2006/1014/EC: Council Decision of 28 November 2006 establishing, in accordance with Article 104(8), that the action taken by Poland in response to the Recommendation of the Council in accordance with Article 104(7) of the Treaty establishing the European Community is proving to be inadequate
Date: 2006-11-28
Institutions: Council of the European Union
Subjects: Poland, budget deficit, public administration, public debt, stability pact

30.12.2006

EN

Official Journal of the European Union

L 414/81

II

(Acts whose publication is not obligatory)

COUNCIL

COUNCIL DECISION

of 28 November 2006

establishing, in accordance with Article 104(8), that the action taken by Poland in response to the
Recommendation of the Council in accordance with Article 104(7) of the Treaty establishing the
European Community is proving to be inadequate

(2006/1014/EC)

THE COUNCIL OF THE EUROPEAN UNION,

Member States,
implement
Pact in a strict and timely manner.

the Council and the Commission,
to
the Treaty and the Stability and Growth

Having regard to the Treaty
Community, and in particular Article 104(8) thereof,

establishing the European

Having regard to the recommendation from the Commission,

Whereas:

(1)

(2)

According to Article 104 of the Treaty, Member States
are to avoid excessive government deficits.

as

sound

finances

a means

government

The Stability and Growth Pact is based on the objective
of
of
strengthening the conditions for price stability and for
strong sustainable growth conducive to employment
creation. The Stability and Growth Pact includes Regu-
lation (EC) No 1467/97 of 7 July 1997 on speeding up
and clarifying the implementation of the excessive deficit
procedure (1) which was adopted to further the prompt
correction of excessive general government deficits.

(4)

(5)

The Eurostat Decision of 2 March 2004 on the sectoral
classification of pension schemes (3) established that a
defined-contributions funded scheme cannot be classified
as a social security scheme. This scheme cannot therefore
be considered as part of general government. This was a
framework decision which required bilateral discussions
with Member States before implementation.
In the
those discussions, Eurostat acknowledged
context of
‘some Member States might need a transitional
that
the decision and to avoid
period to implement
budgetary
their
conduct
disruptions
policies’ (4). The transitional period, allowed by Eurostat,
will expire with the first fiscal notification of 2007, due
by 1 April 2007. Poland decided to avail itself of this
transitional period. Therefore, social contributions and
other revenue collected (and expenditure incurred) by
funded
been
have
recorded as government
(and expenditure),
which result in deficit and debt figures being smaller
than otherwise.

defined-contribution

schemes

revenue

the

of

in

By Decision 2005/183/EC (5) of 5 July 2004,
decided,
Treaty, that an excessive deficit existed in Poland.

in accordance with Article 104(6) of

it was
the

(3)

The Resolution of the Amsterdam European Council of
17 June 1997 (2) solemnly invited all parties, namely the

(1) OJ L 209, 2.8.1997, p. 6, Regulation as last amended by Regulation

(EC) No 1056/2005 (OJ L 174, 7.7.2005, p. 5).

(2) OJ C 236, 2.8.1997, p. 1.

(3) Eurostat News Releases No 30/2004 of 2 March 2004 and No
117/2004 of 23 September 2004 and Chapter I.1.3 — Classification
of funded pension schemes and impact on government finance of
the Eurostat Manual on government deficit and debt, available for
download
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/
KS-BE-04-002/EN/KS-BE-04-002-EN.PDF

at:

(4) See footnote 3.
(5) OJ L 62, 9.3.2005, p. 18.

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Official Journal of the European Union

30.12.2006

(6)

(7)

the Treaty and
In accordance with Article 104(7) of
Article 3(4) of Regulation (EC) No 1467/97, on 5 July
2004 the Council also adopted a recommendation to the
Polish authorities to bring the existence of an excessive
deficit to an end as rapidly as possible and to take action
in a medium-term framework to achieve the objective of
bringing the deficit below 3 % of GDP by 2007 in a
credible and sustainable manner,
in accordance with
the path for deficit reduction specified in the convergence
programme submitted by the authorities in May 2004
and endorsed in the Council opinion of 5 July 2004,
with the following annual
targets: 5,7 % of GDP in
2004, 4,2 % of GDP in 2005, 3,3 % in 2006 and
1,5 % of GDP in 2007. The Council established the
deadline of 5 November 2004 to take effective action
‘regarding the measures envisaged to achieve the 2005
deficit target’.

The deficit-reduction path endorsed by the Council on 5
July 2004 did not include the cost of the pension reform
implemented in 1999. About 20 % of the revenue from
pension contributions has been redirected from the pay-
as-you-go system to the fully-funded defined-contribution
pension schemes. At the time of the recommendation
under Article 104(7), the Council took explicitly into
account the fact that the deficit targets would have to
be revised upwards, with an estimated annual cost of the
Polish pension reform of around 1,5 % of GDP. In view
of this, and also of the prevailing negative risks attached
to the budgetary consolidation strategy,
the Council
pointed out in its opinion on the May 2004 convergence
programme that ‘the budgetary stance in the programme
may not be sufficient to reduce the deficit below 3 % of
GDP during the programme period’ (i.e. by 2007).

(8)

After the expiry of the deadline of 5 November 2004 set
in the Council recommendation under Article 104(7), the
Commission concluded,
in its Communication to the
Council of 14 December 2004, that no further steps
were necessary under the excessive deficit procedure for
Poland as the Polish government had taken effective
action regarding the measures envisaged to achieve the
2005 deficit target.

(9)

On 17 February 2005, the Council delivered its opinion
the convergence
on the November 2004 update of

programme of Poland. The update revised the 2007
deficit target upwards to 2,2 % of GDP in 2007 (from
1,5 % in the May 2004 convergence programme),
i.e.
about 3,7 % of GDP including the cost of pension
reform. This upward revision occurred in spite of
continued strong growth (projected in the programme
to average more than 5 % per annum), while deficit
outcomes/projections for the years 2004 to 2006 were
all lowered, due to measures taken by the government,
stronger economic growth as well as statistical revisions.
The Council noticed a risk of a delayed or incomplete
adjustment measures.
implementation of
to the
Referring
budgetary consolidation strategy,
invited
Poland inter alia to strengthen the fiscal adjustment
beyond 2005 and lower the deficit target for 2007. In
effect, only a small number of measures was imple-
mented. The fiscal outcome for 2005 was nevertheless
better than expected at 2,5 % of GDP.

attached
the Council

to the negative

fiscal

risks

the

(10) On 14 March 2006, the Council adopted its opinion on
the January 2006 update of the convergence programme
of Poland. The update aimed at a slow reduction of the
(by about 0,3 % of GDP
general government deficit
annually on average in the period 2006 to 2008)
in
order to meet the budgetary convergence criteria by the
end of the legislature (i.e. by the end of 2009). Also,
while deficit outcomes and projections for the years
2004 to 2006 were again revised downward, due to
measures taken by the government, stronger economic
growth as well as statistical revisions, the programme
confirmed the deficit target for 2007 at 2,2 % of GDP
(with the cost of the pension reform not included). Given
the upward revision of the pension reform cost to 2 %,
due to better-than-expected labour market developments
and higher participation in the new pension system, the
2007 deficit target including this cost was 0,4 percentage
points of GDP higher than in the previous update (4,1 %
of GDP compared to 3,7 % of GDP). The Council pointed
to various risks attached to the budgetary consolidation
strategy,
growth
relatively
assumptions in the last year of the programme period
(2008), relatively optimistic assumptions about tax elas-
ticities and possible difficulties with expenditure control
in the face of social spending pressures. The Council
concluded that ‘the convergence programme envisages
some progress, but not the effective correction of the
excessive deficit
the Council
mentioned that the planned adjustment in the structural
balance (i.e. the cyclically-adjusted balance net of one-off
the
and other
the information
Commission services on the basis of
the
programme
provided
to
commonly
to
agreed methodology) was
improve on average by 0,25 % of GDP per year over
the programme period.

temporary measures

calculated by

in 2007’.

In addition,

favourable

according

planned

such

the

as

in

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Official Journal of the European Union

L 414/83

(11)

The draft budget for 2007, adopted on 27 September
2006, estimates the 2006 deficit at 2,1 % of GDP
(pension reform cost not included), compared to 2,6 %
of GDP targeted in the January 2006 update of
the
convergence programme (and 3,3 % underlying the July
2004 Council recommendation under Article 104(7)).
The more positive outcome reflects higher
revenues
(especially personal
income tax) owing to stronger-
than-projected growth as well as more contained expen-
public
diture
investment. The draft 2007 budget presents
the
following deficit targets for the subsequent years: 1,7 %
in 2007, 1,2 % in 2008 and 0,5 % in 2009.

lower-than-planned

growth,

notably

(12)

The assessment of the action taken by Poland to correct
the excessive deficit by 2007 in response to the Council
recommendation under Article 104(7)
to the
following conclusions:

leads

— The revised 2007 deficit

target of 1,7 % of GDP
in the draft
(excluding pension reform costs),
budget for 2007,
is above the target of 1,5 % of
GDP endorsed in the Council recommendation of 5
July 2004 for the correction of the excessive deficit.
The revision of the 2007 deficit occurred against the
background of much lower deficit outcomes in the
period 2004 to 2006 than foreseen in the Recom-
mendation.

— The transition period for implementing the Eurostat
Decision of 2 March 2004 on the classification of
funded pension schemes will expire with the first
notification in 2007 due by 1 April. The inclusion
of
than previously projected pension
reform cost leads to a 2007 deficit target of around
3,7 % of GDP.

the higher

— Commission services’ autumn 2006 forecast projects
than
the 2007 deficit by 0,3 % of GDP higher

In particular,
targeted by the Polish authorities.
revenues from direct taxes are expected to be lower
than planned by the authorities, while social expen-
diture and public investment are likely to be higher.

(13)

This leads to the conclusion that, while there has been an
improvement in the fiscal position and Poland has so far
over-achieved its budgetary targets, on the basis of
current
information the 2007 deficit would clearly
exceed the 3 % of GDP deficit reference value which is
not in line with the recommendations of the Council for
a correction of the excessive deficit by the 2007 deadline.

In line with the Resolution of the Amsterdam European
Council on the Stability and Growth Pact, Poland agreed
to make the Council Recommendation of 5 July 2004
public (6),

HAS ADOPTED THIS DECISION:

Article 1

The action taken by Poland in response to the Council Recom-
mendation of 5 July 2004 under Article 104(7) of the Treaty is
proving to be inadequate to correct the excessive deficit within
the deadline fixed by the Recommendation.

Article 2

This Decision is addressed to the Republic of Poland.

Done at Brussels, 28 November 2006.

For the Council
The President

E. HEINÄLUOMA

(6) See http://register.consilium.eu.int/pdf/en/04/st11/st11220.en04.pdf