Council Opinion

of 12 March 2001

on the updated stability programme of Spain, 2000-2004

(2001/C 109/03)

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),

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 March 2001 the Council examined Spain's updated stability programme which covers the 2000-2004 period. The Council notes that the programme reaffirms the strategy adopted in the two previous programmes: promoting healthy economic growth through fiscal consolidation and structural reforms. Notwithstanding, the update has the same lack of information found in the two previous programmes, which makes more difficult the assessment of both the macroeconomic scenario and the estimate of the underlying budgetary position. This lack of information should be corrected in future updates.

The programme's objectives are to turn the estimated 2000 general government deficit of 0,3 % of GDP into a balance in 2001 and a surplus of 0,3 % in 2004, while the debt ratio falls to 49,6 % of GDP at the end of the forecast period.

The Council welcomes the overall record of implementation of the previous update. GDP has grown more briskly than expected along with strong job creation, while general government balance and debt targets have been overachieved. Nevertheless, recent price developments have been worse than expected, reflecting increasing core inflation stemming from strong domestic demand as well as external factors. The Council therefore considers essential that wage growth should be compatible with price stability. The Council recommends that wage indexation be phased out. It also recommends that if inflationary pressures should persist, the Spanish authorities should tighten fiscal policy further.

The macroeconomic scenario considered in the updated programme assumes output growth will decelerate from its present high rate (4,0 % in 2000) to 3,6 % in 2001 and to slightly below trend over the period 2002-2004 (3,2 % on average). Although for 2001 recent developments may point to a weaker outturn, the Council notes that this medium-term macroeconomic scenario appears broadly realistic overall.

The update continues with the successful budgetary strategy based on the restraint of primary current expenditure, which will allow for a reinforcement of government investment and for a reduction in the tax burden through a fiscal reform in 2002. Fiscal policy can be considered mildly restrictive over the period. As the envisaged strengthening of the government balance is based on expenditure restraint, the Council reiterates its encouragement for the approval of appropriate instruments, such as the proposed law of budgetary stability, to reinforce control of public spending at various levels of government. In turn, the Spanish authorities should be prepared to consider measures to offset the budgetary impact of the recent court ruling on civil servant wages in the event that this ruling is upheld on appeal.

The underlying budgetary position from 2001 should provide a sufficient safety margin to prevent the deficit from breaching the 3 % of GDP threshold during a normal cyclical downturn. The safety margin will increase further after 2001. The Council therefore considers that the updated stability programme is in conformity with the provisions of the stability and growth pact. The Council considers the envisaged widening of the safety margin is justified in order to cope with the budgetary consequences of ageing. In this respect, the Council welcomes the commitment made by the Spanish authorities to allocate the expected social security surpluses to further increase the social security reserve fund created in 2000. The Council notes that as recommended in the 2000 broad economic policy guidelines this fund was reinforced in 2000. Nonetheless, the update does not provide additional steps to tackle the long-term sustainability of public finances in view of the ageing population. The Council recommends the Spanish authorities to adopt new measures in order to ensure the viability of the public pension system, and would welcome greater attention to the issue of long-term sustainability in future updates.

The Council considers that the budgetary adjustment should be facilitated by its being shared by all levels of government, and in particular notes with satisfaction that the territorial governments are targeted to be in balance from 2001 on. Given the increasing role of territorial governments in various categories of expenditure (notably investment), this requires the continued effective functioning of the existing coordination between general government sub-sectors, which should be reinforced through the appropriate instruments under domestic discussion, such as the proposed law of budgetary stability. The Council also welcomes the commitment to apply any better-than-expected budgetary results of central government to public debt redemption.

The Council considers that the programme is consistent with the broad economic policy guidelines. The Council notes with approval the importance given in the update to structural policies. Structural reforms play an important role in increasing the potential output of the Spanish economy while easing inflationary pressures. The Council, therefore, encourages the Spanish Government to implement the envisaged structural reforms, which must be closely monitored and speeded up and reinforced if necessary.

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