on the basis of the Commission's analysis, the underlying budgetary position is expected to remain in surplus but below Sweden's 2 % of GDP fiscal rule in the years to 2004. This results from the fact that the considerable fiscal stimulus in 2001 and 2002 is only partially reversed in the following years. Moreover, some restraining measures may be necessary in order to ensure adherence to the expenditure ceilings.

The Council welcomes the attention paid to the sustainability of public finances in the convergence programme, and considers that prudent assumptions should be used as regards the potential evolution of non-age related spending. The Council considers that on the basis of current policies, public finances appear to be on a sustainable footing to meet the budgetary costs of ageing populations, benefiting from the sustained running of budget surpluses and the ambitious reform of the pension system implemented during the 1990s. The Council welcomes the budgetary objective of running budget surpluses of 2 % of GDP up to 2015 with a view to running down public debt at a fast pace. This may however prove difficult for such a sustained period. A challenge will be to complete the tax reform while safeguarding the achievements of the past decade of placing public finances on a sustainable path.

Inflation in Sweden fell back towards the inflation target of 2 % in the spring of 2002. The Council notes that Sweden continues to fulfil the convergence criterion on price stability and is expected to continue do so in the years to 2004. Long-term interest rates in Sweden over the past year have been in line with the trend in the international bond and equity markets. Sweden continues to fulfil the long-term interest rate convergence criterion. Regarding the exchange rate, the krona has not participated in the ERM2 and it has exhibited some volatility since the submission of the previous update. Hence, Sweden does still not fulfil the exchange rate convergence criterion. The Council considers, as stated in its previous Opinion(3), that "Sweden needs to demonstrate its ability to stay in line with an appropriate parity between the krona and the euro over a sufficient period of time without severe tensions. To this end, the Council expects Sweden to decide to join the ERM2 in due course."

In order to obtain high and sustainable economic growth, the strategy of previous programmes is continued and structural measures in this regard have been implemented and proposed, in line with the Broad Economic Policy Guidelines. To this end, the Council considers that completing the tax reform and efforts to reach the key policy objectives regarding employment, social security recipients and days of sick-leave should be given high importance within the framework of sound public finances.

(1) OJ L 209, 2.8.1997.

(2) OJ C 33, 6.2.2002.

(3) OJ C 33, 6.2.2002, p. 4.