Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank - Public Finances in EMU - 2007 - Ensuring the effectiveness of the preventive arm of the SGP {SEC(2007) 776}
Date: 2007-06-13
Institutions: European Commission
Subjects: Economic and Monetary Union, budget policy, coordination of EMU policies, economic convergence, economic growth, public finance, stability pact

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.6.2007 
COM(2007) 316 final 

COMMUNICATION FROM THE COMMISSION  
TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN 
ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS 
AND THE EUROPEAN CENTRAL BANK 

Public Finances in EMU - 2007  

Ensuring the effectiveness of the preventive arm of the SGP 

{SEC(2007) 776} 

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I. 

INTRODUCTION 

Surveillance  and  co-ordination  of  economic  and  budgetary  policies  in  Member  States  is  a 
requirement of the Treaty. The Stability and Growth Pact (SGP) develops the provisions of 
the Treaty into a set of commonly agreed rules, principles and procedures that contribute to 
the design, the surveillance and the co-ordination of budgetary policies in the EU Member 
States. The SGP includes a preventive part and a corrective part. Its functioning depends on 
whether  deficits  are  considered  excessive  or  not.  In  the  former  case,  the  excessive  deficit 
procedure  foresees  pre-defined  and  codified  corrective  actions,  recommendations  and 
sanctions,  which  serve  its  deterrent  function.  The  functioning  under  the  preventive  arm  of 
the  SGP,  the  aims  of  which  are  to  avoid  the  occurrence  of  excessive  deficits  and  ensure 
fiscal  and  economic  coordination  in  the  EU,  is  different.  The  preventive  arm,  although 
relying  on  a  combination  of  numerical  and  procedural  rules  as  the  corrective  part,  focuses 
mainly on medium-term planning, peer support and pressure and exchanges of best practices. 
To  function  effectively,  it  requires  a  common  understanding  of  the  economic  and  fiscal 
policy challenges in the EU, and a strong political commitment to address them.  

One  of  the  central  objectives  of  both  the  Commission  and  the  Council  in  the  2005  SGP 
reform  was  to  strengthen  the  preventive  dimension  of  the  Pact.  This  was  achieved  by 
increasing  the  economic  rationale  of  the  rules  and  favouring  policies  that  create  room  for 
automatic  stabilisation  of  output,  ensure  the  sustainability  of  government  finances,  and 
improve their quality and efficiency. The revised SGP no longer requires Member States to 
aim for a uniform close-to-balance fiscal position in the medium term. Rather, differentiated 
medium-term objectives (MTOs) are set for each Member State, taking into account country-
specific circumstances. The SGP reform introduced provisions to ensure that fiscal policies 
are symmetric over the cycle and that fiscal consolidation continues in the years following 
the correction of excessive deficits. In particular, it specified that Member States in the euro 
area  or  participating  in  ERM-II  should  pursue  an  annual  structural  adjustment  of  0.5%  of 
GDP  as  a  benchmark.  Finally,  the  reform  eliminated  possible  disincentives  to  undertake 
structural  reforms  and  placed  more  emphasis  on  debt  and  long-term  sustainability  in 
budgetary surveillance.  

This Communication reviews the recent budgetary developments and functioning of the EU 
fiscal framework. It underlines the smooth implementation of excessive deficit procedures in 
the recent period but also notes some deviations from the policy rules of the preventive arm 
of  the  SGP.  Now  that  most  EU  countries  have  just  corrected  or  are  about  to  correct  their 
excessive  deficit,  the  challenge  is  to  use  the  opportunity  offered  by  the  current  favourable 
cyclical  conditions to move swiftly towards the MTOs. The provisions  of the revised  SGP 
therefore need to be applied effectively and some aspects of the 2005 SGP reform need to be 
further developed.  

This Communication formulates concrete proposals to this end, on the basis of best practice 
in  the  EU  countries.  These  proposals  are  fully  in  line  with  the  spirit  of  the  political 
agreement of the 2005 SGP reform, and can all be applied under the current legislation. They 
aim to strengthen the credibility and national ownership of medium-term targets included in 
the  Stability  and  Convergence  Programmes  and  suggest  putting  the  surveillance  of  fiscal 
policy in a broader economic perspective, in line with the renewed Lisbon Strategy for Jobs 
and Growth.  

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II. 

RECENT  BUDGETARY  DEVELOPMENTS  CALL  FOR  STEPS  TO  BE  TAKEN  TO 
ENSURE THE EFFECTIVE FUNCTIONING OF THE PREVENTIVE ARM OF THE SGP 

The improvement in government finances continues 

In 2006 the budgetary situation continued to improve in the EU and in the euro area. Against 
the background of favourable economic conditions – real GDP growth reached 3.0% in 2006 
in the  EU,  up  from  1.7%  in 2005 – the EU government  deficit  was  reduced  from  2.4%  of 
GDP in 2005 to 1.7% of GDP in 2006. The debt ratio recorded its first decline since 2002 in 
both the EU and the euro area. Moreover, the improvement in the overall budgetary situation 
was  marked  for  the  second  consecutive  year  by  a  significant  reduction  in  the  structural 
deficit (0.9 percentage point of GDP), i.e. the government deficit net of cyclical factors and 
one-off  and  temporary  measures.  According  to  Commission  calculations,  the  structural 
deficit  in  the  EU  was  reduced  from  nearly 3%  of  GDP  in  2004  to  below  1½%  of  GDP  in 
2006. 

The  reduction  of  the  government  deficit  in  2006  was  notably  driven  by  large  positive 
surprises in tax revenue developments. It is estimated that the larger-than-planned increase in 
government revenue contributed to an improvement in the government balance by about one 
percentage  point  of  GDP  compared  to  plans  formulated  by  Member  States  in  the  end-
November  2005  updates  of  the  Stability  and  Convergence  Programmes  (SCPs).  In  the 
meantime, however, government expenditure also increased faster than planned in a number 
of EU countries. Such developments cast doubt on the permanent character of the ongoing 
improvement in government finances. 

Avoid repeating past mistakes  

The different composition of the fiscal adjustment compared to plans suggests that in some 
cases  tax  windfalls,  which  may  be  of  a  temporary  nature,  were  partly  used  to  finance 
increases in government expenditure. This shift suggests a risk that past policy mistakes are 
being repeated. The current configuration of rapid economic growth and positive surprises in 
tax revenues closely resembles the situation that prevailed at the turn of the decade, during 
which policy mistakes were made. In the years 1999-2001, several Member States failed to 
make  use  of  good  economic  conditions  to  achieve  healthy  public  finances.  They 
subsequently found themselves in an uncomfortable position when the cycle entered a less 
favourable phase.  

There  is  today  a  consensus  among  economists  and  policy  makers  that  inappropriate  fiscal 
behaviour  in  good  economic  times  was  at  the  root  of  the  difficulties  in  respecting  the 
Stability  and  Growth  Pact  experienced  in  the  first  half  of  this  decade.  As  most  of  EU 
countries  have  corrected  (or  are  about  to  correct)  their  excessive  deficits,  it  is  essential  to 
keep  the  momentum  of  fiscal  consolidation  in  the  current  cyclical  upturn.  The  window  of 
opportunity offered by the economic upturn must be used to place the government debt ratio 
on a durable downward trend in the EU countries.  

Recent developments call for a better functioning of the preventive arm 

In  its  early  assessment  on  the  SGP  reform,  the  Commission  noted  one  year  ago  that  the 
reform  had  improved  the  functioning  of  the  excessive  deficit  procedure.  Recent 
developments confirm this view. Countries with excessive deficits have used appropriately 

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the deadlines for the correction of the excessive deficits established under the reformed SGP, 
and  made  significant  structural  efforts  to  correct  the  situation  of  excessive  deficit.  On 
average,  they  have  improved  their  structural  government  balance  by  about  1  percentage 
point of GDP in 2006. The budgetary plans of these countries are generally consistent with 
the goal of correcting the excessive deficits within the time limits specified by the Council. 
While up to ten Member States had deficits larger than  3% of GDP in  2004,  in 2008 only 
Hungary and the Czech Republic will be in this situation according to the most recent SCPs. 

In  contrast,  concerns  about  the  functioning  of  the  preventive  arm  of  the  SGP  remain. 
Backward-and  forward-looking  elements  support  this  view.  In  2006,  fiscal  consolidation 
efforts of some countries not yet at their medium-term objective were insufficient given the 
improving cyclical conditions. Fiscal plans are also somewhat disappointing. In a number of 
euro-area  and  ERM-II  countries,  the  envisaged  improvement  in  the  structural  balance  in 
2007 and subsequent years falls short of the 0.5% of GDP benchmark of the revised SGP, 
contrary to what the Council recommended recently1, and despite economic conditions that 
would  justify  going  beyond  it2.  According  to  the  Commission’s  spring  2007  economic 
forecast  based  on  the  assumption  of  no  policy  change,  only  ten  of  the  twenty-seven  EU 
countries  will  have  reached  their  medium-term  objective  in  2008,  after  two  consecutive 
years of above-trend growth.  

III. 

A  MORE  EFFECTIVE  PREVENTIVE  ARM  TO  ENSURE  PROGRESS  TOWARDS 
SUSTAINABLE GOVERNMENT FINANCES 

The  preventive  arm  of  the  SGP  is  based  on  regular  monitoring  and  surveillance  of  public 
finances  in  the  Member  States.  To  this  end,  the  EU  countries  submit  annual  Stability  or 
Convergence Programmes (SCPs) in which they present planned budgetary positions for the 
next  three  or  four  years.  Member  States  which  have  not  yet  achieved  their  medium-term 
budgetary objective (MTO) present in their SCP the adjustment path towards this objective. 
These  programmes  are  then  appraised  by  the  Commission  and  the  Council  delivers  on 
Opinion on each of them.  

As seen above, the fiscal plans formulated by Member States in their SCPs are not always in 
line with the preventive arm of the SGP, notably in terms of annual adjustment. Moreover, a 
number  of  EU  countries  have  in  the  past  had  difficulty  respecting  their  multiannual 
budgetary  targets.  These  difficulties  were  due  in  particular  to  recurrent  expenditure 
overruns3.  The  improved  track  record  of  the  last  two  years  in  respecting  budget  balance 
targets is largely due to positive surprises in government revenue.  

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Council  country-specific  recommendation  of  March  2007  on  the  Integrated  Guidelines  for  Jobs  and 
Growth addressed to the euro-area Member States: "the euro area Member States are recommended to 
make  use  of  the  favourable  cyclical  situation  to  aim  at  more  ambitious  budgetary  consolidation 
towards  the  medium-term  objective  of  close  to  balance  or  in  surplus,  hence  striving  to  achieve  an 
annual structural adjustment of at least 0.5% of GDP as a benchmark". 
The revised SGP specifies that Member States in the euro area and participating in ERM II which have 
not yet achieved their MTO should pursue an annual adjustment in their structural balance of 0.5% of 
GDP as a benchmark. The adjustment effort should be higher in good times; it could be more limited 
in bad times.  
For  a  detailed  analysis  of  the  reasons  for  the  difficulties  to  respect  budgetary  targets,  see  the  2007 
edition of the Commission report on "Public Finances in EMU". 

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Against this background, this section formulates a number of concrete proposals to ensure a 
better  functioning  preventive  arm  of  the  SGP,  on  the  basis  of  best  practices  in  the  EU 
countries.  These  proposals  can  all  be  applied  under  the  current  legislation  and  are  in  line 
with the spirit of the 2005 SGP reform. They are articulated around four main themes:  

(i) 

Putting fiscal policy issues in a broader economic perspective;  

(ii)  Enhancing  the  national  ownership  of  the  medium-term  budgetary  targets  set 

in the Stability and Convergence Programmes;  

(iii)  Strengthening  the  reliability  and  credibility  of  the  medium-term  budgetary 

plans included in the SCPs;  

(iv)  Moving towards sustainable fiscal positions in the medium term. 

Putting fiscal policy issues in a broader economic perspective 

The benefits of sound fiscal policies would be better understood if fiscal surveillance were 
put in a broader economic perspective, notably the context of the renewed Lisbon Strategy 
for  Growth  and  Jobs.  This  would  entail  explaining  more  clearly  how  medium-term 
budgetary  plans  will  contribute  to  macro-financial  stability  and  how  envisaged  changes  in 
the level and structure of expenditure and taxation and other economic policy measures will 
set  the  right  priorities  and  incentives  to  encourage  innovation  and  competitiveness  and  to 
strengthen private investment and employment.  

In  view  of  the  ultimate  objective  of  fostering  strong  sustainable  growth  conducive  to 
employment  creation  in  the  EU  countries,  the  assessment  of  fiscal  policy  developments  in 
the  context  of  the  preventive  arm  of  the  SGP  could  take  greater  account  of  the  overall 
macroeconomic situation of the country concerned and consider the quality and composition 
of budgetary strategies. Particular attention should be given to risks linked to developments 
in internal and external imbalances, inflation and competitiveness, bearing in mind that being 
a country inside or outside the euro area implies different effects. For example, for countries 
within the euro area, this requires a greater focus on real exchange rate adjustments or, in the 
case of convergence countries, that consideration could be given to the role of fiscal policy 
to support a sustainable catching-up process. 

Discussions on the quality and efficiency of public expenditure and on their contribution to 
raising potential growth should become more systematic in the assessment of medium-term 
budgetary plans submitted by Member States in their SCPs. The scarcity of public resources, 
intensified  by  the  spending  needs  stemming  from  an  ageing  population  and  growing  tax 
competition,  makes  it  even  more  necessary  than  in  the  past  to  allocate  public  resources 
according  to  priorities  and  use  them  efficiently,  taking  into  account  the  country-specific 
recommendations adopted by the Council on the basis of the integrated guidelines for jobs 
and growth. Ensuring that the SCPs and their assessments clearly highlight the medium-term 
consequences of structural reforms, entailing significant changes in the level and structure of 
government  expenditure  and  taxation,  would  contribute  to  a  better  perception  of  those 
reforms  and  of  the  role  they  play  within  a  comprehensive  strategy.  The  SCPs  should  thus 
provide systematic information on the direct budgetary costs or savings of the main reforms 
envisaged in the national reform programmes. 

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Proposal  1.  To  ensure  the  rapid  achievement  of  sustainable  budgetary  positions 
while enhancing the contribution of budgetary policies to growth and employment, 
emphasis  on  the  quality  and  efficiency  of  government  finances  could  be 
strengthened  in  the  SCPs  as  well  as  in  the  Commission’s  assessments  thereof. 
Member  States  could  provide  clearer  indications  as  to  their  policy  intentions  in 
terms of changes in the structure and/or efficiency of public spending and taxation 
and  the  expected  benefits  in  terms  of  growth  and  employment.  Such  indications 
could also highlight links with the National Reform Programmes under the Lisbon 
Strategy. To allow exchanges of best practices, Member States could also provide 
information  on  reforms  of  budget  institutions  aiming  at  improving  the  quality  and 
efficiency  of  government  finances  –  e.g.  introduction  of  performance-budgeting 
techniques  or  new  fiscal  rules  favouring  re-allocation  of  expenditure  towards 
different priorities. 

Proposal 2. Member States and the Commission could take greater account of the 
overall  macroeconomic  situation  of  the  country  concerned  in  the  assessment  of 
national  fiscal  policies.  Particular  attention  could  be  devoted  to  developments  in 
external  imbalances,  inflation  and  competitiveness.  The  objective  would  be  to 
ensure a smooth functioning and internal adjustment in the euro area and to support 
a  sustainable  catching-up  process  in  convergence  countries.  A  broader  economic 
assessment  would  facilitate  a  more  comprehensive  evaluation  of  whether  the 
economy  is  experiencing  "good  times"  and  of  the  implications  for  the  conduct  of 
fiscal policy. 

Enhancing national ownership of the medium-term budgetary targets set 
in the Stability and Convergence Programmes 

The 2005 SGP reform has gone a long way towards improving the national ownership of the 
EU  fiscal  rules.  The  increased  economic  rationale  of  the  rules  and  the  introduction  of 
country-specific medium-term budgetary objectives were key steps in this direction.  

In  the  context  of  the  2005  SGP  reform,  the  Council  also  invited  Member  States’ 
governments to present SCPs and the Council opinions on them to their national parliaments. 
Little  progress  has  been  made  on  this  issue  in  the  last  two  years.  According  to  a  recent 
survey  by  the  Commission,  there  is  an  insufficient  degree  of  political  commitment  at 
national  level  to  the  medium-term  budgetary  targets  set  in  the  SCPs.  In  only  a  few  EU 
countries is the SCP the subject of a vote or derived from a document previously adopted by 
the national parliament. Moreover, while SCPs present budgetary projections for the whole 
of the general government, there is in some cases no or little ex ante co-ordination between 
various government tiers prior to setting the targets.  

As  a  consequence,  the  link  between  multiannual  budgetary  plans  set  in  the  SCPs  and  the 
preparation of annual budgets for the subsequent years tends to be relatively weak in the EU 
countries.  In  a  number  of  cases  the  budgetary  projections  included  in  the  SCPs  are  only 
indicative and are hardly taken into account in the preparation of subsequent annual budgets. 
This  gives  rise  to  sizeable  revisions  to  ensure  consistency  between  budgetary  plans  laid 
down in the SCPs and objectives set in the subsequent annual budgets. Overall, the current 
situation  suggests  that  there  is  a  significant  gap  between  what  would  be  desirable  and  the 
reality of the preparation and status of SCPs in the Member States. 

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For the euro-area Member States, the national ownership of fiscal policy coordination under 
the preventive arm would also benefit from the preparation of a common public document, 
summarising the multiannual fiscal plans submitted by all the euro-area Member States. This 
Stability  Programme  for  the  euro  area  would  highlight  the  contribution  of  each  Member 
State to the policy mix of the euro area. It could be discussed by Eurogroup Ministers at an 
early stage of the surveillance  exercise, on the basis of an assessment by the Commission, 
therefore  reinforcing  the  examination  of  the  individual  Stability  Programmes  of  the  euro-
area Member States.  

Proposal  3.  Member  States  would  benefit  in  their  capacity  to  adhere  to  their 
medium-term budgetary plans from ensuring a stronger commitment of all national 
actors taking part in the conduct of fiscal policy to conduct policies consistent with 
the  medium-term  budgetary  targets  set  in  SCPs.  To  this  end,  as  agreed  in  the 
context  of  the  2005  SGP  reform,  Member  States  could  consider  a  stronger 
involvement  of  national  parliaments  in  the  preparation  of  the  SCPs  and  in  the 
follow-up to the Council Opinions. Multiannual budgetary targets should preferably 
be set following proper coordination between various levels of governments.  

Proposal  4.  With  a  view  to  strengthening  the  national  ownership  of  the  medium-
term  budgetary  targets  formulated  in  the  SCPs  and  the  consistency  between  SCPs 
and subsequent annual budgets, Member States could consider supplementing their 
domestic  budgetary  frameworks  with  national  multiannual  fiscal  rules  consistent 
with the SCPs targets. This could build on the positive experience of some Member 
States,  where  rules-based  multiannual  expenditure  frameworks  ensure  a  strong 
adherence to medium-term budgetary plans – notably on the expenditure side – and 
consistency between these plans and subsequent annual budgets.  

Strengthening  the  reliability  and  credibility  of medium-term  budgetary 
targets 

The primary aim of SCPs is to foster a proper coordination of fiscal policies in the EU, in a 
multiannual  perspective.  In  some  EU  Member  States  SCPs  are  also  used  domestically  to 
extend the time horizon for the conduct of fiscal policy beyond the annual budgetary cycle. 
If  there  continue  to  be  recurrent  deviations  from  medium-term  budgetary  plans,  as  in  the 
past,  the  credibility  of  the  projections  could  be  undermined  to  the  point  of  making  them 
meaningless.  

One  area  where  particular  attention  is  called  for  is  the  preparation  of  macroeconomic 
forecasts  used  for  the  budgetary  projections,  which  in  turn  determine  the  amount  of 
resources  available  in  the  medium-term  to  finance  policies.  In  the  past,  medium-term 
budgetary  projections  were  in  some  cases  based  on  overly  optimistic  macroeconomic 
forecasts,  notably  in  upturns.  However,  the  inclination  to  revise  medium-term  growth 
forecasts  upwards  in  favourable  growth  periods  seems  to  have  been  significantly  less 
pronounced  since  the  SGP  reform.  Member  States  should  continue  to  base  their  budgetary 
projections on realistic assumptions. They could also consider the use of so-called prudence 
factors  such  as  contingent  budgetary  reserves  which  can  be  activated  only  under  specific 
conditions. 

Another improvement would consist in greater transparency on the nature and magnitude of 
the fiscal challenges implied by the budgetary targets included in the SCPs. Member States 

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could notably provide clearer indications in the SCPs on whether the projected path for the 
main budgetary aggregates is attainable under unchanged policies. The baseline "unchanged 
policy" scenario could notably be specified. The SGP, including the Code of Conduct on the 
Content  and  Format  of  SCPs  which  guides  Member  States  in  the  preparation  of  SCPs, 
already  specifies  that  the  programmes  should  describe  the  budgetary  and  other  economic 
policy  measures  being  taken  or  proposed  to  achieve  the  budgetary  objectives4.  In  practice, 
however,  the  information  on  the  envisaged  corrective  measures  is  relatively  scarce  in  the 
SCPs. 

Proposal  5.  To  enhance  the  reliability  and  credibility  of  their  medium-term 
budgetary  targets,  Member  States  could  make  clearer  in  their  SCPs  whether  the 
medium-term budgetary targets are attainable under unchanged policies, or whether 
they  will  require  the  implementation  of  additional  policy  measures.  In  the  latter 
case,  it  would  be  important  that  the  SCPs  specify  the  gap  between  the  main 
budgetary targets (government balance, government expenditure) and developments 
in  government  finances  under  unchanged  policies,  and  provide  as  detailed  a 
description  as  possible  of  the  measures  envisaged  to  bridge  the  gap  between 
budgetary trends and objectives.  

Moving towards sustainable fiscal positions in the medium term 

The main fiscal policy objective in the EU countries is to move towards positions consistent 
with  the  long-term  sustainability  of  government  finances.  In  most  of  the  EU  countries, 
addressing  the  sustainability  challenge  requires  a  broad-based  strategy  consisting  of  both 
discretionary fiscal consolidation and structural reforms. In some Member States, important 
choices  have  to  be  made  as  to  what  part  of  the  sustainability  gap  should  be  addressed 
through medium-term consolidation  and what  part should be addressed through reforms of 
labour markets, pensions and health systems. Medium-term budgetary objectives should be 
ambitious enough to address a significant part of the sustainability challenge.  

Moving  swiftly  towards  sound  fiscal  positions  also  requires  a  better  understanding  of  the 
origins of past deviations from medium-term budgetary plans, in order to avoid them in the 
future. Greater emphasis should be placed on the monitoring of previous budgetary plans in 
the context of the assessments of SCPs by the Commission and the Council. Considering that 
Member  States  typically  plan  expenditure-based  fiscal  consolidations  and  that  deviations 
from  medium-term  plans  mainly  stem  from  expenditure  overruns,  strengthened  monitoring 
should devote specific attention to developments in expenditure5.  

For  the  euro-area  countries,  consistency  between  previously  set  medium-term  budgetary 
targets  and  annual  budgets  could  be  monitored  in  the  context  of  the  Mid-Term  Review  of 
Fiscal Policies. This consists of an annual discussion, each spring, on fiscal policy plans for 
the next year, which  aims  to ensure  a  proper coordination of national fiscal policies  in the 
euro area and provide peer support for sound fiscal policies at national level. The Eurogroup 
recently decided to transform this exercise into a real strategic policy debate, organised just 

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See document "Specifications on the implementation of the Stability and Growth Pact and Guidelines 
on the format and content of Stability and Convergence Programmes", endorsed by the Ecofin Council 
in September 2005. 
See Commission report "Public Finances in EMU – 2007" for a detailed analysis of the reasons for the 
difficulties in respecting budgetary targets set in the SCPs. 

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before  the  crucial  decisions  on  the  budgetary  plans  for  the  following  year  are  taken  in  the 
Member States6.  

Proposal 6. As agreed in the context of the SGP reform, the Commission and the 
Member  States  will  step  up  efforts  to  further  develop  the  links  between  medium-
term  fiscal  policies  and  long-term  budgetary  dynamics.  Country-specific  medium-
term  budgetary  objectives  (MTOs)  will  better  take  into  account  sustainability 
challenges.  The  objective  is  to  identify  where  necessary  more  ambitious  country-
specific  MTOs  which  can  help  Member  States  to  substantially  improve  the 
sustainability of government finances.  

Proposal 7. When assessing SCPs, the Commission will strengthen its analysis of 
the track record in respecting the budgetary targets of the previous SCPs, focusing 
on  developments  in  government  expenditure.  For  euro-area  countries,  consistency 
between  previously  set  medium-term  budgetary  targets  –  notably  government 
expenditure targets – and annual budgets will also be monitored as part of the Mid-
Term Review of Fiscal Policies. 

IV. 

CONCLUSION 

This Communication reviews the recent budgetary developments and functioning of the EU 
fiscal framework. It underlines the ongoing improvement of the budgetary situation and the 
smooth implementation of excessive deficit procedures. However, the Communication also 
points  out  concerns  on  the  part  of  the  Commission  as  regards  the  implementation  of  the 
preventive  arm  of  the  SGP.  These  relate,  notably,  to  the  insufficient  fiscal  consolidation 
efforts  of  Member  States  not  yet  at  their  MTOs  in  an  environment  of  favourable  cyclical 
conditions. In some Member States, unexpected increases in tax revenue are partly used to 
finance  increases  in  government  expenditure.  Such  developments  raise  doubts  as  to  the 
permanent character of the ongoing fiscal consolidation. 

Against  this  background,  and  in  a  context  where most  EU  countries  have  just  corrected  or 
are about to correct their excessive deficit, the challenge is to use current favourable cyclical 
conditions to move decisively towards the MTOs.  

With  a  view  to  strengthening  the  effectiveness  of  the  preventive  arm  of  the  SGP,  this 
Communication formulates therefore concrete proposals building on the 2005 SGP reform. 
These proposals will be discussed with Member States in the coming months. They deal with 
the way governments formulate and implement their budgetary strategies over the medium 
term, and the way surveillance and coordination of economic and budgetary policies should 
be  strengthened  at  EU  level  in  order  to  support  the  achievement  of  sustainable  budgetary 
policies which contribute to higher growth and employment. Recent country experience and 
empirical  work  have  shown  that  implementing  these  proposals  would  effectively  support 
Member States' efforts to converge towards sustainable fiscal positions whilst also delivering 
more growth and jobs.  

6 

In  practice,  Member  States  provide  their  peers  and  the  Commission  with  information  on  the  fiscal 
policy  intentions  for  the  following  year.  On  this  basis,  a  discussion  takes  place  assessing  the 
appropriateness  of  these  intentions,  both  for  the  country  concerned  and  from  the  perspective  of  the 
euro area as a whole. 

EN 

9 

   EN