Council Opinion of 18 February 2003 on the 2002 update of Ireland's Stability Programme, 2003 to 2005
Date: 2003-02-18
Institutions: Council of the European Union
Subjects: Ireland, budget policy, economic policy, gross domestic product, stability programme

5.3.2003

EN

Official Journal of the European Union

C 51/5

2003 to eliminate the deficit estimated for 2002. Especially in
the light of the phased transfer underway of important tax and
spending powers to regional authorities, the Council welcomes
the fiscal discipline framework set by the General Law of
Budgetary Stability. This needs to be implemented effectively
while preserving adequate margins of manoeuvre for
the
working of the automatic stabilisers in either direction.

The Council welcomes the fact that the updated programme
gives greater weight compared with the previous update to the
issue of the long-term sustainability of the public finances. It
notes the commitment to achieve balanced budget positions
leading to a continuous debt reduction as well as that some
measures to increase employment rates and the incentives for
active ageing and private pension schemes were taken. It never-
theless considers that these are just steps towards the adequate
reorientation of policy in line with its previous opinions.
Although the
revised demographic projections presented
would imply a somewhat more moderate budgetary impact
than earlier projections,
the Council considers that on the
basis of current policies the risk of unsustainable public
finances in terms of emerging budgetary imbalances in the
long run cannot be excluded: such a risk essentially stems
from the large projected increase in age-related spending on
public pensions. Strengthening long-term sustainability should
therefore remain of primary concern in the framework of an

ambitious three-pronged strategy. In this respect, the Council
notes that no major review of the public pension system has
yet been undertaken, in contrast with the recommendations in
both the previous opinion and the 2002 Broad Economic
Policy Guidelines. The Council urges the Spanish authorities
to agree a timetable for reaching policy conclusions and
implementation of
the pension
system to align more closely contributions and benefits.
Assets of the public pensions reserve fund created in 2000
to finance future liabilities will stand in 2003 slightly above
1 % of GDP, which compares to a target of 1 % in 2004. New
targets which will substantially reinforce the fund now need to
be set if this fund is to make a substantial contribution to
meeting the costs of ageing populations.

the envisaged reform of

labour,

in these areas

further progress

and product markets.

Finally, the Council welcomes recent initiatives for structural
It
reform in the
capital
recommends
to support
employment-oriented and non-inflationary growth with lower
although
inflation
improvement in the labour market in recent years has been
notable, persistence of
and female
relatively
employment and wide regional unemployment disparities call
for sustained efforts. Such efforts would be consistent with the
2002 Broad Economic Policy Guidelines.

Particularly,

low total

recorded

hitherto.

than

COUNCIL OPINION

of 18 February 2003

on the 2002 update of Ireland's Stability Programme, 2003 to 2005

(2003/C 51/04)

THE COUNCIL OF THE EUROPEAN UNION,

After consulting the Economic and Financial Committee,

Having regard to the Treaty establishing the European
Community,

HAS DELIVERED THIS OPINION:

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,

(1) OJ L 209, 2.8.1997.

On 18 February 2003 the Council examined the 2002 update
of Ireland's stability programme, which covers the period 2003
to 2005. The update broadly complies with the data
requirements of the revised ‘code of conduct’ on the content
and format of stability and convergence programmes. However,
compliance would be strengthened by explaining the nature
and significance of the large ‘contingency provisions’ included
in the public finance projections for the final two years of the
programme. The economic policies as reflected in the planned
measures in the programme update broadly comply with the
Broad Economic Policy Guidelines for 2002.

C 51/6

EN

Official Journal of the European Union

5.3.2003

the

the

commitment of

Irish
The Council welcomes
government to let the Stability and Growth Pact provide the
framework for its budgetary policy. However,
it notes that,
following the very large deterioration in the budget balance
in 2001, and in spite of an upward revision of GDP growth
and inflation for 2002, the projected budgetary outcome is a
deficit of 0,1 % of GDP, half a percent of GDP worse than
planned in last year's programme. In cyclically-adjusted terms,
the deficit in 2002 becomes significantly worse, not in line
the Stability and
with the ‘close-to-balance’ requirement of
Growth Pact, although the estimate of
the output gap
presents unusual margins of uncertainty due to the special
features of the Irish economy. Due to revenue reasons, the
budgetary stance turned out
to be expansionary in 2002
rather than broadly neutral as recommended for that year in
the Broad Economic Policy Guidelines.

The programme's macroeconomic scenario assumes a gradual
recovery towards growth around that generally accepted to be
sustainable in the medium term, of around 5 %. The potential
growth rate derived by the Commission based on the data in
the programme initially exceeds, but, by the end of
the
programme, converges to this rate. The projected downward
path of inflation ought to be attained, otherwise there would
be a significant risk to competitiveness and price stability if
wage expectations fail
to the changed economic
environment.

to adapt

The Council observes that the new programme further deepens
and extends the downward shift in the projected path for the
general government balance that was outlined in the previous
programme. The actual balance is projected to continue to
deteriorate in 2003 and 2004 (with the deficit rising to
0,7 % and 1,2 % of GDP respectively and the primary surplus
falling to 0,9 % and 0,3 % of GDP). The deficit stabilises at
1,2 % of GDP in the last year of
the programme. The
Council notes with concern that this coincides with a return
to Ireland's sustainable growth in the medium term. The reason
for the deterioration over the programme period is that the
trend decline in the revenue ratio outweighs the modest drop
in the expenditure ratio achieved through expenditure restraint.
Excluding the build-up of assets in the National Pension
Reserve Fund, the debt ratio would continue to fall throughout
the period, rather than record a marginal rise to 35 % towards
the end of the programme period.

examination of

The Council notes however that important considerations bear
the budgetary position in the
on the
to the abovementioned uncer-
programme. Firstly, subject
tainties about
the
underlying deficit is estimated to have peaked in 2002 and
to move
the
to balance
in spite of the ongoing deterioration in
programme period,
the actual balances. Specifically, a tightening of fiscal policy

the measurement of

the output gap,

end of

towards

closer

the

the underlying deficit

of about 0,5 percentage point of GDP is foreseen in 2003,
when the budget implements a cut in capital expenditure, a
marked reduction in the growth rate of current expenditure
and an overall stabilisation of the tax burden. According to
is 0,6 % of
Commission calculations,
GDP in 2003 and in 2004, and declines to 0,4 % in 2005.
However,
the safety
the targets in the programme respect
margin against breaching the 3 % of GDP threshold for the
deficit ratio. The Council urges the Irish authorities to ensure
that the budgetary stance is implemented as planned in the
programme. Secondly, as in all previous stability programmes,
the budgetary targets for the final
two years incorporate
‘contingency provisions’
against unforeseen developments.
Should these contingency provisions (0,4 % and 0,8 % of
GDP in 2004 and 2005 respectively) not be used, this would
result in a significant improvement in the budgetary position
projected for the medium term.

the primary surpluses projected in the
The low level of
programme reflects
the impact of multi-annual measures,
particularly the investment programme expected to peak with
the National Development Plan 2000 to 2006. The programme
targets imply an underlying deficit of around 0,5 % of GDP in
each year (including contingency provisions), reaching a level
of close-to-balance or in surplus by the end of the period,
which would be in line with the requirement of the Stability
and Growth Pact. The Council notes that, should Ireland make
only limited use of
the close-
to-balance position would be reached already in 2004.

the contingency provision,

reviews

structural

the government's

The update
reform
programme, which focuses on lowering the tax burden, broa-
dening the tax base, improving public services and addressing
infrastructural needs through the further implementation of the
National Development Plan. The Council welcomes the range
of measures, outlined in the programme,
to improve the
management and control of public expenditure and urges the
Irish authorities to supplement this with the development of a
comprehensive norm-based
to guide public
spending in the medium term.

framework

With its low debt level and gradual build-up of assets in the
Ireland seems to be in a
National Pensions Reserve Fund,
relatively strong position to cope with the budgetary impact
of ageing populations. Nonetheless, the Council notes the risk
of budget imbalances in the long run on the basis of current
policies. A financing gap may emerge over time if age-related
spending as a share of GDP approaches the average level for
the EU and if the tax ratio is left unchanged. To ensure that
public finances are on a sustainable footing,
thus
important to develop sustainable financing arrangements for
social welfare expenditure and to maintain a close-to-balance
or in surplus position over the long run.

is

it