Council opinion of 27 March 2007 on the updated stability programme of Spain, 2006-2009
Date: 2007-03-27
Institutions: Council of the European Union
Subjects: Spain, budget estimate, economic forecasting, public finance, stability programme

24.4.2007

EN

Official Journal of the European Union

C 89/7

COUNCIL OPINION

of 27 March 2007

on the updated stability programme of Spain, 2006-2009

(2007/C 89/03)

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)

On 27 March 2007 the Council examined the updated stability programme of Spain, which covers
the period 2006 to 2009 (2).

The macroeconomic scenario underlying the programme envisages that real GDP growth will decrease
from 3,8 % in 2006 to 3,3 % on average over the rest of 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. The projected inflation differential
with the euro area, although decreasing, is still significant. While there may be some upside risks in
the short term, there might also be some downside risks to this scenario in the medium term, asso-
ciated to the imbalances of the economy, namely the increasing household indebtedness, the widening
current account deficit and the possibility of the extended residential construction boom coming to
an end more rapidly than foreseen in the programme.

For 2006, the Commission services' autumn 2006 forecast estimated the general government surplus
at 1,5 % of GDP, fully in line with the updated stability programme, but against a target of 0,9 % of
GDP set in the previous update of the stability programme. This positive outcome is the result of
higher-than-expected revenues stemming from strong job creation and buoyant corporate profits,
which are estimated to have boosted direct tax revenues well above nominal GDP growth.

The update aims at (i) maintaining macroeconomic and budgetary stability and (ii) fostering produc-
tivity by increasing infrastructure, human and technological capital. The general government surplus
is envisaged to decline from 1,4 % of GDP in 2006 to about 1 % in 2009. The time profile of the
primary surplus is similar, falling from 3 % of GDP in 2006 to 2¼ % in 2009. While revenues
should decline by 0,2 % of GDP over the programme period, primary expenditures should increase
by around 0,5 % of GDP, partly offset by a decline in the interest burden. The previous update
projected smaller surpluses against a broadly similar macroeconomic outlook. The difference between
the two updates is to be found in a much better 2006 surplus outcome than projected one year
earlier, which is projected to have favourable carryover effects over the programme period.

(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) The update was submitted 3 weeks beyond the 1 December deadline set in the code of conduct.

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Official Journal of the European Union

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(5)

(6)

(7)

(8)

(9)

the cyclically-adjusted balance net of one-off and other temporary
The structural balance (i.e.
measures) calculated according to the commonly agreed methodology is planned to marginally
decline from around 1¾ % of GDP in 2006 to 1½ % at the end of the programme period. As in the
previous update of the stability programme, the medium-term objective (MTO) for the budgetary
position presented in the programme is a balanced position in structural terms, which the programme
plans to maintain by a large margin throughout the programme period. As the MTO is more
demanding than the minimum benchmark (estimated at a deficit of around 1¼ % 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 is more demanding than implied by 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 macroeco-
nomic scenario underlying the update is plausible and revenue projections seem to reflect cautious
assumptions. On the expenditure side, there is a risk of some expenditure overruns (at the level of
regional authorities) if past trends in education and health care are confirmed.

this risk assessment,

In view of
to maintain the MTO
throughout the programme period, as envisaged in the programme. In addition it provides a sufficient
safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluc-
tuations in every year. The fiscal policy stance implied by the programme is in line with the Stability
and Growth Pact.

the budgetary stance seems sufficient

Government gross debt is estimated to have declined below 40 % of GDP in 2006, well below the
60 % of GDP Treaty reference value. The update projects the debt ratio to further decline by 8
percentage points over the programme period.

The long-term budgetary impact of ageing in Spain is well above the EU average, mainly as a result of
a relatively high increase in pension expenditure as a share of GDP over the coming decades. The
initial budgetary position, improved compared with 2005, contributes to easing the projected long-
term budgetary impact of ageing populations, but is not sufficient to fully cover the substantial
increase in expenditure due to the ageing of the population. Maintaining high primary surpluses over
the medium term and implementing further measures aimed at curbing the significant increase in
age-related expenditures would contribute to reducing risks to the sustainability of public finances.
Overall, Spain appears to be at medium risk with regard to the sustainability of public finances.

(10)

The stability programme contains a qualitative assessment of the overall impact of the October 2006
implementation report of the national reform programme within the medium-term fiscal strategy. It
provides some information, although not in a systematic manner, 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 stability programme
seem consistent with those foreseen in the national
In particular, both
programmes envisage the gradual increase of public R&D expenditures and of infrastructure invest-
ments.

reform 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).

(1) In particular, the data on HICP as well as on general government expenditure by function are not provided.

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The Council considers that the medium term budgetary position is sound and the budgetary strategy
provides a good example of fiscal policies conducted in compliance with the Stability and Growth Pact.
Maintaining a strong budgetary position, thus avoiding an expansionary fiscal stance, is important in the
light of large and rising external imbalances and the existing inflation differential with the euro area.

In view of the above assessment and in particular the projected increase in age-related expenditure, the
Council invites Spain to further improve the long term sustainability of public finances with additional
measures to contain the future impact of ageing on spending programmes.

Comparison of key macro economic and budgetary projections

2005

2006

2007

2008

2009

Real GDP
(% change)

SP Dec 2006

COM Nov 2006 (7)

SP Dec 2005

HICP inflation (6) (%)

SP Dec 2006 (6)

COM Nov 2006

SP Dec 2005 (6)

Output gap
(% of potential GDP)

SP Dec 2006 (1)

COM Nov 2006 (5)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

SP Dec 2005 (1)

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006 (1)

COM Nov 2006

SP Dec 2005 (1)

Structural balance (2)
(% of GDP)

SP Dec 2006 (3)

COM Nov 2006 (4)

SP Dec 2005

3,5

3,5

3,4

3,4

3,4

4,2

0,9

0,8

0,5

1,1

1,1

1,0

2,9

2,9

2,8

1,5

1,5

1,2

1,5

1,5

1,2

3,8

3,8

3,3

3,5

3,6

3,5

0,9

0,9

0,8

1,4

1,5

0,9

3,0

3,1

2,6

1,8

1,9

1,2

1,8

1,9

1,2

3,4

3,4

3,2

2,7

2,8

3,3

1,2

1,1

1,1

1,0

1,1

0,7

2,5

2,7

2,2

1,5

1,6

1,2

1,5

1,6

1,2

3,3

3,3

3,2

2,6

2,7

3,2

1,5

1,3

0,7

0,9

0,9

0,6

2,3

2,3

2,0

1,6

1,4

0,9

1,6

1,4

0,9

3,3

n.a.

n.a.

2,5

n.a.

n.a.

1,6

n.a.

n.a.

0,9

n.a.

n.a.

2,2

n.a.

n.a.

1,6

n.a.

n.a.

1,6

n.a.

n.a.

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Government gross debt
(% of GDP)

SP Dec 2006

COM Nov 2006

SP Dec 2005

2005

43,1

43,1

43,1

2006

39,7

39,7

40,3

2007

36,6

37,0

38,0

2008

34,3

34,7

36,0

2009

32,2

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.
(4) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast.
(5) Based on estimated potential growth of 3,9 %, 3,8 %, 3,6 % and 3,6 % respectively in the period 2005-2008.
(6) Private consumption deflator instead of HICP.
(7) According to first estimates, growth was 3,9 % in 2006. The Commission services' interim forecast of 16 February 2007 projects

growth of 3,7 % in 2007.

Source:

Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations