Council opinion of 8 March 2005 on the updated stability programme of Spain, 2004-2008
Date: 2005-03-08
Institutions: Council of the European Union
Subjects: Spain, stability programme

19.7.2005

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Official Journal of the European Union

C 177/1

I

(Information)

COUNCIL

COUNCIL OPINION

of 8 March 2005

on the updated stability programme of Spain, 2004-2008

(2005/C 177/01)

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 surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

On 8 March 2005 the Council examined the updated stability programme of Spain, which covers
the period 2004-2008. The programme complies with the data requirements of the ‘code of
conduct on the content and format of stability and convergence programmes’. However,
the
updated programme was presented three weeks beyond the 1 December deadline set in the code of
conduct.

The macroeconomic scenario underlying the programme envisages real GDP growth to pick up
from 2,6 % in 2004 to 2,9 % in 2005 and to average 3,0 % over the rest of the programme period.
On the basis of currently available information, this scenario seems to reflect rather favourable
growth assumptions. The update also considers a ‘moderate scenario’ that projects annual GDP
growth of 2,4 % in 2005 and 2,5 % thereafter. While the baseline scenario can be considered as rela-
tively optimistic, the moderate growth scenario is on the low side. The programme's projections for
inflation (based on the GDP deflator) appear realistic, but still remain relatively high thus posing risk
to competitiveness.

According to the update, the general principle guiding fiscal policy is that of budgetary stability over
the full economic cycle. This general principle could lead to budgetary deficits in the event of a
cyclical slowdown, although the update does not target any deficit positions between 2005 and
2008 after the temporary deficit recorded in 2004, which reflected the impact of accounting adjust-
ments. The update targets small, but rising surpluses; from 0,1 % of GDP in 2005 to 0,4 % of GDP

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

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at the end of the projection period. Since interest payments are expected to decrease only slightly
over the programme period, the primary surplus is projected to remain fairly stable at around 2¼ %
of GDP. While the targets for the general government balance are broadly the same as in the
previous update, the targeted primary surpluses are slightly less ambitious, which reflects higher
interest payments projected in the 2003 update. Based on trend GDP calculated by the Commission
services (1) from the projected growth rates in the update, and after netting out the effect of the
2004 one-off accounting adjustments, the cyclically-adjusted budget balance remains between 0,2 %
and 0,5 % of GDP throughout the programme period.

(4)

(5)

(6)

(7)

(8)

The risks to the budgetary projections in the programme appear broadly balanced. In particular,
although growth assumptions are somewhat favourable, the risk of sizeable deviations from the
programme's objectives appears limited.

In view of this risk assessment, the budgetary stance in the programme is sufficient to maintain the
Stability and Growth Pact's medium-term objective of a position of close-to-balance throughout the
programme period (with a temporary deviation in 2004 related to the one-off accounting adjust-
ments). It also provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold
with normal macroeconomic fluctuations over the period covered in the update.

The debt ratio is estimated to have declined to 49,1 % of GDP in 2004, well below the 60 % of GDP
Treaty reference value. The programme projects the debt ratio to further decline by 9 percentage
points over the programme period, mainly on account of primary surpluses above 2 % of GDP.

The budgetary strategy outlined in the programme puts Spain in a relatively favourable position
with regard to long-term sustainability of the public finances, in spite of the projected budgetary
costs of an ageing population. However, given the risks surrounding such long-term expenditure
projections and the large increase of pension expenditure projected in the very long term, current
policies need to be supplemented by measures to prevent the emergence of unsustainable trends in
public finances in the long run,
in particular through a comprehensive reform of the pension
system in line with the recommendations of the multi-partisan agreement ‘Pacto de Toledo’.

Overall, the economic policies outlined in the update are partly consistent with the country-specific
broad economic policy guidelines in the area of public finances. In particular, as regards the recom-
mended reform of the public pension system to ensure the long-term viability of the system has not
been implemented yet.

In view of the above assessment, the Council is of the opinion that Spain should adopt measures to
prevent the emergence of unsustainable trends in public finances in the long run, in particular through a
major reform of the pension system.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation (2)
(%)

SP Dec 2004

COM Oct 2004

SP Jan 2004

SP Dec 2004

COM Oct 2004

SP Jan 2004

2004

2005

2006

2007

2008

2,6

2,6

3,0

3,8

3,1

2,9

2,9

2,6

3,0

3,7

2,9

2,6

3,0

2,7

3,0

3,5

2,5

2,6

3,0

n.a.

3,0

3,2

n.a.

2,6

3,0

n.a.

n.a.

2,8

n.a.

n.a.

(1) The commonly agreed methodology based on the production function approach is not yet applied to Spain, pending
the resolution of estimation problems. Therefore, cyclically-adjusted balances are calculated based on the Hodrick-
Prescott filter methodology.

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General government
balance
(% of GDP)

SP Dec 2004

COM Oct 2004

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Government gross debt
(% of GDP)

SP Jan 2004

SP Dec 2004

COM Oct 2004

SP Jan 2004

SP Dec 2004 (1)

COM Oct 2004

SP Jan 2004 (1)

SP Dec 2004

COM Oct 2004

SP Jan 2004

2004

2005

2006

2007

2008

– 0,8

– 0,6

0,0

1,5

1,7

2,6

– 0,7

– 0,7

0,1

49,1

48,2

46,6

0,1

– 0,1

0,1

2,2

2,1

2,5

0,2

– 0,1

0,1

46,7

45,5

47,7

0,2

0,0

0,2

2,2

2,0

2,6

0,3

0,0

0,2

44,3

42,9

45,7

0,4

n.a.

0,3

2,3

n.a.

2,6

0,5

n.a.

0,3

42,0

n.a.

43,8

0,4

n.a.

n.a.

2,3

n.a.

n.a.

0,4

n.a.

n.a.

40,0

n.a.

n.a.

Note:
(1) The commonly agreed methodology based on the production function approach is not yet applied to Spain, pending the resolution
of estimation problems. Therefore, cyclically-adjusted balances are calculated by Commission services based on the Hodrick-Prescott
filter methodology from the information provided in the programme.
Inflation based on the GDP deflator for the stability programmes.

(2)

Sources:
Stability programme (SP); Commission services autumn 2004 economic forecasts (COM); Commission services calculations