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

28.3.2007

EN

Official Journal of the European Union

C 71/9

COUNCIL OPINION

of 27 February 2007

on the stability programme of Slovenia, 2006-2009

(2007/C 71/03)

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 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)

(4)

(5)

On 27 February 2007 the Council examined the first stability programme of Slovenia, which covers
the period 2006 to 2009.

The macroeconomic scenario underlying the programme envisages that real GDP will grow steadily at
above 4 % over the programme period. Assessed against currently available information, this scenario
appears to be based on plausible growth assumptions. The programme's projections for inflation also
appear realistic.

For 2006, the general government deficit is estimated at 1,6 % of GDP in the Commission services'
autumn 2006 forecast, against a target of 1,7 % of GDP set in the December 2005 update of the
convergence programme. The 2006 estimated outturn, based on more recent figures, of 1,2 % GDP
is lower compared to 2005.

The programme's budgetary strategy is geared to achieving the medium-term objective (MTO) for the
budgetary position as meant in the Stability and Growth Pact by 2009 through a back-loaded consoli-
dation. Reflecting the ongoing tax reform and a number of cost-saving expenditure measures,
revenues and expenditure as a percentage of GDP fall significantly throughout the programme period.
Until 2008, when the respective ratios decrease in broadly equal measure, the general government
deficit is planned to linger at around 1,5 % of GDP. In 2009, the deficit declines to 1,0 % as expendi-
ture reduction outweighs the revenue loss. The primary balance initially deteriorates from 0,1 % of
GDP in 2006 to -0,3 % of GDP in 2008 before improving to 0,3 % of GDP in 2009. Compared with
the last update of the convergence programme, the stability programme postpones the target of
achieving a nominal deficit of 1 % of GDP by one year against a more favourable macroeconomic
scenario.

Over the programme period, 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 by around ¼ % of GDP. As in the December 2005 update of the convergence
programme, the medium-term objective (MTO) for the budgetary position presented in the stability
programme is a structural deficit of 1 % of GDP to be achieved by 2009, one year later than in the
previous programme. The delay is attributed in the programme to a major railway project with an
estimated cost of 0,4 % of GDP in 2007, 0,5 % of GDP in 2008 and 0,2 % of GDP in 2009; as well
as some expenditure of a temporary nature. Since the MTO is more demanding than the minimum
benchmark (estimated at a deficit of around 1½ % of GDP), reaching it should fulfil the aim of
providing a safety margin against the occurrence of an excessive deficit. The MTO lies within the
range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the
code of conduct and adequately reflects the debt ratio and average potential growth in the long term.

(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

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28.3.2007

(6)

(7)

(8)

(9)

The risks to the budgetary projections in the programme appear broadly balanced but the budgetary
outcome could be worse than projected in 2009. On the one hand, the assumptions on growth and
tax revenues seem plausible. Furthermore, Slovenia has established a track record of better-than-
projected budgetary outcomes in recent years, also supported by an effective budgetary mechanism of
containing general government expenditures in response to an unexpected revenue shortfall. On the
other hand, notwithstanding the efforts to restructure the general government expenditure, the share
of mandatory expenditure remains very high but on a declining path. The measures that underpin the
considerable cut in primary expenditure as a percentage of GDP announced for 2009 remain to be
specified in more detail.

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to
ensure that the MTO is achieved by 2009, as envisaged in the programme. However, it provides a
sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeco-
nomic fluctuations throughout the programme period. The pace of the adjustment towards the MTO
implied by the programme is insufficient and should be strengthened to be in line with the Stability
and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improve-
ment in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment
should be higher in good economic times and could be lower in bad economic times. In particular,
good times are expected to occur throughout the programme period but the structural balance is not
planned to improve noticeably before the last year of the programme.

Government gross debt is estimated to have reached 28,5 % of GDP in 2006, well below the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to decline by 0,8 percentage
point over the programme period.

The long-term budgetary impact of ageing in Slovenia is among the largest in the EU, influenced
notably by a considerable increase in pension expenditure as a share of GDP. While some action is
being taken, stronger fiscal consolidation and implementation of further reform measures aimed at
containing the substantial increase in age-related expenditures would contribute to reducing risks to
the sustainability of public finances. Although the initial budgetary position contributes to stabilising
the debt ratio over the medium term, the low structural improvement over the programme period
will not be sufficient to contain the expected budgetary impact of ageing in the long term. Overall,
Slovenia appears to be at high risk with regard to the sustainability of public finances.

(10)

The stability programme contains a qualitative assessment of the overall impact of Slovenia's October
2006 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 but its budgetary projections do not explicitly take into account the
public finance implications of all actions outlined in the national reform programme. The measures
in the area of public finances envisaged in the stability programme seem consistent with those fore-
seen in the national reform programme. In particular, the stability programme provides details of the
tax reform announced in the national reform programme and complements the actions envisaged in
the national reform programme with expenditure measures.

(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, the adjustment
path towards the MTO is insufficient.

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

programmes, the programme has some gaps in the required and optional data. (1)

The Council considers that, while the programme recognises that containing inflationary pressures and
continued fiscal consolidation are necessary to preserve the resilience of the economy, it envisages insuffi-
cient progress towards the MTO in spite of the upbeat growth prospects. In view of the above assessment,
Slovenia is invited to:

(i) taking advantage of

the good economic conditions,

including the better than expected budgetary

outcome in 2006, speed up the achievement of the MTO;

(1) In particular, net external balances for 2006-2007 as well as certain optional data concerning sectoral balances, labour

market developments, general government expenditure by function and debt evolution are not provided.

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(ii) in view of the projected increase in age related expenditure, improve the long-term sustainability of
public finances, in particular by strengthening the ongoing pension reform with additional measures,
geared especially to increasing labour participation of older workers and encouraging the move towards
a greater reliance on private pension saving schemes.

Comparison of key macro economic and budgetary projections

2005

2006

2007

2008

2009

Real GDP
(% change)

HICP inflation
(%)

Output gap
(% of potential GDP)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2006

COM Nov 2006

CP Dec 2005

SP Dec 2006

COM Nov 2006

CP Dec 2005

SP Dec 2006 (1)

COM Nov 2006 (5)

CP Dec 2005 (1)

SP Dec 2006

COM Nov 2006

CP Dec 2005

SP Dec 2006

COM Nov 2006

CP Dec 2005

SP Dec 2006 (1)

COM Nov 2006

CP Dec 2005 (1)

SP Dec 2006 (3)

COM Nov 2006 (4)

CP Dec 2005

SP Dec 2006

COM Nov 2006

CP Dec 2005

4,0

4,0

3,9

2,5

2,5

2,2

– 1,2

– 1,1

– 1,2

– 1,4

– 1,4

– 1,7

0,4

0,3

– 0,2

– 0,9

– 0,9

– 1,2

– 0,9

– 0,9

– 0,4

28,0

28,0

29,0

4,7

4,8

4,0

2,7

2,5

1,5

– 0,5

– 0,3

– 0,7

– 1,6

– 1,6

– 1,7

0,1

– 0,1

– 0,3

– 1,4

– 1,5

– 1,4

– 1,4

– 1,5

– 1,4

28,5

28,4

29,6

4,3

4,2

4,0

2,7

2,5

2,2

4,2

4,5

3,8

2,5

2,6

2,5

– 0,3

– 0,1

0,0

– 0,3

– 1,5

– 1,6

– 1,4

– 0,1

– 0,2

– 0,1

– 1,4

– 1,6

– 1,3

– 1,4

– 1,6

– 1,4

28,2

28,0

29,8

0,4

0,0

– 1,6

– 1,5

– 1,0

– 0,3

– 0,3

0,2

– 1,6

– 1,7

– 1,0

– 1,6

– 1,7

– 1,0

28,3

27,6

29,4

4,1

n.a.

n.a.

2,2

n.a.

n.a.

0,3

n.a.

n.a.

– 1,0

n.a.

n.a.

0,3

n.a.

n.a.

– 1,1

n.a.

n.a.

– 1,1

n.a.

n.a.

27,7

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme.
(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(3) There are no one-off or other temporary measures in the programme.
(4) There are no one-off or other temporary measures in the Commission services' autumn 2006 forecast.
(5) Based on estimated potential growth of 3,8 % in 2005 and 4 % in 2006-2008.

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