Council Opinion of 7 March 2003 on the updated Stability programme of Luxembourg, 2001 to 2005
Date: 2003-03-07
Institutions: Council of the European Union
Subjects: Luxembourg, budget policy, economic policy, gross domestic product, public finance, stability programme

18.3.2003

EN

Official Journal of the European Union

C 64/1

I

(Information)

COUNCIL

COUNCIL OPINION

of 7 March 2003

on the updated Stability programme of Luxembourg, 2001 to 2005

(2003/C 64/01)

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 7 March 2003 the Council examined the updated stability
programme for Luxembourg, which covers the period 2001 to
2005. The programme does not
fully comply with the
requirements of
the code of conduct on the content and
format of the programmes endorsed by the Ecofin Council
on 10 July 2001; in particular it has been transmitted with a
six week delay. The programme partly conforms with the
recommendations of the BEPGs.

In 2002, real GDP growth decelerated further to an estimated
0,5 %, from 1,0 % in 2001, which is well below the forecast
included in the 2001 stability programme. The slowdown is to
a large extent due to adverse developments in financial services,
which accounts for around a quarter of total value added. On
the basis of a cautious macroeconomic scenario, which
assumes a somewhat more muted recovery of economic
activity than in the Commission Autumn 2002 forecast, real
GDP growth is expected to pick up only gradually, to around
3 % in 2005.

The Council notes
finances deteriorated
that government
markedly in 2002 as revenues decelerated in response to the
combined impact of
the tax reform and the economic
slowdown, while expenditure growth remained very strong.
Consequently,
the general government budget balance is
expected to show a deficit of 0,3 % of GDP in 2002, a sharp

(1) OJ L 209, 2.8.1997.

deterioration compared to the large surplus of 6,1 % of GDP in
2001 (2). The general government balance is projected to
remain in deficit by 0,3 % of GDP in 2003, to deteriorate
slightly further in 2004 to a deficit of 0,7 % of GDP, and to
reach a position close to balance in 2005, with a slight
nominal deficit of 0,1 % of GDP. The underlying general
government balance is expected to remain positive over the
horizon covered by the stability programme. Consequently,
the Council considers that Luxembourg continues to be in
conformity with the requirement of the stability and growth
pact to reach a budgetary position of close to balance or in
surplus in the medium term.

the main elements of

lending be positive,
for central government, and not

The Council notes that sound management of public finances
continues to be the guiding principle of the 2002 update; the
Council welcomes
the budgetary
framework currently in place, which inter alia encompasses
the use of cautious macroeconomic projections as the basis
for budgetary policy, as well as the principle to let net
to achieve a balanced
public sector
budget
the rise in
current expenditure exceed the growth of total expenditure.
The Council welcomes
the tax burden
through the implementation of tax reform while aiming for a
sound budgetary position in the medium term; in this context
it encourages a future government to adhere to real expen-
diture ceilings that are compatible with achieving a budgetary
position close to balance or in surplus in the medium term.

the reduction of

to let

However, the Council expresses some concern over the rapid
deterioration of the budget balance of the central government,
which only accounts for part of the general government sector.
The balance of central government was still in surplus by 2,6 %
of GDP in 2001 but is projected to register a deficit of 2,2 % of
GDP in 2002 and of 2,1 % of GDP in 2003, while the central
government deficit is expected to deteriorate further to 2,8 %
of GDP in 2004 and 2005. The Council notes that this is partly
due to revenue shortfalls
in response to the economic
slowdown, while central government expenditure is projected
to increase rapidly; although the starting position of public
finances in Luxembourg is extremely sound, a continued fast
increase of current expenditure might become a factor of risk
should
growth in the medium term slow
significantly.

economic

(2) More recent data communicated on 1 March show that the central
government deficit in 2002 was only 0,1 % of GDP, resulting in a
general government surplus of 2,6 % of GDP in 2002. However,
this information came too late to be reflected in the Commission's
appraisal.

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Official Journal of the European Union

18.3.2003

On the basis of current policies, the Council considers that
public finances in Luxembourg are in a good position to
meet the projected costs of an ageing population. However,
the Council notes that the assessment of the sustainability of
public finances in Luxembourg is very sensitive to devel-
opments as regards the number of cross-border workers. The

Council considers that the commitment to sustain a balanced
budget position in coming years is broadly appropriate in light
of the projected budgetary impact of ageing populations, and
welcomes measures to improve the attractiveness of third pillar
private pensions.

COUNCIL OPINION

of 7 March 2003

on the updated Stability programme for Portugal, 2003 to 2006

(2003/C 64/02)

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 by the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 7 March 2003 the Council examined the updated stability
programme for Portugal, which covers the period 2003 to
2006. The updated programme projects general government
finances to improve steadily, from a deficit of 2,8 % of GDP
in 2002 to a deficit of 0,5 % of GDP in 2006. Government
gross debt is expected to decrease from 58,8 % of GDP in 2002
to 52,7 % in 2006.

that

the updated programme broadly
The Council notes
complies with the requirements of
the revised ‘code of
conduct on the content and format of stability and converge
programmes’. The updated programme was adopted by the
government on 20 December and presented to parliament,
which discussed it and adopted early in January a declaration
of approval by a large majority, including the support of the
main opposition party. The updated programme was then
formally submitted to the Commission. The Portuguese auth-
orities have thus effectively kept the commitment made to the
Council on 5 November, in the framework of the recommen-
dation under Article 104(7), to present before the end of the
year an updated stability programme. The Council considers
reflected in the planned
that
measures in the programme update broadly comply with the
2002 Broad Economic Policy Guidelines.

the economic policies as

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

The update's macroeconomic scenario shows a small accel-
eration of GDP growth to 1,3 % in 2003 (from an estimated
growth rate of 0,7 % in 2002), which in the light of the most
recent information available, pointing to a further deceleration
looks
in economic activity in the second half of 2002,
somewhat optimistic. For the period 2004 to 2006, the macro-
economic scenario presented in the programme update appears
plausible as far as the pace of economic growth is concerned
(an average growth rate of close to 3 % per year). The planned
measures of structural reform should generate beneficial supply
side effects, allowing the economy to rely on greater export
strength.

The Council considers that regaining an appropriate level of
external competitiveness
importance for
is of paramount
Portugal
in the light of the level of inflation and real wage
developments over the last years. To that end, securing wage
moderation and sustained increases in productivity are key
requirements, also as a way to secure a decline in inflation.
In this context,
the government's
the Council welcomes
guideline to use, from 2003 onwards, the average inflation
forecast
the benchmark for wage
negotiations, as well as the freezing of most wages in the
government sector in 2003. This latter measure should have
favourable spill-over effects
the
economy.

in the private sector of

euro-area as

the

for

On 5 November 2002, in the light of a government deficit of
4,1 % of GDP in 2001, the Council decided that an excessive
deficit existed in Portugal and issued a recommendation to
the Treaty.
Portugal according to Article 104(7) of
In the
the Portuguese authorities
this
terms of
were urged to:

recommendation,

(i) implement with resolve their budgetary plans for 2002
to 2,8 % of GDP in
which aim at reducing the deficit
that year. The Council established a deadline of 31
December 2002 for the Portuguese government to take
all necessary measures to bring the excessive deficit to an
end;

(ii) adopt and implement the necessary budgetary measures to
ensure that
in 2003 is further
reduced clearly below 3 % of GDP and that the government
debt ratio is kept below the 60 % of GDP reference value.

the government deficit