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

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Official Journal of the European Union

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I

(Resolutions, recommendations, guidelines and opinions)

OPINIONS

COUNCIL

COUNCIL OPINION

of 27 February 2007

on the updated convergence programme of Slovakia, 2006-2009

(2007/C 72/01)

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 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)

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

The macroeconomic scenario underlying the programme envisages that real GDP growth will increase
from 6,6 % in 2006 to 7,1 % in 2007 and then decrease to 5,5 % and 5,1 % in 2008 and 2009,
respectively. Assessed against currently available information, this scenario appears to be based on
cautious growth assumptions for 2006 and plausible growth assumptions for the rest of
the
programme period. The programme's projections for inflation also appear realistic.

For 2006, the general government deficit is estimated at 3,4 % of GDP in the Commission services'
autumn 2006 forecast, against a target of 4,2 % of GDP set in the previous update of the convergence
programme. The better outturn is due to much stronger GDP and employment growth and lower
interest expenditure and pension reform costs than expected. However, some of the additional
revenues owing to the growth surprise were spent rather than devoted to faster deficit reduction.

(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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(4)

(5)

(6)

(7)

(8)

(9)

As in the previous update, the main goal of the new programme's medium-term budgetary strategy is
to achieve long-term sustainability of public finances in 2010, notably by reaching the medium-term
objective (MTO) for the budgetary position of a structural balance (i.e. cyclically-adjusted balance net
of one-off and other temporary measures) of – 0,9 % of GDP. According to the programme the head-
line deficit should gradually decline from 3,7 % of GDP in 2006 to 1,9 % of GDP in 2009 and the
primary deficit from 1,9 % of GDP in 2006 to 0,2 % of GDP in 2009. The envisaged fiscal consolida-
tion relies on expenditure restraint with respect to both current and capital expenditure (decline in
the expenditure ratio by around 3¼ percentage points of GDP), which is less than fully offset by a
decline in the revenue ratio (1½ percentage point). Compared with the previous update, the new
programme confirms the planned adjustment against a more favourable macroeconomic scenario.

The structural balance calculated according to the commonly agreed methodology is planned to
improve from around – 3½ % of GDP in 2006 to some -2½ % of GDP in 2009. As in the previous
update, the medium-term objective (MTO) for the budgetary position presented in the programme is
a structural deficit of just below 1 % of GDP, which the programme does not aim to achieve within
the programme period but by 2010. As the MTO is more demanding than the minimum benchmark
(estimated at a deficit of around 2 % of GDP), achieving 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 output growth in the long term.

The risks to the budgetary projections in the programme appear broadly balanced. The risks from the
macroeconomic scenario are broadly neutral, while tax projections seem on the whole based on
prudent assumptions. The envisaged fiscal consolidation in the programme relies heavily on expendi-
ture restraint, but
information on the measures
supporting this (after 2007) nor is there a binding medium-term expenditure framework. On the
other hand, Slovakia has built up a good track-record in recent years, although achieving the
budgetary targets was facilitated by higher-than-expected growth and lower-than-expected absorption
of EU funds.

the programme does not provide sufficient

In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with
a correction of the excessive deficit by 2007 as recommended by the Council. However, the adjust-
ment path in structural terms during the correction period should be strengthened given the upward
revision of growth prospects and the good economic times. In the following years the budgetary
stance in the programme does not seem to provide a sufficient safety margin against breaching the
3 % of GDP deficit threshold with normal macroeconomic fluctuations. Moreover, it seems insuffi-
cient to ensure that the MTO is achieved in 2010, as envisaged in the programme. In the years
following the correction of the excessive deficit, the pace of the adjustment towards the MTO implied
by the programme 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 improvement in the structural
balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good
economic times. In particular, an improvement in the structural balance of only around ¾ % of GDP
is anticipated between 2007 and 2009 when good times are expected to occur.

Government gross debt is estimated to have reached 33,1 % of GDP in 2006, well below the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to decline by 3,4 percentage
points over the programme period.

The long-term budgetary impact of ageing in Slovakia is lower than the EU average, with pension
expenditure influenced by the recent pension reform showing a more limited increase than in many
other countries. The initial budgetary position constitutes a risk to sustainable public finances even
before considering the long-term budgetary impact of an ageing population. Consolidating the public
finances would therefore contribute to reducing risks to the sustainability of public finances. Overall,
Slovakia appears to be at medium risk with regard to the sustainability of public finances.

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(10)

The convergence programme does not contain a qualitative assessment of the overall impact of the
October 2006 implementation report of the national reform programme within the medium-term
fiscal strategy. However, it provides some information on the direct budgetary costs or savings of the
main reforms envisaged in the national reform programme and its budgetary projections 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 do
not seem to be fully consistent with those foreseen in the national reform programme. In particular,
apart from education, expenditure priorities listed in the programme are different from the key chal-
lenges identified in the national reform programme. Moreover, the significant support for education
indicated in the national reform programme is not evident in the 2007 budget or in the convergence
programme.

(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy
guidelines included in the integrated guidelines for the period 2005-2008.

(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 Council considers that the programme is consistent with a correction of the excessive deficit by 2007
and envisages progress, but limited, towards the MTO thereafter.

In view of the above assessment, and also in the light of the recommendation under Article 104(7) of 5 July
2004, the Council invites Slovakia to:

i) exploit the strong growth prospects to strengthen the structural adjustment in order to ensure the correc-
tion of the excessive deficit in 2007 with a larger margin and to speed up the progress towards the
MTO; and

ii) reinforce the binding character of the medium-term expenditure ceilings for central government.

Comparison of key macro economic and budgetary projections

2005

2006

2007

2008

2009

Real GDP
(% change)

HICP inflation
(%)

CP Dec 2006

COM Nov 2006

CP Dec 2005

CP Dec 2006

COM Nov 2006

CP Dec 2005

6,1

6,0

5,1

2,8

2,8

2,2

6,6

6,7

5,4

4,4

4,5

1,5

Output gap
(% of potential GDP)

CP Dec 2006 (1)

– 2,2

– 0,9

COM Nov 2006 (5)

– 2,0

– 0,7

CP Dec 2005 (1)

– 1,6

– 1,1

7,1

7,2

6,1

3,1

3,4

2,2

1,0

1,1

0,1

5,5

5,7

5,6

2,0

2,5

2,5

1,6

1,6

0,8

5,1

n.a.

n.a.

2,4

n.a.

n.a.

1,9

n.a.

n.a.

(1) In particular, the data on general government expenditure by function for 2009 are not provided.

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General government
balance (6)
(% of GDP)

CP Dec 2006

COM Nov 2006

Primary balance (6)
(% of GDP)

Cyclically-adjusted
balance (6)
(% of GDP)

Structural balance (2) (6)
(% of GDP)

Government gross debt
(6)
(% of GDP)

CP Dec 2005

CP Dec 2006

COM Nov 2006

CP Dec 2005

CP Dec 2006 (1)

COM Nov 2006

CP Dec 2005 (1)

CP Dec 2006 (3)

COM Nov 2006 (4)

CP Dec 2005

CP Dec 2006

COM Nov 2006

CP Dec 2005

2005

2006

2007

2008

2009

– 3,1

– 3,1

– 4,9

– 1,4

– 1,4

– 3,1

– 2,4

– 2,5

– 4,4

– 1,6

– 1,7

– 3,6

34,5

34,5

33,7

– 3,7

– 3,4

– 4,2

– 1,9

– 1,7

– 2,3

– 3,4

– 3,2

– 3,9

– 3,5

– 3,3

– 3,9

33,1

33,0

35,5

– 2,9

– 3,0

– 3,0

– 0,9

– 1,1

– 1,1

– 3,2

– 3,3

– 3,0

– 3,2

– 3,3

– 3,1

31,8

31,6

35,2

– 2,4

– 2,9

– 2,7

– 0,6

– 0,9

– 0,8

– 2,9

– 3,3

– 2,9

– 2,9

– 3,3

– 2,9

31,0

31,0

36,2

– 1,9

n.a.

n.a.

– 0,2

n.a.

n.a.

– 2,5

n.a.

n.a.

– 2,5

n.a.

n.a.

29,7

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) One-off and other temporary measures taken from the programme (0,8 % of GDP in 2005 — deficit-increasing; 0,1 % in 2006 —

deficit- reducing).

(4) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (0,9 % of GDP in 2005 — deficit-

increasing; 0,1 % in 2006 deficit-reducing).

(5) Based on estimated potential growth of 5,2 %, 5,3 %, 5,3 % and 5,2 % respectively in the period 2005-2008.
(6) Since October 2006, Slovakia has implemented the Eurostat decision of 2 March 2004 on the classification of the second pillar funded
pension schemes. The general government data from the previous update have been adjusted accordingly so as to facilitate comparison
with the new update and the Commission services' autumn 2006 forecast.

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