Council Opinion

of 28 February 2000

on the updated stability programme of Italy for the period 1999 to 2003

(2000/C 98/02)

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 28 February 2000 the Council examined Italy's updated stability programme, which covers the period 1999 to 2003. The Council notes with satisfaction that despite the cyclical slowdown, the initial programme's objective of a budget deficit of 2,0 % of gross domestic product (GDP) in 1999 appears to have been attained, as recommended in the Broad Economic Policy Guidelines. Lower than expected interest payments and higher than expected revenues, namely from improved tax collection, have contributed to this outcome. The decrease in the gross government debt/GDP ratio kept pace in 1999, as large privatisation receipts offset the negative impact of lower growth. The Council notes the confirmation of the objectives for the net borrowing of the general government in 2000 and 2001 (respectively, 1,5 % and 1,0 % of GDP). It welcomes the commitment to further budgetary consolidation, which would support a decline by over three percentage points per year in the debt/GDP ratio, to reach 100,0 % in 2003. The Council considers that the updated programme is consistent with the Broad Economic Policy Guidelines.

The macroeconomic projections in the updated stability programme assume a gradual acceleration in GDP growth, from an annual rate of 1,3 % in 1999 to nearly 3 % in 2002 to 2003. The Council notes that such an acceleration constitutes a realistic scenario and that the cyclical upswing in 2000 and 2001 could turn out stronger than assumed in the updated programme; on the other hand, the new assumptions on interest rates could be too optimistic in the light of recent developments in financial markets.

The Council notes the continuation of the budgetary strategy outlined in the initial programme, aiming at pursuing the stabilisation of public finances and promoting growth and an equitable distribution of income. The strategy is based on keeping the primary surplus at a high level and on reducing current expenditure as a percentage of GDP, in parallel with some easing of the still heavy tax burden and an expansion of public investment, particularly in the South. The Council notes that the deficit targets are maintained even though the primary surplus is now planned to stabilise at the level of 5 % of GDP lower than in the initial programme. The Council notes the commitment of the Italian authorities to reduce non-interest current expenditures as a percentage of GDP from 37,9 % of GDP in 1999 to 36,2 % of GDP in 2003.

The Council considers that the underlying budgetary position in 2000 should be sufficient to provide a safety margin against breaching the three percent of GDP deficit threshold in normal cyclical fluctuations; the proposed path of budgetary consolidation would widen such a safety margin, implying that Italy would continue to satisfy the requirements of the Stability and Growth Pact up to 2003. However, the Council reaffirms that Italy must secure a steady decline in its still high government debt ratio, and it considers that the budgetary objectives in the updated programme should be fulfilled in order to respect the commitment on the part of the Italian government to reduce the debt/GDP ratio to below 100 % by 2003. Should growth turn out stronger than projected in the updated programme, the Council expects Italy to achieve better budgetary outcomes than planned and thus accelerate the reduction in the debt/GDP ratio towards the 60 % reference value.

Following its opinion(2) on the original stability programme, the Council urges the Italian government toaddress with determination the medium-term structural challenges to public finances from pension and other age-related budgetary expenditures. Recent government proposals to promote the expansion of funded pension provisions go in the right direction but would not eliminate the need to reexamine the parameters of the present system. A timely reassessment of the parameters of the pension system would allow the expected increase in the ratio of pension expenditures to GDP to be contained. The Council further encourages the Italian government to pursue with vigour its privatisation programme and to enhance the structural reforms of labour and product markets and of the public administration, which are all needed in order to foster competition and efficiency and revitalise the Italian economy.

(1) OJ L 209, 2.8.1997, p. 1.

(2) OJ C 68, 11.3.1999, p. 1.