Council opinion of 27 February 2007 on the updated convergence programme of Poland, 2006-2009
Date: 2007-02-27
Institutions: Council of the European Union
Subjects: Poland, budget estimate, economic convergence, economic forecasting, public finance, stability programme

29.3.2007

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Official Journal of the European Union

C 72/13

COUNCIL OPINION

of 27 February 2007

on the updated convergence programme of Poland, 2006-2009

(2007/C 72/04)

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 particular
Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

On 27 February 2007 the Council examined the updated convergence programme of Poland, which
covers the period 2006 to 2009.

The macroeconomic scenario underlying the programme envisages real GDP growth to have reached
5,4 % in 2006 and to broadly stabilise (around 5¼ % on average) over the rest of the programme
period. Assessed against currently available information, this scenario appears to be based on growth
assumptions which are cautious in 2007 and rather favourable thereafter as the labour market may
not improve as rapidly as foreseen in the programme in particular. The programme's projections for
inflation appear realistic, tilted to be on the low side towards the end of the programme horizon,
notably because of rising wage pressures from the tightening labour market.

In the January 2006 convergence programme, the target for the general government balance in 2006
was set at – 2,6 % of GDP, the Commission services' autumn forecast points at – 2,2 % of GDP,
while the November 2006 update of the convergence programme estimates the 2006 outturn at
– 1,9 % of GDP. The better-than-expected outturn mainly results from an incomplete execution of
expenditure plans (especially social transfers and public investment), while revenue increase resulted
mainly from stronger-than-expected growth. The above-mentioned deficit figures exclude the pension
reform cost, estimated at around 2 % of GDP in 2006, in line with the transition period for imple-
menting the Eurostat decision of 2 March 2004 on the classification of funded pension schemes (2),
which expires in spring 2007. The main goal of the budgetary strategy in the November 2006
update is to correct the excessive deficit by 2007 by qualifying for the provision of the reformed Pact
which allows a part of
the pension reform cost to be deducted. For the following years, the
programme plans a gradual reduction of the deficit so that the 3 % of GDP reference value is reached
in 2009.

The deficit is planned to narrow by 0,4 percentage point of GDP annually (0,3 percentage point if
the pension reform costs are included), from 1,9 % of GDP in 2006 to 0,6 % of GDP in 2009. The
primary surplus is planned to improve from 0,5 % of GDP in 2006 to 1,7 % of GDP in 2009.
Including the impact of the above-mentioned Eurostat decision, the deficit in the updated programme
would improve from 3,9 % of GDP in 2006 to 2,9 % in 2009. The adjustment is planned to be
revenue-based in 2007 (revenue ratio increase by 0,6 percentage point of GDP with a near-constant
expenditure ratio) and strongly expenditure-based in 2008-2009 so as to more than offset a large

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2) See Eurostat News Releases No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004.

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decline in the revenue ratio (average annual expenditure ratio reduction by 1,6 percentage point, espe-
cially consumption and social transfers, with the revenue ratio declining by 1,2 percentage point on
average mainly reflecting a cut in social contributions, changes in personal income tax system and
other changes to the tax system, which are not always fully specified). Compared with the previous
programme, the deficit targets have been revised downwards in view of much stronger growth and
the better-than-expected outcome in 2006.

The structural balance (i.e.
the cyclically-adjusted balance net of one-off and other temporary
measures) calculated according to the commonly agreed methodology is planned to improve from
around – 2 % of GDP in 2006 to – ¾ % of GDP in 2009 at the end of the programme period
(pension reform costs not included). As in the previous update of the convergence programme, the
medium-term objective (MTO) for the budgetary position presented in the programme is a structural
deficit of 1 % of GDP, which the programme does not aim to achieve within the programme period.
As the MTO is more demanding than the minimum benchmark (estimated at a deficit of around
1½ % of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence
of an excessive deficit. The MTO adequately reflects the debt ratio and average potential output
growth in the long term.

The budgetary outcomes could be worse than targeted in the programme in particular in the outer
years of the programme. There are significant uncertainties about the effective implementation of
planned reforms as they are not backed up by precise measures supporting the envisaged expenditure
restraint. In addition, there are risks stemming from the rather favourable macroeconomic scenario
for the outer years of the programme period. Consequently, the action taken so far is not sufficient
and the planned measures should be strengthened to achieve that result.

In view of this risk assessment, the budgetary stance in the programme does not seem consistent
with a correction of the excessive deficit by 2007 as recommended by the Council. The budgetary
targets do not provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold
with normal macroeconomic fluctuations throughout the programme period. In the years following
the correction of the excessive deficit, the pace of the structural adjustment towards the MTO implied
by the programme should be strengthened, taking advantage of good economic times, and should be
backed up by measures.

Government gross debt is estimated to have reached 42,0 % of GDP in 2006, well below the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to decline by 1,4 percentage
point over the programme period. Including the impact of the above-mentioned Eurostat decision,
the government gross debt would rise from 48,9 % in 2006 to 50,2 % in 2009.

The long-term budgetary impact of ageing in Poland is the lowest in the EU, with age-related expendi-
ture projected to fall, partly as a result of the considerable expenditure-reducing impact of the reform
of the pension system — assuming that the pension reforms are fully implemented. The initial
budgetary position, although improved compared to 2005, still constitutes a risk to sustainable
public finances before the long-term budgetary impact of an ageing population is considered and
further budgetary consolidation envisaged in the programme would contribute to contain risks to the
sustainability of public finances. Overall, Poland appears to be at low risk with regard to the sustain-
ability of public finances.

(5)

(6)

(7)

(8)

(9)

(10)

The convergence programme contains a qualitative assessment of the overall impact of the reforms
listed in the October 2006 implementation report of the national reform programme within the
medium-term fiscal strategy. In addition, it provides some information on the direct budgetary costs
or savings of the main reforms envisaged in the national reform programme and its budgetary projec-
tions seem to take into account the public finance implications of the actions outlined in the national
reform programme. The measures in the area of public finances envisaged in the convergence
programme seem consistent with those foreseen in the national reform programme. In particular,
both programmes envisage some harmonisation of the farmers' social security system with the
general national system, the gradual harmonisation of the disability benefits with the reformed
pension system and the implementation of the basket of guaranteed medical services.

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(11)

The budgetary strategy in the programme is partly consistent with the broad economic policy guide-
lines included in the integrated guidelines for the period 2005-2008. In particular, action taken to
correct the excessive deficit does not appear adequate.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme provides all required and most of the optional data (1).

The programme envisages a correction of the excessive deficit by 2007, referring to the provision of Article
2(7) of Council Regulation (EC) No 1467/97, but the Council recalls that the action taken so far does not
appear adequate and the planned measures appear insufficient to achieve that result.

While in subsequent years the programme envisages to make appropriate progress towards the MTO in a
context of strong growth prospects, there are important risks to the achievement of the budgetary targets
and the durability of the adjustment.

In view of the above assessment, and taking into account a new recommendation addressed to Poland to
correct the excessive deficit adopted by the Council on 27 February 2007 under Article 104(7) of the
Treaty, the Council invites Poland to:

(i) ensure the correction of the excessive deficit by 2007 in line with the new recommendation under

Article 104(7).

(ii) taking advantage of the good economic times, using any extra revenue for deficit reduction, strengthen
the pace of adjustment towards the MTO after the planned correction of the excessive deficit, by speci-
fying and implementing the additional measures, especially on the expenditure side, that are necessary
to achieve the envisaged adjustment.

(iii) safeguard the results of the pension reform.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

CP Nov 2006

COM Nov 2006

CP Jan 2006

CP Nov 2006

COM Nov 2006

CP Jan 2006

Output gap
(% of potential GDP)

CP Nov 2006 (1)

COM Nov 2006 (3)

CP Jan 2006 (1)

2005

2006

2007

2008

2009

3,5

3,2

3,3

2,2

2,2

2,2

– 0,4

– 0,3

0,1

5,4

5,2

4,3

1,4

1,4

1,5

0,5

0,4

0,3

5,1

4,7

4,6

2,1

2,5

2,2

0,5

0,3

0,3

5,1

4,8

5,0

2,5

2,8

2,5

0,3

0,1

0,6

5,6

n.a.

n.a.

2,5

n.a.

n.a.

0,4

n.a.

n.a.

General government
balance
(pension reform cost
excluded)
(% of GDP)

CP Nov 2006

– 2,5

– 1,9

– 1,4

– 1,0

– 0,6

COM Nov 2006

– 2,5

– 2,2

– 2,0

– 1,8

CP Jan 2006

– 2,9

– 2,6

– 2,2

– 1,9

n.a.

n.a.

(1) In particular, the data on employment in hours worked and labour productivity measured as GDP per hours worked have

not been provided. Contributions to the potential growth are also missing.

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General government
balance
(pension reform cost
included)
(% of GDP)

Primary balance
(pension reform cost
excluded)
(% of GDP)

Structural balance (2)
(pension reform cost
excluded)
(% of GDP)

Structural balance (2)
(pension reform cost
included)
(% of GDP)

Government gross debt
(pension reform cost
excluded)
(% of GDP)

Government gross debt
(pension reform cost
included)
(% of GDP)

CP Nov 2006

COM Nov 2006

CP Jan 2006

CP Nov 2006

COM Nov 2006

CP Jan 2006

CP Nov 2006

COM Nov 2006

CP Jan 2006

CP Nov 2006

COM Nov 2006

CP Jan 2006

CP Nov 2006

COM Nov 2006

CP Jan 2006

CP Nov 2006

COM Nov 2006

CP Jan 2006

2005

2006

2007

2008

2009

– 4,4

– 4,4

– 4,7

0,1

0,1

– 0,3

– 2,4

– 2,3

– 2,1

– 4,3

– 4,2

– 4,7

41,9

42,0

42,5

47,3

47,4

47,9

– 3,9

– 4,2

– 4,6

0,5

0,2

– 0,2

– 2,1

– 2,3

– 2,7

– 4,1

– 4,3

– 4,7

42,0

42,4

45,0

48,9

49,3

51,2

– 3,4

– 4,0

– 4,1

1,0

0,4

0,3

– 1,6

– 2,1

– 2,4

– 3,6

– 4,1

– 4,2

42,1

43,1

45,3

50,0

51,0

52,1

– 3,1

– 3,9

– 3,7

1,4

0,6

0,6

– 1,1

– 1,8

– 2,1

– 3,2

– 3,9

– 3,9

41,4

42,7

45,4

50,3

51,6

52,6

– 2,9

n.a.

n.a.

1,7

n.a.

n.a.

– 0,7

n.a.

n.a.

– 3,0

n.a.

n.a.

40,6

n.a.

n.a.

50,2

n.a.

n.a.

Notes
(1) Commission services calculations on the basis of the information in the programme.
(2) Cyclically-adjusted balance excluding one-off and other temporary measures. Cyclically-adjusted balance and structural balance are the

same since one-off and other temporary measures taken from the programme are insignificant.

(3) Based on estimated potential growth of 4,1 %, 4,4 %, 4,8 % and 5,0 % respectively in the period 2005-2008.

Source
Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations