Communication from the Commission to the Council - Assessment of the action taken by Belgium, the Czech Republic, Germany, Ireland, Spain, France, Italy, the Netherlands, Austria, Portugal, Slovenia and Slovakia in response to the Council Recommendations of 2 December 2009 with a view to bringing an end to the situation of excessive government deficit
Date: 2010-06-15
Institutions: European Commission
Subjects: EU Member State, budget deficit, economic recession, public debt, public finance

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EUROPEAN COMMISSION 

Brussels, 15.6.2010 
COM(2010) 329 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken 

by Belgium, the Czech Republic, Germany, Ireland, Spain, France, Italy, the 
Netherlands, Austria, Portugal, Slovenia and Slovakia 

in response to the Council Recommendations of 2 December 2009 with a view to 
bringing an end to the situation of excessive government deficit  

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken 

by Belgium, the Czech Republic, Germany, Ireland, Spain, France, Italy, the 
Netherlands, Austria, Portugal, Slovenia and Slovakia 

in response to the Council Recommendations of 2 December 2009 with a view to 
bringing an end to the situation of excessive government deficit  

1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

The vast majority of EU countries currently have general government deficits above the 3% 
of GDP reference value set in the Treaty on the Functioning of the European Union (TFEU). 
The origin of the often strong deterioration in the deficit as well as the debt positions must be 
seen  in  the  context  of  the  unprecedented  global  financial  crisis  and  economic  downturn  in 
2008/09. Several factors are at play. First, the economic downturn brought about declining tax 
revenue  and  rising  social  benefit  expenditure  (e.g.  unemployment  benefits).  Second, 
recognising that budgetary policies have an important role to play in the current extraordinary 
economic  situation,  the  Commission  called  for  a  fiscal  stimulus  in  its  November  2008 
European Economic Recovery Plan (EERP), endorsed by the European Council in December. 
The Plan stipulated that the stimulus should be differentiated across Member States to reflect 
their different positions in terms of public finance sustainability and competitiveness. Finally, 
several countries took measures to stabilise the financial sector, some of which have impacted 
on  the  debt  position  or  constitute  a  risk  of  higher  deficits  and  debt  in  the  future,  although 
some of the costs of the government support could be recovered in the future. 

In  October  2009,  capitalizing  on  first  sign  of  a  recovery  in  sight,  the  European  Council 
endorsed a fiscal exit strategy based on the following principles: (i) The exit strategy should 
be coordinated across countries in the framework of consistent implementation of the Stability 
and Growth Pact. (ii) There is a need for timely withdrawal of the fiscal stimulus. Provided 
that  the  Commission  forecasts  continue  to  indicate  that  the  recovery  is  strengthening  and 
becoming self-sustaining, fiscal consolidation in all EU Member States should start in 2011 at 
the  latest.  Specificities  of  country  situations  should  be  taken  into  account,  and  a  number  of 
countries need to consolidate before then. (iii) In view of the challenges, the planned pace of 
the fiscal consolidation should be ambitious, and will have to go well beyond the benchmark 
of 0.5% of GDP per annum in structural terms in most Member States. (iv) Important flanking 
policies  to  the  fiscal  exit  will  include  strengthened  national  budgetary  frameworks  for 
underpinning  the  credibility  of  consolidation  strategies  and  measures  to  support  long-term 
fiscal sustainability, as emphasised by the SGP. In addition, structural reform efforts should 
be  strengthened  to  enhance  productivity  and  to  support  long-term  investment.  These 
principles  for  fiscal  exit  have  been  put  into  operation  in  the  recommendations  issued  in  the 
context of the excessive deficit procedures as well as in the latest round of annual assessment 
of  Stability  and  Convergence  Programmes.  The  deadlines  for  correction  and  required 
structural efforts have been differentiated across Member States, taking into account country-
specific circumstances.  

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The  stimulus  measures  in  the  context  of  the  EERP  coupled  with  the  measures  taken  to 
stabilise  the  financial  sector  have  prevented  an  economic  meltdown  and  laid  the  foundation 
for  a  recovery.  The  Commission  services'  spring  2010  forecast  confirms  the  outlook  of 
gradual  recovery  consistent  with  withdrawal  of  fiscal  stimulus.  Indicators  point  towards  a 
self-sustaining recovery at the end of 2010 and into 2011. However, significant risks remain 
linked to the situation in financial markets and the potential negative feedback loop between 
sovereign debt evolution and the banking sector. The spring 2010 forecast suggests that fiscal 
outcomes for the current year should be broadly in line with plans. In 2011 on the back of the 
expected recovery, governments' deficits are projected to begin to fall at unchanged policies. 

Stability and convergence programmes of the Member States under review all confirmed the 
deadlines  for  correcting  the  excessive  deficits  foreseen  in  the  Council  Recommendations 
under  Article  126  of  the  Treaty.  However,  in  several  cases  the  macroeconomic  scenario 
spelled  out  in  the  programmes  could  be  considered  favourable  in  comparison  to  the 
Commission services’ forecast. Moreover, measures to achieve the targets in the outer years 
of the programme period (2011 and beyond) were generally not yet spelled out in much detail 
and require further specification.  

Developments  over  the  past  weeks  have  highlighted  financial  markets’  concerns  about 
unsustainable  debt  developments  and  prospects  for  growth  in  the  EU  and  the  euro  area 
Member States in particular. Risk premia on sovereign debt increased sharply from the end of 
April  to  levels  unprecedented  in  EMU,  especially  in  Member  States  with  the  highest 
perceived  fiscal  and  macro-financial  risks.  The  unravelling  of  the  Greek  crisis  induced 
broader financial distress and high and rising public debts raised increasing concerns on other 
countries' solvency. As financial market tensions persisted and escalated even after agreement 
on  financial  assistance  and  a  fiscal  and  macroeconomic  adjustment  programme  for  Greece, 
the  Council  agreed  on  9  May  2010  to  setting  up  a  European  Financial  Stabilisation 
Mechanism. At the same time, Ministers strongly committed to ensuring fiscal sustainability 
and  enhanced  economic  growth  in  all  Member  States  and  agreed  that  plans  for  fiscal 
consolidation and structural reforms would be accelerated, where warranted. 

The  ECOFIN  Council  agreement  of  9  May  2010  and  the  establishment  of  the  European 
Financial Stabilisation mechanism represent important steps to safeguard the stability of the 
euro  area  and  EU  economy.  The  benefits  need  to  be  secured  through  further  policy  actions 
addressing the fiscal challenges head on. An effective and coordinated short and longer term 
response  is  needed.  The  policy  response  must  come  from  differentiated  fiscal  consolidation 
and bold supply side measures tailored also to remove obstacles to domestic demand. 

In  the  most  vulnerable  countries,  the  consolidation  effort  will  take  place  in  a  particularly 
adverse  economic  environment  of  low  output  growth,  high  unemployment  and  deflationary 
pressures.  These  conditions  render  consolidation  and  reversal  of  debt  dynamics  particularly 
challenging.  However,  in  the  current  climate  of  renewed  risk  aversion  delivering  on  the 
nominal budgetary targets even against a less favourable than assumed economic environment 
may be necessary in order to avoid destabilising debt dynamics for all but the least exposed 
countries. Frontloading fiscal consolidation and early decision of additional measures, as well 
as structural reforms, would bolster confidence, both domestically and in financial markets, in 
the ability to reverse the adverse debt dynamics.  

To  avoid  choking  the  nascent  recovery,  an  undifferentiated  rush  for  unprecedented  fiscal 
consolidation  should  be  avoided.  Instead,  a  coordinated  and  differentiated  approach  to 
accelerated  fiscal  consolidation  would  further  enhance  market  confidence  and  contribute  to 

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fiscal sustainability by taking explicitly into account interdependence across countries. Such a 
differentiated  approach  is  needed  to  optimise  the  fiscal  exit  strategy  at  the  EU  level:  some 
countries need to do more because they face greater risks and, by the same token, because the 
credibility and coherence of the entire EU exit strategy is at stake. Countries most exposed to 
macro-financial  risks  need  to  pursue  and,  where  warranted,  strengthen  their  consolidation 
effort as the cost of inaction would be far larger than the potential short-run negative impact 
of  fiscal  consolidation  on  growth.  Others  should  stick  to  their  targets  as  agreed  in  their 
stability  and  convergence  programmes.  Finally,  some  need  to  adopt  early  decision  of 
consolidation in order to substantiate their consolidation strategy. 

The following assessment of effective action taken by the twelve Member States in response 
to  the  recommendations  of  2  December  2009  takes  place  against  the  background  outlined 
above.  The  recommendations  were  issued  and  the  corresponding  measures  taken  in  the 
context of the exit strategy outlined by the October 2009 European Council. In the light of the 
most  recent  developments  and  according  to  9  May  ECOFIN  Council  conclusions  also  an 
assessment of the new targets and additional measures by Spain and Portugal is presented in 
annex 2.  

2. 

ASSESSMENT OF ACTION TAKEN 

The  Stability  and  Growth  Pact  requires  the  Commission  to  initiate  the  excessive  deficit 
procedure (EDP) whenever the deficit of a Member State exceeds the 3% of GDP reference 
value.  The  amendments  to  the  Stability  and  Growth  Pact  in  2005  aimed  at  ensuring  that  in 
particular the economic and budgetary background was taken into account fully in all steps in 
the  EDP.  In  this  way,  the  Stability  and  Growth  Pact  provides  the  framework  supporting 
government  policies  for  a  prompt  return  to  sound  budgetary  positions taking  account  of  the 
economic situation, and thereby ensuring long-term sustainability of public finances. 

On 2 December 2009, the Council addressed recommendations under Article 126(7) TFEU to 
Belgium,  the  Czech  Republic,  Germany,  Italy,  Netherlands,  Austria,  Portugal,  Slovenia  and 
Slovakia and revised recommendations under the same Article to France, Spain, Ireland and 
the United Kingdom with a view to bringing the situation of an excessive deficit to an end1. 
These recommendations were based on the Commission services' autumn 2009 forecast and 
on the agreed principles of the fiscal exit strategy. The Council set the date of 2 June 2010 for 
taking effective action in response to the recommendations. 

According to Regulation (EC) No 1467/972 and the revised Code of Conduct3 a Member State 
should  be  considered  to  have  taken  effective  action  if  it  has  acted  in  compliance  with  the 
Article  126(7)  TFEU  recommendation.  The  Code  of  Conduct  states  that  the  assessment  of 
effective  action  should  in  particular  take  into  account  whether  the  Member  State  concerned 
has  achieved  the  annual  improvement  of  its  cyclically  adjusted  balance,  net  of  one-off  and 
other  temporary  measures,  initially  recommended  by  the  Council.  In  case  the  observed 
adjustment  proves  to  be  lower  than  recommended,  a  careful  analysis  of  the  reasons  for  the 

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An overview of all past and ongoing EDP procedures is available at: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm 
OJ L 209, 2.8.1997, p. 6. 
“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  of  10 
November 2009, available at: 
http://ec.europa.eu/economy_finance/sgp/deficit/legal_texts/index_en.htm. 

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shortfall should be made. In case of a multi-annual adjustment, the Code of Conduct specifies 
that the assessment should mainly focus on the measures taken in order to ensure an adequate 
fiscal adjustment in the year following the identification of the excessive deficit. 

Against  this  background,  the  Commission  has  made  an  assessment  of  action  taken  by 
Belgium,  the  Czech  Republic,  Germany,  Ireland,  Spain,  France,  Italy,  the  Netherlands, 
Austria,  Portugal,  Slovenia  and  Slovakia,  in  response  to  the  Council  recommendations  of  2 
December4.  The  Commission  considers  that  for  these  countries,  no  further  steps  in  the 
excessive deficit procedure are needed at present. Details of this assessment are presented in 
the country-specific sections in the Annex 1.  

Moreover, in view of the call of the ECOFIN Council of 9 May 2010 to accelerate plans for 
fiscal  consolidation  and  structural  reforms  where  warranted,  the  Commission  welcomes  the 
important additional measures and more ambitious targets for the budget balance in 2010 and 
2011 in Spain and Portugal. In both countries, these new consolidation measures underpin an 
appropriate  and  ambitious  downward  revision  of  the  2010  and  2011  deficit  targets  (in 
comparison with the plans outlined in the 2010 stability programme updates). These measures 
will also lead to a parallel improvement in the Commission services’ deficit forecast for these 
years.  Spain  and  Portugal  are  expected,  at  the  same  time,  to  specify  measures  in  their  2011 
budget amounting to 1¾% and 1½% of GDP respectively in order to attain the improvement 
foreseen in their stability programme and reduce budgetary risks. This assessment should be 
considered as early guidance of next year’s budget. This is very much in line with proposals 
on reinforced economic governance which foresees early guidance in order to ensure a sound 
articulation  between  the  European  and  national  budgetary  process.  A  more  detailed 
assessment of the new targets and measures for Spain and Portugal is presented in Annex 2.  

Overall,  the  current  budgetary  targets,  including  recent  revisions  reflecting  the  need  to 
frontload in the countries most at risk, appear to strike an adequate balance between the need 
to  secure  the  incipient  signs  of  economic  recovery  and  the  cost  of  fiscal  retrenchment. 
Irrespective of the size of the consolidation, two features  are likely to influence its success: 
the degree of policy commitment, reflected by the permanent nature of the measures, and the 
composition of consolidation, with revenue-based measures likely to be less effective because 
of the negative repercussions on growth, but with important distinctions linked to tax structure 
and design, as well as the starting level of the tax burden. 

The Commission will continue to closely monitor budgetary developments in accordance with 
the Treaty and the Stability and Growth Pact (SGP). 

4 

For the UK, which also received recommendations under Article 126(7) TFEU on 2  December 2009, 
the Commission postponed its assessment until the presentation of the emergency budget announced by 
the new British government for 22 June 2010. 

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ANNEX 1: ASSESSMENT OF ACTION TAKEN BY COUNTRY 

1. 

BELGIUM 

1.1. 

Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Belgium  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to Belgium in accordance with Article 126(7) with a 
view to bringing an end to the situation of an excessive government deficit5. 

The Council recommended Belgium to put an end to the present excessive deficit situation by 
2012. The Belgian authorities should bring the general government deficit below 3 % of GDP 
in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically,  to  this  end,  the  Belgian  authorities  should:  (a)  implement  the  deficit-reducing 
measures in 2010 as planned in the draft budget for 2010, and strengthen the planned fiscal 
effort in 2011 and 2012; (b) ensure an average annual fiscal effort of ¾ % of GDP over the 
period 2010-2012, which should also contribute to bringing the government gross debt ratio 
back on a declining path that approaches the reference value at a satisfactory pace by restoring 
an  adequate  level  of  the  primary  surplus;  (c)  specify  the  measures  that  are  necessary  to 
achieve  the  correction  of  the  excessive  deficit  by  2012,  cyclical  conditions  permitting,  and 
accelerate the reduction of the deficit if economic or budgetary conditions turn out better than 
currently  expected;  (d)  strengthen  monitoring  mechanisms  to  ensure  that  fiscal  targets  are 
respected. 

In  addition,  the  Belgian  authorities  should  seize  opportunities  beyond  the  fiscal  effort, 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
back towards the reference value. 

The  Council  established  the  deadline  of  2  June  2010  for  the  Belgian  government  to  take 
effective  action  to  implement  the  deficit-reducing  measures  in  2010  as  planned  in  the  draft 
budget for 2010 and to outline in some detail the strategy that will be necessary to progress 
towards  the  correction  of  the  excessive  deficit.  The  assessment  of  effective  action  will  take 
into account economic developments compared to the economic outlook in the Commission 
services' autumn 2009 forecast. 

1.2. 

Assessment of action taken 

The global economic and financial crisis led to a contraction of economic activity in Belgium 
of 3% in 2009. The rebound in global demand triggered the recovery of economic growth in 
the  second  half  of  2009.  According  to  the  Commission  services'  2010  spring  forecast,  this 
recovery is expected to continue in 2010 and 2011, leading to real GDP growth of 1.3% and 
1.6%, respectively. For 2010, this means that the outlook for 2010 has improved considerably 
since the Commission services' 2009 autumn forecast, which had projected real GDP growth 
of  0.6%,  whereas  it  remained  relatively  stable  for  2011.  The  output  gap  is  expected  to 
gradually diminish over the forecast horizon. 

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All  EDP-related  documents 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

for  Belgium 

can  be 

found 

at 

the 

following  website: 

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Regarding  2010,  the  authorities  broadly  implemented  the  deficit-reducing  measures  in  2010 
planned in the draft budget for 2010 as recommended by the Council except for an additional 
expenditure  of  less  than  0.1%  of  GDP,  in  the  areas  of  security  and  active  labour  market 
policies, financed from windfall revenues decided in the context of the March 2010 budgetary 
control  exercise.  The  most  recent  projections  of  the  Belgian  authorities,  as  reported  in  the 
May 2010 update of the budget foresee a deficit of 4.8% of GDP compared to 6.0% of GDP 
in  2009;  the  spring  forecast  of  5.0%  of  GDP  is  slightly  more  pessimistic,  mainly  resulting 
from  less  positive  tax  elasticity  assumptions,  notably  corporate  taxes.  In  any  case,  both 
forecasts represent a considerable improvement compared to the projected deficit of 5.6% of 
GDP  in  the  authorities'  budget,  presented  to  Parliament  on  6  November  2009.  The  2010 
deficit is expected to benefit somewhat from additional consolidation measures taken by other 
government tiers, but mainly from the more favourable macro-economic environment. This is 
broadly  in  line  with  the  recommendation  to  accelerate  deficit  reduction  if  economic  and 
budgetary conditions turn out better than expected.  

According  to  the  spring  forecast  the  structural  balance  improves  by  ¼%  of  GDP,  which  is 
lower than the planned consolidation of ½% of GDP foreseen in the stability programme, but 
still in line with the Council recommendations to start consolidation in 2010. The structural 
change in 2010 can be explained by consolidation measures of 1% of GDP which are largely 
offset by an increasing expenditure trend. This consolidation includes the partial withdrawal 
of  the  stimulus  package,  improving  the  budget  by  ¼%  of  GDP,  as  well  as  a  consolidation 
package concentrated on the revenue side and largely consisting of several tax increases and 
non-tax revenues from the financial sector. The increasing expenditure trend of ½% of GDP is 
the  result  of  previously  taken  measures  and  the  budgetary  impact  of  population  ageing  and 
also reflects rising interest expenditure. Overall, the expected structural improvement in 2010 
falls short of the average annual fiscal effort of ¾% of GDP as recommended under Article 
126(7), which will require above-average fiscal effort for the period 2011-2012. 

The  main  goal  of  the  medium-term  budgetary  strategy  is  to  correct  the  excessive  deficit  by 
2012, in line with the Council recommendation under Article 126(7) of 2 December 2009. To 
this end, the programme targets an improvement of the headline deficit from 5.9% of GDP in 
2009 to 4.8% in 2010, 4.1% in 2011 and 3.0% in 2012. However, as concluded by the Council 
in its opinion of the latest update of the stability programme, measures underpinning the target 
for 2011 are only partly specified and there are no measures specified for 2012. In addition, 
the slightly favourable macroeconomic assumptions combined with an average annual fiscal 
effort  that  is  somewhat  below  the  ¾%  of  GDP  recommended  by  the  Council,  pose  further 
downward  risks  to  the  targets.  Therefore,  the  strategy  would  need  to  be  backed  up  by  fully 
specified measures as from 2011 and additional measures need to be considered to ensure the 
correction of the excessive deficit by 2012, as recommended by the Council. 

The debt level, which was on a downward trend since 1993, is on an increasing trend since 
2008.  According  to  the  stability  programme,  it  will  reach  101½%  of  GDP  in  2011,  before 
falling  slightly  to  100½%  of  GDP  in  2012.  Risks  to  these  projections  are  related  to  the 
favourable  budgetary  targets  from  2011  in  the  programme.  The  spring  forecast  projects  the 
debt to reach 101% of GDP in 2011, which is slightly more optimistic, mainly resulting from 
a lower debt level in 2009 than was expected in the programme.  

In  the  stability  programme,  improvements  are  announced  regarding  the  fiscal  framework 
aimed  at  strengthening  monitoring  mechanisms  to  ensure  that  fiscal  targets  are  respected. 
These include the introduction of multi-annual budgetary agreements among all government 
tiers,  some  steps  towards  multi-annual  budgeting  at  the  federal  level,  regular  and  stringent 

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control  budget  exercises  and  improvements  to  the  reporting  system  of  local  governments. 
Nevertheless,  more  could  be  done,  for  example  by  creating  enforceable,  multi-annual 
expenditure ceilings.  

1.3. 

Conclusions 

On  current  information  it  appears  that  Belgium  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council.  In  particular,  Belgium  is  broadly  implementing  the  deficit-reducing  measures  in 
2010 as planned in the draft budget, totalling 1% of GDP and leading to an improvement in 
the structural balance of ¼% of GDP. Furthermore, the 2010 headline deficit is expected by 
the  Commission  services  to  come  out  lower  than  the  deficit  for  2010  projected  in  the  draft 
budget, at 5% of GDP and 5.6% of GDP respectively.  

The  Belgian  authorities  have  outlined  in  some  detail  the  consolidation  strategy,  by  setting 
targets and indicating a number of measures supporting them, which is necessary to progress 
towards  the  correction  of  the  excessive  deficit  by  2012,  the  deadline  recommended  by  the 
Council.  However,  the  measures  underpinning  the  envisaged  consolidation  path  from  2011 
onwards will need to be specified further in order to reach the recommended average annual 
fiscal  effort  and  to  correct  the  excessive  deficit  by  the  deadline  and  to  ensure  that  the  debt 
ratio embarks on a downward path by the end of the correction period. Also, Belgium should 
further strengthen monitoring mechanisms to ensure that fiscal targets are respected. In view 
of  the  above,  it  would  be  important  for  Belgium  to  take  action  to  specify  consolidation 
measures for the coming years in order to ensure a timely correction of the excessive deficit. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Belgium are needed at present. The Commission will continue 
to closely monitor budgetary developments in Belgium in accordance with the Treaty and the 
SGP. 

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Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2007 
2.9 
n.a. 
2.3 
n.a. 
-0.2 
n.a. 
3.6 
n.a. 
-1.4 
n.a. 
-1.3 
n.a. 
84.2 
n.a. 

2008 
1.0 
1.0 
1.5 
1.8 
-1.2 
-1.2 
2.6 
2.6 
-2.0 
-2.2 
-2.1 
-2.2 
89.8 
89.8 

2009 
-3.1 
-3.1 
-2.7 
-2.4 
-6.0 
-5.9 
-2.3 
-2.3 
-4.5 
-4.6 
-3.9 
-3.8 
96.7 
97.9 

2010 
1.3 
1.1 
-2.4 
-2.5 
-5.0 
-4.8 
-1.3 
-1.1 
-3.7 
-3.4 
-3.8 
-3.4 
99.0 
100.6 

2011 
1.6 
1.7 
-1.9 
-2.2 
-5.0 
-4.1 
-1.2 
-0.4 
-4.0 
-2.9 
-4.0 
-2.9 
100.9 
101.4 

2012 
n.a. 
2.2 
n.a. 
-1.4 
n.a. 
-3.0 
n.a. 
0.8 
n.a. 
-2.2 
n.a. 
-2.2 
n.a. 
100.6 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission services on
of the information in the programmes. 
2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source:  Commission  services’  2010  spring  forecast  (COM)  and  January  2010  stability  programme 
update (SP) 

2. 

THE CZECH REPUBLIC 

2.1. 

Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  the  Czech 
Republic in accordance with Article 126(6) of the Treaty on the Functioning of the European 
Union  (TFEU)  and  addressed  recommendations  to  the  Czech  Republic  in  accordance  with 
Article  126(7)  with  a  view  to  bringing  an  end  to  the  situation  of  an  excessive  government 
deficit6.  

The Council recommended the Czech Republic to put an end to the present excessive deficit 
situation by 2013. The Czech authorities should bring the general government deficit below 
3%  of  GDP  in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term 
framework. Specifically, to this  end, the Czech authorities should: (a) implement the deficit 
reducing measures in 2010 as planned in the draft budget law for 2010; (b) ensure an average 
annual fiscal effort of 1% of GDP over the period 2010-2013; (c) specify the measures that 
are  necessary  to  achieve  the  correction  of  the  excessive  deficit  by  2013,  cyclical  conditions 
permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or  budgetary  conditions 
turn out better than currently expected.  

To  limit  the  risks  to  the  adjustment,  the  Czech  Republic  should  enforce  rigorously  its 
medium-term  budgetary  framework  and  improve  the  monitoring  of  the  budget  execution 
throughout  the  year  to  avoid  expenditure  overruns  compared  to  the  budget  and  multiannual 
plan.  

6 

All EDP-related documents for the Czech Republic can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

EN 

9 

   EN 

  
 
                                                 
 
The  Council  established  the  deadline  of  2  June  2010  for  the  Czech  government  to  take 
effective  action  to  implement  the  deficit  reducing  measures  in  2010  as  planned  in  the  draft 
budget  law  for  2010  and  to  outline  in  some  detail  the  consolidation  strategy  that  will  be 
necessary  to  progress  towards  the  correction  of  the  excessive  deficit.  The  assessment  of 
effective  action  will  take  into  account  economic  developments  compared  to  the  economic 
outlook in the Commission services' autumn 2009 forecast. 

2.2. 

Assessment of action taken 

The Czech economy did not avoid a sharp recession due to the crisis, with real GDP falling by 
4.2%  in  2009.  In  line  with  the  improving  global  economic  environment,  growth  became 
positive in the third quarter of 2009. Moreover, the outlook in the latest Commission services' 
spring  2010  forecast  is  more  favourable  than  envisaged  last  autumn.  Real  GDP  is  now 
expected to grow by 1.6% and 2.4% in 2010 and 2011 respectively, while in autumn 2009 the 
Commission services projected a growth of 0.8% and 2.3%. The government deficit increased 
to  5.9%  of  GDP  in  2009  (from  2.7%  of  GDP  in  2008),  reflecting  anti-crisis  measures  of 
around 2% of GDP and the operation of automatic stabilisers. This was a better outcome than 
the 6.6% of GDP expected by the Commission services and the authorities in autumn 2009.  

Given the risks related to rising deficits, the government decided to withdraw fiscal stimulus 
at the end of 2009 and start fiscal consolidation already in 2010. A consolidation package was 
approved  as  part  of  the  draft  budget  for  2010.  It  relies  predominantly  on  revenue  side 
measures,  including  increases  in  VAT,  excise  duties,  property  taxes  and  social  security 
ceilings for high-income earners. Stimulus measures such as temporary cuts in social security 
contributions were withdrawn earlier than planned. Expenditure side measures include cuts in 
social benefits and the public sector wage bill and a freeze of pensions in 2010. The overall 
impact of the consolidation measures in 2010 is estimated at 2.1% of GDP.  

In the February 2010 Convergence Programme, the authorities targeted a government deficit 
of 5.3% of GDP and a 2 pp. improvement in the structural balance. The Commission services' 
spring  2010  forecast  expects  the  deficit  to  reach  5.7%  of  GDP,  and  an  improvement  in  the 
structural balance by 0.5 pp. The gap in the estimated structural effort is partly due to a base 
effect: the downward revision of the 2009 deficit to 5.9% of GDP was taken into account in 
the spring 2010 forecast but not in the convergence programme. The lower deficit in 2009 did 
however not translate into a lower 2010 deficit in the Commission services’ forecast because 
of lower projected revenues and, to a lesser extent, higher expected deficits of local budgets 
and  additional  expenditure  approved  before  the  parliamentary  elections  (around  0.1%  of 
GDP).  

According to the Commission services’ forecast, the fiscal effort as measured by the change 
in  the  structural  balance  in  2010  is  therefore  lower  than  the  1%  of  GDP  (on  average  over 
2010-2013) recommended by the Council. This reflects a low tax-to-GDP elasticity in 2010 – 
while  revenue  side  consolidation  measures  are  estimated  to  some  1.8%  of  GDP,  the 
Commission services’ spring 2010 forecast projects an increase in the revenue-to-GDP ratio 
of  only  1  percentage  point.  The  fiscal  effort  is  higher  than  recommended  when  using  the 
bottom-up  approach  based  on  the  Czech  authorities'  estimates  of  the  fiscal  impact  of 
consolidation  measures.  These  measures  have  been  fully  implemented,  in  line  with  the 
Council recommendation.  

Taking  into  account  data  for  the  first  months  of  2010,  the  authorities  identified  risks  to  the 
budgetary  execution  in  2010.  They  stem  from  lower  tax  revenue  and  property  income  and 

EN 

10 

   EN 

higher-than-expected spending of local authorities. Nevertheless, in a letter of 27 May 2010, 
the authorities reiterated their strong commitment to the 5.3% of GDP deficit target for 2010. 
To this end, the government adopted additional measures amounting to around ¼% to ½% of 
GDP  which  have  not  been  taken  into  account  in  the  Commission  services'  spring  2010 
forecast and which include: setting limits on expenditure in individual budget chapters, using 
dividends from state-owned enterprises for deficit reduction and postponing payment of past 
environmental damage claims.  

Beyond 2010, the Czech authorities aim at reducing the government deficit to 4.8% and 4.2% 
of GDP in 2011 and 2012 respectively and at reaching the 3% deficit target in 2013, in line 
with  the  Council  Recommendation.  The  budgetary  targets  are  nevertheless  subject  to  risks. 
The medium-term budgetary strategy outlines in broad terms the consolidation path but does 
not provide details on concrete measures, in particular on the expenditure side. Furthermore, 
no  measures  are  specified  for  2013  while  a  significant  reduction  of  the  general  government 
deficit by 1.2 pp. is assumed, thus implying a back-loaded consolidation path. In the letter of 
27  May  2010,  the  authorities  inform  about  their  intention  to  revise  the  medium-term 
expenditure  ceilings  for  2011-2013  in  order  to  align  them  with  the  above  mentioned  fiscal 
targets. This revision as well as more details on the consolidation measures will be included in 
the Ministry of Finance's Fiscal Outlook due in June 2010.  

The Czech authorities have not announced any further measures to improve enforcement the 
medium-term  budgetary  framework.  Some  progress  has  however  been  made  to  improve 
budgetary  execution.  The  ongoing  implementation  of  changes  in  tax  collection  and  tax 
management as well as a shift to a treasury system of budgetary management will contribute 
to more efficient management of public finances.  

2.3. 

Conclusions 

On  current  information  it  appears  that  the  Czech  Republic  has  taken  action  representing 
adequate progress towards the correction of the excessive deficit within the time limits set by 
the  Council.  In  particular,  the  Czech  authorities  have  implemented  the  deficit  reducing 
measures in 2010 as planned in the draft budget law for 2010 and have taken some additional 
measures in the course of the year to reach the 2010 deficit target. Overall, the fiscal impact of 
the measures is estimated at more than 2% of GDP.  

The  Czech  authorities  have  outlined  in  some  detail  the  consolidation  strategy  needed  to 
correct the excessive deficit by 2013, the deadline recommended by the Council. However, to 
achieve the planned consolidation strategy it will be important to ensure rigorous budgetary 
execution in 2010 and stand ready to adopt additional measures if necessary to reach the 5.3% 
of GDP deficit target. Furthermore, it is necessary to adopt a budget for 2011 consistent with 
Council recommendations and to specify in more detail consolidation measures for 2012 and 
2013.  Some  progress  has  been  made  in  improving  the  monitoring  of  the  budget  execution 
throughout  the  year,  as  the  Council  recommended,  but  further  measures  to  improve 
enforcement of the budgetary framework will be needed.  

In view of the above, the Commission considers that no further steps in the excessive deficit 
procedure  of  the  Czech  Republic  are  needed  at  present.  The  Commission  will  continue  to 
closely monitor budgetary developments in the Czech Republic in accordance with the Treaty 
and the SGP. 

EN 

11 

   EN 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 
6.1 
n.a. 
6.0 
n.a. 
-0.7 
n.a. 
0.5 
n.a. 
-2.9 
n.a. 
-2.9 
n.a. 
29.0 
n.a. 

2008 
2.5 
2.5 
4.8 
5.6 
-2.7 
-2.1 
-1.6 
-1.0 
-4.5 
-4.5 
-4.5 
-4.5 
30.0 
30.0 

2009 
-4.2 
-4.0 
-2.2 
-2.0 
-5.9 
-6.6 
-4.6 
-5.3 
-5.1 
-5.9 
-5.4 
-6.1 
35.4 
35.2 

2010 
1.6 
1.3 
-2.7 
-2.9 
-5.7 
-5.3 
-3.9 
-3.5 
-4.7 
-4.2 
-4.9 
-4.1 
39.8 
38.6 

2011 
2.4 
2.6 
-2.5 
-2.6 
-5.7 
-4.8 
-3.6 
-2.8 
-4.8 
-3.8 
-4.9 
-3.7 
43.5 
40.8 

2012 
n.a. 
3.8 
n.a. 
-1.1 
n.a. 
-4.2 
n.a. 
-2.0 
n.a. 
-3.8 
n.a. 
-3.5 
n.a. 
42.0 

2013 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 

COM 
CP 
COM 
CP 
COM 
CP 
COM 
CP 
COM 
CP 
COM 
CP 
COM 
CP 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and February 2010 convergence 
programme update (CP) 

3. 

GERMANY 

3.1. 

Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Germany  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to Germany in accordance with Article 126(7) with 
a view to bringing an end to the situation of an excessive government deficit7.  

The  Council  recommended  the  Germany’s  authorities  to  implement  the  fiscal  measures  in 
2010  as  envisaged  and,  starting  consolidation  in  2011,  put  an  end  to  the  present  excessive 
deficit situation by 2013.  

The German authorities should bring the general government deficit below 3 % of GDP in a 
credible and sustainable manner by taking action in a medium-term framework. Specifically, 
to this end, the German authorities should: (a) ensure an average annual fiscal effort of at least 
0,5  %  of  GDP  over  the  period  2011-2013,  which  should  also  contribute  to  bringing  the 
government gross debt ratio back on a declining path that approaches the reference value at a 
satisfactory  pace  by  restoring  an  adequate  level  of  the  primary  surplus;  (b)  specify  the 
measures that are necessary to achieve the correction of the excessive deficit by 2013, cyclical 
conditions  permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or  budgetary 
conditions turn out better than currently expected. 

7 

EN 

All  EDP-related  documents 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm 

for  Germany  can  be 

found  at 

the 

following  website: 

12 

   EN 

  
 
                                                 
In  addition,  the  German  authorities  should  seize  any  opportunity  beyond  the  fiscal  efforts, 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
back towards the reference value. 

The  Council  established  the  deadline  of  2  June  2010  for  the  German  government  to  take 
effective action to implement the fiscal measures in 2010 as envisaged and to outline in some 
detail the consolidation strategy that will be necessary to progress towards the correction of 
the  excessive  deficit.  The  assessment  of  effective  action  takes  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission  services'  autumn  2009 
forecast. 

3.2. 

Assessment of action taken 

According to the Commission services' spring 2010 forecast, real GDP is projected to increase 
by  1.2%  in  2010  and  1.6%  of  GDP  in  2011  which  does  not  differ  substantially  from  the 
autumn 2009  projection  (0.1 pp. lower growth in 2011). The Commission services expect a 
relatively steady but moderate recovery, which would initially be mainly export-led but then 
spill  over  into  stronger  domestic  demand.  Given  the  remarkable  resilience  of  the  labour 
market,  the  employment  outlook  has  become  more  favourable.  The  negative  output  gap  is 
expected to diminish slightly in 2010 and 2011. 

According to the February 2010 update of the Stability Programme, the general government 
deficit is likely to increase by around 2¼ pp. to 5½% of GDP in 2010. This widening of the 
deficit  in  2010  is  mainly  fuelled  by  fiscal  stimulus  measures  introduced  in  line  with  the 
European Economic Recovery Plan (EERP) and to a lesser extent by the impact of automatic 
stabilisers. General government revenue is projected to shrink by almost 2% of GDP on the 
back  of  household  relief  measures  and  weaker  domestic  demand.  The  expected  increase  in 
general  government  expenditure  by  around  ½%  of  GDP  can  be  mainly  attributed  to  the 
previously-projected  increase  in  unemployment  and  continued  investment  in  public 
infrastructure.  Given  the  improved  outlook  for  the  labour  market,  the  Commission  services' 
spring 2010 forecast expects a general government deficit of 5% of GDP in 2010.  

The federal budget for 2010, approved in March 2010, set the federal deficit target at 3¼% of 
GDP. According to the February 2010 update of  the  Stability Programme, the deficit of the 
aggregated budgets of the state and local government is projected to amount to 2% of GDP, 
while  the  budgets  of  the  social  security  systems  are  likely  to  be  almost  balanced.  In  2010, 
major measures in the general government budget encompass: (1) the package of 27 January 
2009  (Konjunkturpaket  II)  including  a  higher  basic  personal  income  tax  allowance,  (2)  the 
Citizens' Relief Act (Bürgerentlastungsgesetz) of 16 July 2009 establishing tax deductibility 
of  health-care  and  long-term  care  contributions  and  (3)  the  Act  to  Accelerate  Economic 
Growth (Wachstumsbeschleunigungsgesetz) raising, inter alia, child allowances. While some 
of  the  stimulus  measures  expired  at  the  end  of  2009  (e.g.  car  scrapping  premium),  others 
continue in 2010 and may even have a higher budgetary impact than in 2009 (e.g. the reduced 
contribution  rate  to  the  health-care  insurance,  introduced  as  of  mid-2009).  Moreover,  some 
measures will come into effect with a lag, e.g. additional infrastructure investment. 

According  to  the  February  2010  update  of  the  Stability  Programme,  the  main  goal  of  the 
medium-term budgetary strategy is to correct the excessive deficit by 2013 with an average 
annual  fiscal  effort  of  almost  ¾%  of  GDP  in  2011-2013,  which  is  in  line  with  the  Council 
Recommendation  of  2  December  2009.  The  envisaged  adjustment  path  is  based  on  the 
technical assumption of expenditure-driven consolidation at the federal level, which is related 

EN 

13 

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to the consolidation requirements implied by the new constitutional budgetary rule. The rule 
prescribes  a  federal  structural  deficit  ceiling  of  0.35%  of  GDP  as  of  2016  and  balanced 
structural  budgets  for  the  Länder  from  2020  onwards.  The  new  budgetary  rule  –  being  an 
important consolidation anchor – still remains to be implemented at all levels of governments.  

On  7  June  2010,  the  German  government  announced  budgetary  consolidation  measures  for 
the  period  2011-2014  at  the  federal  level.  Major  retrenchment  steps  include  cuts  in  certain 
social and family benefits (including, inter alia, reduced support for unemployed, abolition of 
federal coverage of pension insurance contributions for the long-term unemployed, abolition 
of  parental  allowance  for  the  long-term  unemployed)  and  cost  savings  in  the  public  sector 
(including  wage  restraint  and  employment  cuts).  Additional  revenue  is  expected  from  the 
abolition of eco-tax subsidies, a new air traffic charge and new levies on the nuclear energy 
and  banking  sectors.  The  expected  average  annual  consolidation  effort  at  the  federal  level 
over the period 2011-2013/14 amounts to ¼% of GDP. The German government is to adopt 
the  draft  2011  federal  budget  and  the  federal  medium-term  financial  plan  2011-2014  at  the 
end of June/beginning of July. The general government budgetary strategy is to be discussed 
with the Länder and the communes in a working group of the new national Stability Council 
on 14 July8.  

As  presented  in  the  latest  update  of  the  Stability  Programme,  the  debt-to-GDP  ratio  has 
increased  rapidly  by  6½  pp.  to  72½%  of  GDP  in  20099  –  driven  by  a  sharp  increase  in  net 
borrowing, financial market stabilisation measures and a decline of the nominal GDP. It is set 
to increase to 82% of GDP in 2013. In addition to all risks attached to the deficit path, there is 
still some risk of further debt increases related to financial market stabilisation measures and 
to  the  uncertainty  regarding  the  sector  classification  of  debt  related  to  "bad  banks"  out  of 
public  banks.  The  Commission  expects  the  debt  to  amount  to  around  81½%  in  2011.  The 
difference  of  2  pp.,  as  compared  to  the  latest  national  projection,  is  mainly  explained  by  a 
technical assumption that the establishment of a "bad-bank" for one of the Landesbanken has 
a direct impact on the debt10. 

3.3. 

Conclusions 

On  current  information  it  appears  that  Germany  not  only  has  taken  action  representing 
adequate  progress  towards  the  implementation  of  the  Council  Recommendations  under 
Article  126(7)  TFEU  of  2  December  2009,  but  also  presented  budgetary  consolidation 
measures for the period 2011-2014.  In particular, the German authorities have implemented 
the fiscal stimulus measures in 2010 as planned, including the additional tax relief measures 
introduced by the Act to Accelerate Economic Growth. 

The German authorities have also outlined in some detail a medium-term budgetary strategy 
to correct the excessive deficit by 2013 with an average annual fiscal effort of almost ¾% of 
GDP  in  2011-2013.  In  particular,  the  German  authorities  have  announced  specific 
consolidation  measures  over  2011-2014  at  the  federal  level.  To  what  extent  these  will  feed 
through to the general government balance and ensure the correction of the excessive deficit 
by  2013  will  also  depend  on  the  budgetary  strategies  followed  by  the  Länder  and  local 

8 
9 
10 

Letter from the German Minister of Finance W. Schäuble to the Commissioner O. Rehn (27.5.2010). 
According to the Bundesbank estimate from May, 2010, the debt–to-GDP ratio stood at 73.1% in 2009. 
This  treatment  follows  the  practice  currently  used  by  the  German  statistical  authorities  and  does  not 
prejudge the final accounting decision. 

EN 

14 

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communities.  In  particular,  the  national  budgetary  rule  is  still  to  be  transposed  to  the  sub-
federal level. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Germany are needed at present. The Commission will continue 
to closely monitor budgetary developments in Germany in accordance with the Treaty and the 
SGP. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 

2008 

2009 

2010 

2011 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2.5 
2.5 
2.7 
2.0 
0.2 
-0.2 
3.0 
2.6 
-1.2 
-1.2 
-1.2 
-0.9 
65.0 
65.1 

1.3 
1.3 
3.0 
3.2 
0.0 
0.0 
2.7 
2.7 
-1.5 
-1.6 
-1.1 
-1.2 
66.0 
65.9 

-5.0 
-5.0 
-2.9 
-2.6 
-3.3 
-3.2 
-0.7 
-0.6 
-1.8 
-1.9 
-1.7 
-1.8 
73.2 
72½ 

1.2 
1.4 
-2.7 
-2.1 
-5.0 
-5½ 
-2.3 
-3 
-3.6 
-4.4 
-3.6 
-4.4 
78.8 
76½ 

1.6 
2 
-2.3 
-1.3 
-4.7 
-4½ 
-2.0 
-2 
-3.5 
-4.1 
-3.5 
-3.9 
81.6 
79½ 

2012 
n.a. 
2 
n.a. 
-1.1 
n.a. 
-3½ 
n.a. 
-½ 
n.a. 
-3.1 
n.a. 
-3.0 
n.a. 
81 

2013 
n.a. 
2 
n.a. 
-0.9 
n.a. 
-3 
n.a. 
½ 
n.a. 
-2.3 
n.a. 
-2.3 
n.a. 
82 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and February 2010 stability programme 
update (SCP) 

4. 

IRELAND 

4.1. 

Excessive deficit procedure and most recent recommendations 

On  27  April  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Ireland  in 
accordance  with  Article  104(6)  of  the  Treaty  establishing  the  European  Community  (TEC). 
The  most  recent  Council  Recommendation  under  Article  126(7)  of  the  Treaty  on  the 
Functioning of the European Union (TFEU) was adopted on 2 December 200911. 

The Council recommended Ireland to put an end to the present excessive deficit situation by 
2014. 

The  Irish  authorities  should  bring  the  general  government  deficit  below  3%  of  GDP  in  a 
credible and sustainable manner by taking action in a medium-term framework. Specifically, 
to this end, the Irish authorities should: (a) specify consolidation measures in the budget for 
2010 in line with the package announced in the April 2009 supplementary budget; (b) ensure 

11 

All EDP-related documents for Ireland can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

EN 

15 

   EN 

  
 
                                                 
an average annual fiscal effort of 2 % of GDP over the period 2010-2014, which should also 
contribute  to  bringing  the  government  gross  debt  ratio  back  on  a  declining  path  that 
approaches the 60 % of GDP reference value at a satisfactory pace by restoring an adequate 
level  of  the  primary  surplus;  (c)  specify  the  measures  that  are  necessary  to  achieve  the 
correction of the excessive deficit by 2014, cyclical conditions permitting, and accelerate the 
reduction  of  the  deficit  if  economic  or  budgetary  conditions  turn  out  better  than  currently 
expected. 

In addition, the Irish authorities should seize opportunities beyond the fiscal effort, including 
from  better  economic  conditions,  to  accelerate  the  reduction  of  the  gross  debt  ratio  back 
towards the 60 % of GDP reference value. 

To  limit  risks  to  the  adjustment,  Ireland  should  strengthen  the  enforceable  nature  of  its 
medium-term  budgetary  framework  as  well  as  closely  monitor  adherence  to  the  budgetary 
targets  throughout  the  year.  To  reduce  the  risks  to  the  long-term  sustainability  of  public 
finances,  the  Irish  authorities  should  pursue  further  reforms  to  the  social  security  system  as 
soon as possible. 

The Council established the deadline of 2 June 2010 for the Irish government to take effective 
action  to  specify  consolidation  measures  in  the  budget  for  2010  in  line  with  the  package 
announced  in  the  April  2009  supplementary  budget  and  to  outline  in  some  detail  the 
consolidation  strategy  that  will  be  necessary  to  progress  towards  the  correction  of  the 
excessive  deficit.  The  assessment  of  effective  action  will  take  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission  services'  autumn  2009 
forecast. 

4.2. 

Assessment of action taken 

According to the Commission services' spring 2010 forecast, the outlook for real activity in 
Ireland is slightly better than expected at the time the Council issued its recommendations in 
December 2009. After a fall by an estimated 7.1% in 2009, a further decline in real GDP by 
0.9%  is  now  expected  in  2010,  followed  by  an  expansion  by  3.0%  in  2011,  implying  an 
upward revision of around ½ percentage point for all years vis-à-vis the Commission services' 
autumn  2009  forecast.  However,  more  subdued  inflationary  developments  than  previously 
projected imply a slight downward revision of the nominal GDP level. 

The general government deficit stood at 14.2% of GDP in 2009, compared to an estimate of 
12.5%  of  GDP  in  the  autumn  2009  forecast.  The  upward  revision  mainly  reflects  a  one-off 
capital injection into Anglo Irish bank of 2.4% of GDP, which was reclassified as a deficit-
increasing capital transfer. Excluding this item, the underlying deficit of 11.8% of GDP was 
better  than  expected  in  the  autumn  forecast.  This  is  explained  by  a  lower-than-expected 
revenue  ratio  by  ¼  percentage  point  to  GDP,  which  was  more  than  offset  by  a  lower 
expenditure ratio by almost 1 percentage point, mainly on the capital side. 

For  2010,  the  deficit  target  is  11.6%  of  GDP  in  the  December  2009  stability  programme 
(revised  to  11.5%  of  GDP  in  the  April  2010  EDP  notification  in  view  of  the  revised 
expenditure  estimates  for  central  government).  To  reach  the  target,  the  authorities 
implemented a significant savings package of 2.5% of GDP in the budget for 2010, broadly as 
announced in the April 2009 supplementary budget and thus broadly in line with the Council 
recommendation.  Nearly  all  of  the  adjustment  effort  is  on  the  expenditure  side,  including 
public sector wage cuts, social welfare savings, other current savings and a reduction in public 

EN 

16 

   EN 

investment,  each  contributing  in  broadly  equal  measure  to  the  overall  package.  On  the 
revenue side, the effect of a new carbon tax is broadly offset by a reduction in the standard 
VAT rate and in excise duties on alcohol. Overall, the net deficit-reducing thrust for 2010 is 
estimated at 4¼% of GDP, including the full-year effect of measures taken in the course of 
2009. The Commission services' spring 2010 forecast projects a deficit of 11.7% of GDP. The 
small difference with the official target is largely due to lower nominal growth projected in 
the spring forecast. The structural deficit, i.e. the cyclically-adjusted deficit excluding one-off 
and  other  temporary  measures,  is  estimated  to  stay  broadly  unchanged  compared  to  2009 
despite  the  significant  consolidation  package  exceeding  the  recommended  average  fiscal 
effort  of  2%  of  GDP  over  the  period 2010-14.  This  is explained by the  ongoing underlying 
deterioration of the fiscal position on a no-policy change basis.  

After 2010, the stability programme targets a gradual reduction of the deficit to below 3% of 
GDP  by  2014,  the  correction  deadline  set  by  the  Council.  To  reach  the  targets,  quantified 
consolidation efforts on the current and capital side of the budget are envisaged but no broad 
measures are outlined. In its opinion of 26 April 2010 on the programme, the Council stated 
that  the  deficit  targets  for  2011-14  need  to  be  backed  up  by  concrete measures  and  that  the 
plans for the entire period need to be strengthened to address the risks from less favourable 
GDP growth and possible expenditure slippages.  

According to the stability programme, gross general government debt stood at 64% of GDP in 
2009 and is expected to be on an increasing trend until 2012, when it would reach nearly 84% 
of GDP and then start to gradually decline. The Council Opinion highlighted risks to the debt 
projections,  related  to  further  capital  injections  into  banks  and  the  negative  risks  to  the 
budgetary  targets.  The  Commission  services'  spring  2010  forecast  projects  the  debt  ratio  to 
rise to 83% of GDP in 2011 on a no-policy change basis. 

Regarding the Council's recommendation to strengthen the budgetary framework, the stability 
programme  indicates  that  further  reforms  are  being  considered,  such  as  the  introduction  of 
binding multi-annual envelopes for current expenditure and a fiscal rule stipulating the use of 
future  windfall  profits  for  deficit  reduction  purposes.  Finally,  concerning  the  Council's 
recommendation  on  long-term  sustainability,  the  programme  contains  some  indications  on 
plans  for  public  sector  pension  reform  and,  on  3  March  2010,  the  authorities  published  the 
"National Pensions Framework" setting out their plans for broader pension reform, including 
a gradual increase in the age at which people qualify for the State pension by three years. 

4.3. 

Conclusions 

On current information it appears that Ireland has taken action representing adequate progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular,  the  authorities  implemented  a  significant  savings  package  for  2010  of  2.5%  of 
GDP, broadly in line with the Council's recommendation.. Beyond 2010, the authorities have 
outlined in some detail a medium-term consolidation strategy by laying out deficit targets and 
quantifying packages to reach them with a view to correcting the excessive deficit by 2014, 
the deadline recommended by the Council. In order to achieve the targets, it will be important 
to  spell  out  the  measures  underlying  the  consolidation  efforts  and  to  address  the  downside 
risks to the budgetary targets, also to ensure that the debt ratio would embark on a downward 
path before the end of the programme period. In view of the above, it would be important for 
Ireland  to  take  action  to  specify  consolidation  measures  for  the  coming  years  in  order  to 
ensure a timely correction of the excessive deficit.  

EN 

17 

   EN 

Improvements  to  long-term  sustainability  as  recommended  by  the  Council  could  usefully 
build on the pension reform measures that have recently been announced by the government, 
while  also  for  the  recommended  strengthening  of  the  budgetary  framework  some  measures 
are currently under consideration. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Ireland are needed at present. The Commission will continue to 
closely  monitor  budgetary  developments  in  Ireland  in  accordance  with  the  Treaty  and  the 
SGP. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 
6.0
n.a. 
4.4 
n.a. 
0.1 
n.a. 
1.2 
n.a. 
-1.6 
n.a. 
-1.6 
n.a. 
25.0 
n.a. 

2008 
-3.0
n.a. 
-0.5 
0.0 
-7.3 
-7.2 
-5.9 
-6.1 
-7.0 
-7.2 
-7.0 
-6.4 
43.9 
n.a. 

2009 
-7.1
-7.5 
-7.2 
-7.0 
-14.3 
-11.7 
-12.2 
-9.6 
-11.4 
-8.9 
-9.4 
-9.3 
64.0 
64.5 

2010 
-0.9
-1.3 
-7.3 
-7.6 
-11.7 
-11.6 
-8.8 
-8.8 
-8.7 
-8.6 
-9.3 
-9.2 
77.3 
77.9 

2011 
3.0
3.3 
-4.7 
-4.6 
-12.1 
-10.0 
-8.6 
-6.6 
-10.2 
-8.2 
-10.2 
-8.2 
87.3 
82.9 

2012 
n.a. 
4.5 
n.a. 
-2.2 
n.a. 
-7.2 
n.a. 
-3.4 
n.a. 
-6.3 
n.a. 
-6.3 
n.a. 
83.9 

2013 
n.a. 
4.3 
n.a. 
-0.6 
n.a. 
-4.9 
n.a. 
-1.0 
n.a. 
-4.7 
n.a. 
-4.7 
n.a. 
83.3 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2014 
n.a.
4.0 
n.a. 
0.1 
n.a. 
-2.9 
n.a. 
1.0 
n.a. 
-2.9 
n.a. 
-2.9 
n.a. 
80.8 

1 Output gaps and cyclically-adjusted balances according to the programme as recalculated by Commission services on the 
basis of the information in the programme. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 
0.8% of GDP in 2008 (deficit-increasing), 0.4% of GDP in 2009 and 0.6% of GDP in 2010 (both deficit-reducing) 
according to the programme and 2.0% of GDP in 2009 (deficit-increasing) and 0.6% of GDP in 2010 (deficit-reducing) 
according to the Commission services' spring 2010 forecast. 

Source: Commission services’ 2010 spring forecast (COM) and December 2009 stability programme update 
(SP) 

5. 

SPAIN 

5.1. 

Excessive deficit procedure and most recent recommendations 

On  27  April  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Spain  in 
accordance  with  Article  104(6)  of  the  Treaty  establishing  the  European  Community  (TEC). 
The  most  recent  Council  Recommendation  under  Article  126(7)  of  the  Treaty  on  the 
Functioning of the European Union (TFEU) was adopted on 2 December 200912.  

The  Council  recommended  Spain  to  put  an  end  to  the  present  excessive  deficit  situation  by 
2013. The Spanish authorities should bring the general government deficit below 3 % of GDP 

12 

EN 

All  EDP-related 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm 

for  Spain 

documents 

found 

can 

be 

at 

the 

following  website: 

18 

   EN 

  
 
                                                 
in a credible and sustainable manner by taking action in a medium-term framework. To this 
end, the Spanish authorities should: (a) implement the significant deficit reducing measures in 
2010  planned  in  the  draft  2010  Budget  Law;  (b)  ensure  an  average  annual  fiscal  effort  of 
above 1.5 % of GDP over the period 2010-2013, which should also contribute to halting the 
rapid rise of the government gross debt ratio, which is forecast to breach the reference value; 
(c) specify the measures that are necessary to achieve the correction of the excessive deficit 
by 2013, cyclical conditions permitting, and accelerate the reduction of the deficit if economic 
or budgetary conditions turn out better than currently expected.  

The  Council  established  the  deadline  of  2  June  2010  for  the  Spanish  government  to  take 
effective action to implement the deficit reducing measures in 2010 planned in the draft 2010 
Budget Law and to outline in some detail the consolidation strategy that will be necessary to 
progress  towards  the  correction  of  the  excessive  deficit.  The  assessment  of  effective  action 
will  take  into  account  economic  developments  compared  to  the  economic  outlook  in  the 
Commission services' autumn 2009 forecast. 

5.2. 

Assessment of action taken 

Spain's GDP recorded a contraction of 3.6% in 2009, slightly less than the outlook presented 
in  the  Commission  services  autumn  2009  forecast,  which  had  projected  GDP  to  decline  by 
3.7% in 2009. As for economic activity in 2010, GDP was assumed to decline again by 0.8% 
in  the  Commission  services’  autumn  2009  forecast,  while  in  the  spring  forecast,  the  GDP 
prospects  were  revised  to  a  growth  rate  of  -0.4%.  As  regards  2011,  GDP  was  projected  to 
expand  by  1%  according  to  the  Commission  services’  autumn  2009  forecast  and  by  0.8% 
according  to  the  spring  2010  forecast.  Overall,  the  macroeconomic  backdrop  against  which 
fiscal  developments  have  taken  place  is  not  substantially  different  from  the  one  expected  at 
the time the Council issued its recommendations. 

The February 2010 update of the stability programme of Spain targeted a general government 
deficit  at  9.8%  of  GDP  for  2010.  In  the  Commission  services’  spring  2010  forecast,  the 
government  deficit  was  also  projected  at  9.8%  of  GDP  in  2010.  On  12  May  2010,  Spain 
announced a consolidation package, which was approved by parliament on 27 May 2010 and 
underpinned a downward revision of the 2010 and 2011 deficit targets. For 2010, the deficit 
target  is  reduced  to  9.3%  of  GDP.  This  adds  to  efforts  already  taken,  such  as  the 
discontinuation of temporary stimulus measures adopted for 2009 and some tax increases in 
2010. The May consolidation measures are expected to entail a consolidation of 0.5% of GDP 
in  2010  and  of  1.5%  of  GDP  in  2011  (in  cumulative  terms),  in  comparison  with  the  plans 
outlined  in  the  February  2010  stability  programme.  The  new  measures  are  all  made  up  of 
expenditure cuts, the most sizeable of which concern: government wages, with a cut by 5% in 
nominal  wages  on  average  as  of  mid  2010  and  more  for  higher  wages,  and  their  freeze  in 
2011; a reduction of public investment; a  freeze on pensions (except  for the lowest pension 
categories); phasing-out of the tax allowance in the personal income tax for birth or adoption 
of a child; and cuts in transfers to regional and local governments.  

Moreover, the government adopted on 28 May 2010 a ceiling for non-financial expenditure of 
the  central  government  of  slightly  over  122  bn.  euro,  which  implies  a  drop  of  7.7%  in 
expenditure  in  relation  to  the  2010  budget.  This  could  result  in  a  further  reduction  of 
government  expenditure  of  around  1%  of  GDP.  However,  the  individual  measures  to  keep 
spending within the ceiling still need to be identified. 

EN 

19 

   EN 

The structural balance in 2010 – i.e., the cyclically-adjusted balance net of one-off and other 
temporary measures, was expected to yield an improvement of 2 pps. of GDP in the February 
2010 stability programme plans. According to the Commission services’ spring 2010 forecast, 
the structural deficit could improve by over 1 pp. of GDP, although the announcement of the 
new  wave  of  consolidation  measures  in  mid-May  implies  that  the  improvement  in  the 
structural balance is now expected to be over 1½ pps. of GDP.  

As  for  2011,  the  February  2010  update  of  the  stability  programme  of  Spain  targeted  a 
government deficit of 7.5% of and projected a GDP growth of 1.8%, while the Commission 
services’ spring 2010 forecast projected a government deficit of 8.8% of GDP in 2011 and an 
expansion  of  GDP  of  0.8%  in  2011.  The  difference  in  the  growth  scenarios  between  the 
Spanish  authorities  and  the  Commission  entails  a  risk  for  the  achievement  of  the  budgetary 
target  in  2011  and  beyond.  The  May  consolidation  measures  underpinned  a  downward 
revision of the 2011 deficit target to 6% of GDP, which is expected to reduce GDP growth to 
1.3%.  Nevertheless,  the  initial  difference  in  the  growth  scenarios  between  the  Spanish 
authorities  and  the  Commission  remains,  and  so  the  risk  for  the  achievement  of  the  new 
budgetary  target.  As  a  result,  the  deficit  targets  still  need  to  be  backed-up  by  measures  as 
stressed  in  the  Commission's  services  assessment  of  the  2010  update  of  the  stability 
programme, in order for the new expenditure ceilings to be respected. 

The 2010 update of the stability programme underpinned a deficit reduction with a number of 
consolidation measures that targeted on equal shares the expenditure and revenue sides. The 
restraint  in  government  expenditure  focused  on  areas  such  as  compensation  of  employees, 
investment  or  intermediate  consumption,  whereas  the  additional  tax  revenue  would  come 
mainly from increases in VAT rates, excise taxes and the elimination of the 400-euro personal 
income  tax  credit.  In  comparison  with  the  plans  outlined  in  the  stability  programme,  the 
additional  consolidation  measures  announced  on  12  May  are  planned  to  yield  a  deficit 
reduction  by  1.5%  of  GDP:  a  0.5%  of  GDP  deficit  reduction  is  due  to  measures  already  in 
place in 2010, with measures becoming effective in 2011 having an additional impact of 1% 
of GDP through expenditure cuts. 

According to the latest update of the stability programme, the structural balance was expected 
to reflect an improvement of 1¾ pps. of GDP in 2011. In the light of the announcement of 12 
May,  the  Commission  estimates  the  improvement  in  the  structural  balance  in  2011  to  be 
slightly over 1¾ pps. of GDP in relation to 2010, after the additional measures announced in 
mid May. This overall outlook for fiscal consolidation in 2010 and 2011 compares with the 
call in the Council Recommendation under Article 126(7) TFEU for an average annual fiscal 
effort of 1½% of GDP over the period 2010-2013.  

As for 2012 and 2013, the 2010 update of the stability programme targeted deficits of 5.3% 
and 3.0% of GDP respectively. The structural balance was projected to improve by an annual 
average  of  over  1½%  of  GDP  in  those  two  years.  The  deficit  reduction  was  planned  to  be 
helped  by  a  gradually  accelerating  GDP  and  the  concomitant  increase  in  tax  revenue  and 
would also reflect discretionary efforts, mainly to contain spending, including a reductions in 
compensation  of  employees,  intermediate  consumption  and  investment.  However,  the  front 
loading  of  consolidation  plans  in  mid  May  have  made  the  targets  for  2012  and  2013  of  the 
stability  programme  somewhat  outdated,  and  new  deficit  targets  have  been  set  at  4.4%  and 
3.0%  of  GDP  in  2012  and  2013  respectively.  Taking  into  account  risks  to  these  ambitious 
fiscal targets, further sizeable corrective efforts may be needed in order to attain these annual 
deficit targets up to the year 2013. 

EN 

20 

   EN 

Regarding  government  gross  debt,  it  is  estimated  to  have  reached  53.2%  of  GDP  in  2009, 
significantly up from 39.7% in the year before. Apart from the sizeable increase in the deficit 
and  the  decline  in  GDP  growth,  a  significant  stock-flow adjustment reflecting  mostly  credit 
support operations also contributed to the rise in the debt ratio. According to the 2010 update 
of  the  stability  programme,  the  debt  ratio  is  projected  to  increase  by  19  pps.  over  the 
programme period. This ratio is expected to reach 74.3% of GDP in 2012, mainly driven by 
continued high government deficits, followed by a slight decrease to 74.1% of GDP in 2013. 
The  Commission  services  spring  2010  forecast  projects  the  debt  ratio  at  64.9%  of  GDP  in 
2010 and at 72.5% of GDP in 2011, although the consolidation measures announced in May 
are expected to result in correspondingly lower debt levels. 

5.3. 

Conclusions 

On current information it appears that Spain has taken action representing adequate progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular, the Spanish authorities have taken measures that represent an annual fiscal effort of 
more than 1½% of GDP in both 2010 and 2011.  

For the period beyond 2010, the Spanish authorities have outlined in some detail plans for a 
correction  of  the  excessive  deficit  situation  by  2013,  as  recommended  by  the  Council, 
announcing  a  number  of  new  measures  in  mid-May  2010  which  entail  an  additional  fiscal 
consolidation  effort  of  1%  of  GDP  in  2011  to  underpin  the  consolidation  path.  This  brings 
total  consolidation  in  both  years  to  1.5%  of  GDP.  These  measures  explain  the  change  in 
targets  compared  to  the  stability  programme.  However,  as  noted  in  the  stability  programme 
assessment, the consolidation effort for reaching the 2011 target, estimated at some 1¾ pp. of 
GDP,  should  be  further  specified  as  soon  as  possible  in  the  context  of  the  2011  budget 
preparatory work. Part of this consolidation would be achieved by respecting the expenditure 
ceilings  announced  on  28  May  2010.  As  regards  the  outer  years,  additional  efforts  will  be 
required for the debt ratio to embark on a downward path by the end of the correction period 
in 2013. Those efforts would have to be designed taking into account the possibility that the 
fiscal restraint takes a toll on economic growth over the short and medium term, before the 
benefits  of  a  more  sustainable  public  finances  and  a  sounder  macroeconomic  setting 
materialise. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Spain are needed at present. The Commission will continue to 
closely monitor budgetary developments in Spain in accordance with the Treaty and the SGP. 

EN 

21 

   EN 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 

Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

COM  
SP 
COM  
SP 
COM  
SP 
New targets3 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2007 
3.6 

1.7 

1.9 

3.5 

1.2 

1.2 

36.2 

2008 
0.9 
0.9 
0.8 
0.6 
-4.1 
-4.1 

-2.5 
-2.5 
-4.4 
-4.3 
-4.1 
-4.3 
39.7 
39.7 

2009 
-3.6 
-3.6 
-3.6 
-3.5 
-11.2 
-11.4 

-9.4 
-9.6 
-9.6 
-9.9 
-8.9 
-9.9 
53.2 
55.2 

2010 
-0.4 
-0.3 
-4.6 
-4.4 
-9.8 
-9.8 

 -9.3 
-7.6 
-7.7 
-7.8 
-7.9 
-7.8 
-7.9 
64.9 
65.9 

2011 
0.8 
1.8 
-4.2 
-3.2 
-8.8 
-7.5 

 -6.0 
-6.2 
-4.9 
-7.0 
-6.1 
-7.0 
-6.1 
72.5 
71.9 

2012 
n.a. 
2.9 
n.a. 
-1.6 
n.a. 
-5.3 

n.a. 
n.a. 
-2.3 
n.a. 
-4.6 
n.a. 
-4.6 
n.a. 
74.3 

2013 
n.a. 
3.1 
n.a. 
-0.2 
n.a. 
-3.0 

n.a. 
n.a. 
0.1 
n.a. 
-2.9 
n.a. 
-2.9 
n.a. 
74.1 

Note:  
1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 
2 Cyclically-adjusted balance excluding one-off and other temporary measures. 
3 New targets for the government balance for 2010 and 2011 in accordance with the announced consolidation measures on 
12 May 2010 
Source: Commission services’ 2010 spring forecast (COM) and March 2010 stability programme update (SP) 

6. 

FRANCE 

6.1. 

Excessive deficit procedure and most recent recommendations 

On  27  April  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  France  in 
accordance  with  Article  104(6)  of  the  Treaty  establishing  the  European  Community  (TEC). 
The  most  recent  Council  Recommendation  under  Article  126(7)  of  the  Treaty  on  the 
Functioning of the European Union (TFEU) was adopted on 2 December 200913. 

The  Council  recommended  the  French  authorities  to  put  an  end  to  the  excessive  deficit 
situation by 2013. The French authorities should bring the general government deficit below 
3%  of  GDP  in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term 
framework. Specifically, to this end, the French authorities should (a) implement the deficit-
reducing measures in 2010 as planned in the government proposal for the budget law for 2010 
while  avoiding  a  further  deterioration  of  public  finances,  and  implement  and  strengthen  the 
fiscal effort from 2011 onwards above the consolidation measures already planned; (b) ensure 
an average annual fiscal effort of above 1% of GDP over the period 2010-2013, which should 
also  contribute  to  bringing  the  government  gross  debt  ratio  back  on  a  declining  path  that 
approaches  the  reference  value  at  a  satisfactory  pace  by  restoring  an  adequate  level  of  the 
primary surplus; (c) specify the measures that are necessary to achieve the correction of the 
excessive deficit by 2013, cyclical conditions permitting, and accelerate the reduction of the 
deficit if economic or budgetary conditions turn out better than currently expected.  

13 

EN 

All  EDP-related  documents 
at 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

for  France 

can  be 

found 

the 

following  website: 

22 

   EN 

  
  
  
  
  
  
  
  
  
  
  
  
  
                                                 
In  addition,  the  French  authorities  should  seize  opportunities  beyond  the  fiscal  effort, 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
back towards the reference value. 

The  Council  established  the  deadline  of  2  June  2010  for  the  French  government  to  take 
effective  action  to  implement  the  fiscal  measures  in  2010  as  planned  in  the  government 
proposal for the budget law for 2010 and to outline in some detail the consolidation strategy 
that  will  be  necessary  to  progress  towards  the  correction  of  the  excessive  deficit.  The 
assessment of effective action will take into account economic developments compared to the 
economic outlook in the Commission services' autumn 2009. 

6.2. 

Assessment of action taken 

In 2009, GDP contracted by 2.6%, according to the first official annual estimate, somewhat 
more  than  forecast  in  the  Commission  services'  autumn  2009  forecast  (2.2%).  The  country 
came  out  of  the  recession  in  mid-2009  and,  according  to  the  Commission  services'  2010 
spring forecast, economic activity is set to continue to recover in the course of 2010 (1.3%) 
and 2011 (1.5%), broadly unchanged with respect to the autumn 2009 forecast. This modest 
recovery will translate into a gradually closing output gap. 

The 2009 deficit came out at 7.5% of GDP thanks to better-than-expected revenue, compared 
to  an  anticipated  8.2%  of  GDP.  This  led  to  a  lowering  of  the  official  deficit  projection  for 
2010 by 0.5 pp. to 8.0% of GDP, as also shown in the spring 2010 forecast. The new deficit 
projection takes into account the impact of the decision to suspend the environmental tax and 
the measures linked to the ‘grand emprunt’ (totalling 0.2% of GDP). 

The  2010  structural  deficit  is  forecast  to  be  unchanged  from  2009,  at  6.2%  of  GDP.  The 
balance of discretionary measures is broadly neutral. Recovery measures of 1.1% of GDP in 
2009 are partially phased out in 2010, and reduced to around 0.3% of GDP; in addition, some 
further consolidation measures represent around 0.1% of GDP. Thus France implemented the 
deficit-reducing measures in 2010 as planned, and mostly related to the partial withdrawal of 
the recovery plan. These savings are fully offset by measures introduced in the context of the 
‘grand emprunt’ (around 0.1% of GDP) as well as new stimulus measures amounting to 0.7% 
of GDP14; 0.4% of GDP of the latter are a one-off decrease of revenue linked to the reform of 
the local business tax, therefore not affecting the structural balance. However, there are higher 
interest  expenditure  and  the  lagged  effect  of  the  crisis  on  social  benefits  of  the  same 
magnitude. In all, the fiscal stance in 2010 remains neutral and falls short of the fiscal effort 
of ½% of GDP originally planned and the "above 1% of GDP" recommended for the average 
annual structural adjustment over 2010 – 2013 as foreseen in the Council recommendation. 

As  regards  2011,  the  French  authorities  planned  in  the  latest  stability  programme  that  the 
general  government  deficit  would  decrease  to  6%  of  GDP.  The  recovery  package  will  be 
completely withdrawn, with a deficit-decreasing impact of around 0.3% of GDP;  moreover, 
the transitory budgetary impact of 0.4% of GDP of the reform of the local business tax will be 
phased out. These measures are estimated to more than offset the budgetary impact linked to 
the  ‘grand  emprunt’  (around  0.1%  of  GDP).  In  2011–2013,  the  improvement  in  the  deficit 
relies  on  measures  aimed  at  curbing  expenditure  growth  at  all  sub-government  levels.  The 
government  announced  that  it  would  freeze  all  expenditure  at  the  central  government  level 
except  for  interest  and  pensions  for  civil  servants.  The  budgetary  impact  of  existing  tax 

14 

This includes the reform of the local business tax (0.6% of GDP) and the decrease in the VAT rate for 
the catering sector (0.1% of GDP). 

EN 

23 

   EN 

                                                 
exemptions would be reduced by around 0.1% of GDP each year starting in 2011. Finally, a 
legislative  proposal  for  a  further  pension  reform  is  planned  for  the  summer.  However,  as 
concluded by the Council in its opinion on the latest update of the stability programme, the 
adjustment  path  presented  in  the  programme  is  also  based  on  a  markedly  favourable  macro 
scenario  for  2011-2013  combined  with  an  average  annual  structural  adjustment  that  is 
somewhat  below  the  adjustment  recommended  of  above  1%  of  GDP.  The  medium-term 
budgetary  projections  are  therefore  subject  to  substantial  downside  risks  and  the  fiscal 
consolidation may need to be strengthened accordingly and measures sufficiently specified to 
ensure a correction of the excessive deficit by 2013, as recommended by the Council.  

Regarding the debt-to-GDP ratio, the latest update of the stability programme anticipates that 
it would reach the level of about 87% in 2013, up from an anticipated 77.4% in 2009. In view 
of the substantial risks to the budgetary targets, the evolution of the debt ratio is likely to be 
less  favourable  than  projected  in  the  programme.  The  Commission  services'  2010  spring 
forecast projects the ratio to attain 88.6% in 2011.  

France  intends  to  make  improvements  in  the  area  of  fiscal  governance.  Following 
recommendations made at the second conference on public finances, the government decided 
to  curb  the  evolution  of  healthcare  spending  and  to  better  control  local  government 
expenditure notably by freezing transfers to it. Moreover, it announced its intention to set up 
rules  notably  compelling  each  newly  appointed  government  to  set  out  a  five-year 
consolidation path. Details in this respect are expected to be announced in the coming months. 

6.3. 

Conclusions 

On current information it appears that France has taken action representing adequate progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular, the French authorities have broadly implemented the deficit-reducing measures in 
2010  as  planned,  notably  the  partial  withdrawal  of  the  recovery  plan.  The  deficit  target  for 
2010  has  been  revised  down  by  0.5%  of  GDP  compared  to  the  budget  target,  taking  into 
account a better outcome for 2009.  

For the period after 2010 the French authorities have outlined in some detail the consolidation 
strategy  necessary  to  progress  towards  the  correction  of  the  excessive  deficit  by  2013,  the 
deadline recommended by the Council. However, measures backing the consolidation strategy 
need  to  be  further  specified.  In  addition,  given  the  risks  related  to  the  growth  scenario  and 
assumptions as regards tax elasticities, the consolidation strategy may have to be strengthened 
and  further  consolidation  measures  backing  this  strategy  may  have  to  be  taken  to  achieve  a 
correction of the excessive deficit by the deadline and to ensure that the debt ratio embarks on 
a  downward  path  by  the  end  of  the  correction  period.  In  view  of  the  above,  it  would  be 
important for France to take action to further specify consolidation measures for the coming 
years in order to ensure a timely correction of the excessive deficit. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of France are needed at present. The Commission will continue to 
closely  monitor  budgetary  developments  in  France  in  accordance  with  the  Treaty  and  the 
SGP. 

EN 

24 

   EN 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 
2.3 
n.a. 
1.9 
n.a. 
-2.7 
n.a. 
0.0 
n.a. 
-3.7 
n.a. 
-3.8 
n.a. 
63.8 
n.a. 

2008 
0.4* 
0.4 
0.8 
0.8 
-3.3 
-3.4 
-0.5 
-0.6 
-3.7 
-3.8 
-3.8 
-3.8 
67.5 
67.4 

2009 
-2.2* 
-2.25 
-2.7 
-2.9 
-7.5 
-7.9 
-5.2 
-5.4 
-6.2 
-6.5 
-6.2 
-6.5 
77.6* 
77.4 

2010 
1.3 
1.4 
-2.7 
-2.9 
-8.0 
-8.2 
-5.4 
-5.5 
-6.6 
-6.8 
-6.2 
-6.8 
83.6 
83.2 

2011 
1.5 
2.5 
-2.3 
-2.1 
-7.4 
-6.0 
-4.5 
-3.2 
-6.2 
-4.9 
-6.2 
-4.9 
88.6 
86.1 

2012 
n.a. 
2.5 
n.a. 
-1.2 
n.a. 
-4.6 
n.a. 
-1.7 
n.a. 
-4.0 
n.a. 
-4.0 
n.a. 
87.1 

2013 
n.a. 
2.5 
n.a. 
-0.4 
n.a. 
-3.0 
n.a. 
-0.1 
n.a. 
-2.8 
n.a. 
-2.8 
n.a. 
86.6 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

*According to the national accounts released on 12th May 2010 by INSEE GDP growth has been revised to 0.2% 
and -2.6% for 2008 and 2009, respectively. At the same moment Government gross debt has been revised to 
78.1% of GDP for 2009. 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 

services on the basis of the information in the programmes. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and February 2010 stability programme 
update (SP) 

7. 

ITALY 

7.1. 

Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Italy  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU)  and  addressed  recommendations  to  Italy  in  accordance  with  Article  126(7)  with  a 
view to bringing an end to the situation of an excessive government deficit15.  

The  Council  recommended  Italy  to  put  an  end  to  the  present  excessive  deficit  situation  by 
2012. The Italian authorities should bring the general government deficit below 3% of GDP in 
a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically, to this end, the Italian authorities should: (a) implement the budgetary measures 
in 2010 as planned in the three-year fiscal package for 2009-2011 approved in summer 2008 
and  confirmed  in  the  Economic  and  Financial  Planning  Document  (EFPD)  2010-2013;  (b) 
ensure an average annual fiscal effort of at least 0.5 percentage points of GDP over the period 
2010-2012, which should also contribute to bringing the government gross debt ratio back on 
a  declining  path  that  approaches  the  60%  of  GDP  reference  value  at  a  satisfactory  pace  by 
restoring  an  adequate  level  of  the  primary  surplus;  and  (c)  specify  the  measures  that  are 
necessary  to  achieve  the  correction  of  the  excessive  deficit  by  2012,  cyclical  conditions 

15 

EN 

All  EDP-related 
at 
for 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

documents 

found 

Italy 

can 

be 

the 

following  website: 

25 

   EN 

  
 
 
                                                 
permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or  budgetary  conditions 
turn out better than currently expected.  

In  addition,  the  Italian  authorities  should  seize  any  opportunities  beyond  the  fiscal  effort, 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
towards the 60% of GDP reference value. 

The  Council  established  the  deadline  of  2  June  2010  for  the  Italian  government  to  take 
effective action to implement the fiscal measures in 2010 as planned and to outline in some 
detail the consolidation strategy that will be necessary to progress towards the correction of 
the  excessive  deficit.  The  assessment  of  effective  action  will  take  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission  services'  autumn  2009 
forecast. 

7.2. 

Assessment of action taken 

services' 

autumn  2009 

The  near-term  outlook  for  the  Italian  economy  has  not  changed  significantly  since  the 
Commission 
the  Council 
recommendation. Real GDP contracted by 1.3% in 2008, slightly more than estimated earlier 
by the statistical office (-1%), and by 5% in 2009 (-4.7% in the autumn 2009 forecast). The 
Commission  services’  spring  2010  forecast  projects  output  to  grow  by  0.8%  in  2010, 
marginally faster than projected in autumn 2009 (0.7%), while the growth projection for 2011 
remains unchanged at 1.4%.  

forecast,  which  underpinned 

After reaching 5.3% of GDP in 2009, the deficit ratio is targeted to decrease slightly in 2010, 
to 5% of GDP. This target was initially set in the July 2009 EFPD, setting out the budgetary 
strategy  for  2010-2013,  and  was  most  recently  confirmed  in  the  Combined  Report  on  the 
Economy and Public Finances (RUEF)16 published on 6 May 2010. The measures underlying 
the 2010 deficit target are those already adopted in the summer 2008 fiscal package for 2009-
2011, aimed at restraining expenditure and estimated according to the authorities to reduce the 
2010  deficit  in  cumulative  terms  by  around  1  pp.  of  GDP  compared  to  an  unchanged 
legislation  scenario  (half  of  which  represents  the  effect  of  the  measures  for  2009).  Some 
additional  expansionary  measures  were  adopted  with  the  budget  for  2010,  directed  at 
supporting  low-income  workers  and  ensuring  the  funding  of  additional  health  and  social 
expenditure  and  of  military  missions  abroad.  These  additional  measures  account  for  a 
relatively small share of GDP (0.4%) and are, according to official estimates, fully financed, 
mainly through the one-off revenues from the extraordinary tax on illegally expatriated assets 
(scudo  fiscale)  recorded  in  2009  and  used  in  the  budget  for  2010  to  postpone  from  2009  to 
2010 the collection of some income taxes. The budgetary strategy for 2010 can be regarded as 
broadly in line with the Council recommendations even though the additional measures in the 
budget  imply  some  deviation.  The  Commission  services'  spring  2010  forecast  projects  a 
slightly  higher  deficit  ratio  in  2010  (5.3%)  relative  to  the  RUEF,  mainly  reflecting  a  less 
favourable  projection  for  tax  elasticities.  The  forecast  points  to  an  improvement  in  the 
structural deficit (the cyclically-adjusted deficit net of one-off and other temporary measures) 
by around ¼ pp. of GDP in 2010, slightly short of the average annual fiscal effort of at least 
0.5%  of  GDP  over  the  period  2010-2012  as  recommended  under  Article  126(7).  This 
compares with the ½ pp. of GDP structural adjustment projected in the stability  programme 
and RUEF. 

16 

Relazione Unificata sull'Economia e la Finanza pubblica (RUEF), available (in Italian only) at: 
http://www.mef.gov.it/doc-finanza-pubblica/dfp.ruef.asp  

EN 

26 

   EN 

                                                 
For the period after 2010, the authorities target a gradual reduction of the deficit to below 3% 
of GDP by 2012, the correction deadline set by the Council. To achieve the deficit target of 
3.9%  of  GDP  in  2011,  the  RUEF  envisages  the  additional  consolidation  effort  beyond  that 
already adopted with the fiscal package for 2009-2011 to be doubled compared to what was 
planned  in  the  stability  programme  (0.8%  of  GDP  as  against  0.4%),  mainly  because  of  a 
downward revision of GDP growth in the RUEF. In 2012, the further additional consolidation 
effort remains unchanged in the RUEF (0.8% of GDP) as the underlying growth projection is 
the same as in the stability programme. On 25 May 2010, the government adopted a decree 
law specifying the measures that underpin the additional consolidation efforts for 2011-2012, 
which  fall  mainly  on  current  expenditure.  The  package  foresees  cuts  in  expenditure 
amounting  to  around  0.5%  of  GDP  in  2011  and  1%  in  2012  relative  to  the  trend  scenario 
based on unchanged legislation.  Half  of these cuts will be borne by the local authorities, as 
transfers  from  the  central  government  will  be  reduced.  The  rest  includes  restraint  in  wages 
and  recruitment  throughout  the  public  sector,  cuts  to  ministerial  expenditure  and  the 
postponement  by  some  months  of  access  to  retirement  for  those  meeting  the  age/seniority 
eligibility conditions. On the revenue side, the fight against tax evasion will be stepped up and 
is expected to yield higher revenues of around 0.1% of GDP in 2011 and 0.5% in 2012. 

The  downward  revision  of  growth  assumptions  for  2010-2011  underlying  the  government's 
latest projections and the specification of the additional consolidation measures for 2011-2012 
address some of the risks to Italy’s medium-term budgetary strategy that were highlighted in 
the Council Opinion of 26 April 2010 on the stability programme. However, deficit outcomes 
in  the  entire  period  could  still  be  worse  than  targeted,  in  particular  in  the  light  of  the 
favourable assumptions on tax elasticities in the government projections for 2010 and a track 
record of expenditure overruns. 

The Council opinion highlighted that the evolution of the gross government debt-to-GDP ratio 
could well be less favourable than the 114.6% projected in the stability programme in 2012. 
The  RUEF  contains  an  upward  revision  of  the  debt  projections  over  the  period  2010-2012, 
due  to:  (i)  a  higher  2009  starting  position;  (ii)  lower  nominal  GDP  growth;  and  (iii)  less 
favourable  stock-flow  adjustment  developments.  The  RUEF  projects  a  decline  in  the  debt 
ratio  as  from  2012,  to  117.2%  of  GDP,  one  year  later  than  the  stability  programme.  In  the 
Commission services' spring 2010 forecast, based on a no-policy-change assumption, the debt 
ratio was expected to increase to around 119% in 2011.  

7.3. 

Conclusions  

On  current  information  it  appears  that  Italy  has  taken  action  representing  adequate  progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular,  the  consolidation  measures  for  2010,  taken  in  the  context  of  the  summer  2008 
package for the period 2009-2011 and, according to the authorities, reducing the 2010 trend 
deficit  by  around  0.5%  of  GDP,  are  being  implemented  broadly  as  recommended  by  the 
Council and the 5% of GDP deficit target for 2010 has been confirmed. For the period after 
2010, the Italian authorities have spelled out the budgetary strategy to reduce the deficit below 
3%  of  GDP  by  2012,  the  deadline  set  by  the  Council,  based  on  an  additional  consolidation 
effort of 0.8% of GDP in 2011 and again in 2012. The Commission welcomes the adoption by 
the Italian government of a decree law specifying the measures that underpin these efforts. In 
order to achieve the correction of the excessive deficit by the deadline, it will be important to 
ensure  a  strict  implementation  of  the  planned  expenditure  restraint  and  address  possible  tax 
revenue shortfalls, also to ensure that the debt ratio embarks on a downward path by the end 
of the correction period. 

EN 

27 

   EN 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Italy are needed at present. The Commission will continue to 
closely monitor budgetary developments in Italy in accordance with the Treaty and the SGP. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 

Output gap1 
(% of potential GDP) 

General government balance 
(% of GDP) 

Primary balance 
(% of GDP) 

Cyclically-adjusted balance1 
(% of GDP) 

Structural balance2 
(% of GDP) 

Government gross debt 
(% of GDP) 

Notes: 

COM 
RUEF 
SP 
COM 
RUEF 
SP 
COM 
RUEF 
SP 
COM 
RUEF 
SP 
COM 
RUEF 
SP 
COM 
RUEF 
SP 
COM 
RUEF 
SP 

2007 
1.5 
1.5 
1.6 
3.0 
n.a. 
2.7 
-1.5 
-1.5 
-1.5 
3.5 
3.5 
3.5 
-3.0 
n.a. 
-2.9 
-3.2 
n.a. 
-3.0 
103.5 
103.5 
103.5 

2008 
-1.3 
-1.3 
-1.0 
1.2 
n.a. 
1.1 
-2.7 
-2.7 
-2.7 
2.5 
2.5 
2.4 
-3.3 
n.a. 
-3.3 
-3.5 
n.a. 
-3.5 
106.1 
106.1 
105.8 

2009 
-5.0 
-5.0 
-4.8 
-3.9 
n.a. 
-4.0 
-5.3 
-5.3 
-5.3 
-0.6 
-0.6 
-0.5 
-3.3 
n.a. 
-3.2 
-4.0 
n.a. 
-3.8 
115.8 
115.8 
115.1 

2010 
0.8 
1.0 
1.1 
-3.4 
n.a. 
-3.5 
-5.3 
-5.0 
-5.0 
-0.7 
-0.4 
-0.1 
-3.6 
n.a. 
-3.2 
-3.7 
n.a. 
-3.3 
118.2 
118.4 
116.9 

2011 
1.4 
1.5 
2.0 
-2.6 
n.a. 
-2.5 
-5.0 
-3.9 
-3.9 
-0.2 
1.0 
1.3 
-3.7 
n.a. 
-2.7 
-3.6 
n.a. 
-2.7 
118.9 
118.7 
116.5 

2012 
n.a. 
2.0 
2.0 
n.a. 
n.a. 
-1.6 
n.a. 
-2.7 
-2.7 
n.a. 
2.5 
2.7 
n.a. 
n.a. 
-1.9 
n.a. 
n.a. 
-1.9 
n.a. 
117.2 
114.6 

1  Output  gaps  and  cyclically-adjusted  balances  according  to  the  stability  programme  as  recalculated  by 
Commission services on the basis of the information in the programme. 

2  Cyclically-adjusted  balance  excluding  one-off  and  other  temporary  measures.  In  the  Commission  services' 
spring 2010 forecast and stability programme, one-off and other temporary measures are 0.2% of GDP in 2007 
and 2008, 0.6% in 2009 and 0.1% in 2010, all deficit-reducing. 

Source: Commission services’ 2010 spring forecast (COM); January 2010 stability programme update (SP); and 
May 2010 Combined Report on the Economy and Public Finances (RUEF). 

8. 

THE NETHERLANDS 

8.1. 

Excessive deficit procedure and most recent recommendations 

On 2 December 2009, the Council decided that an excessive deficit existed in the Netherlands 
in  accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to the Netherlands in accordance with Article 126(7) 
with a view to bringing an end to the situation of an excessive government deficit17.  

17 

All  EDP-related  documents  for 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

the  Netherlands  can  be  found  at 

the  following  website: 

EN 

28 

   EN 

 
 
                                                 
The Council recommended the Dutch authorities to implement the fiscal measures in 2010 as 
envisaged and, starting consolidation in 2011, put an end to the present excessive deficit by 
2013. 

The  Dutch  authorities  should  bring  the  general  government  deficit  below  3%  of  GDP  in  a 
credible and sustainable manner by taking action in a medium-term framework. Specifically, 
to this end, the Dutch authorities should (a) ensure an average annual fiscal effort of ¾% of 
GDP over the period 2011-2013, which should also contribute to halting the rapid rise of the 
government gross debt ratio, which is forecast to breach the reference value; (b) specify the 
measures that are necessary to achieve the correction of the excessive deficit by 2013, cyclical 
conditions  permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or  budgetary 
conditions turn out better than currently expected.  

The  Council  established  the  deadline  of  2  June  2010  for  the  Netherlands  to  take  effective 
action to implement the fiscal measures in 2010 as envisaged and to outline in some detail the 
consolidation  strategy  that  will  be  necessary  to  progress  towards  the  correction  of  the 
excessive  deficit.  The  assessment  of  effective  action  will  take  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission  services'  autumn  2009 
forecast. 

8.2. 

Assessment of action taken 

The global economic and financial crisis led to a contraction of Dutch GDP by 4% in 2009. 
The  rebound  of  economic  growth  in  the  second  half  of  2009,  mainly  driven  by  the 
improvement in global demand, explains why the Commission services' spring 2010 forecast 
projects economic activity for 2010 and 2011 to be positive at 1.3% and 1.8%, respectively. 
The  output  gap  is  expected  to  gradually  diminish  over  the  forecast  horizon.  These  latest 
projections  indicate  that  economic  conditions  have  improved  significantly  since  the 
Commission  services'  autumn  2009  forecast,  on  which  the  Council  recommendation  of  2 
December 2009 was based. This forecast expected a contraction of real GDP of -4.5% of GDP 
in 2009, followed by positive real GDP growth of 0.3% of GDP in 2010 and 1.6% of GDP in 
2011.  

Regarding 2010, the authorities are implementing the fiscal measures that were envisaged in 
the 2010 budget as recommended by the Council. This notably concerns the continuation of 
the stimulus package which in 2010 amounts to approximately 1% of GDP, somewhat higher 
than 2009. The measures are evenly spread between the revenue and the expenditure side.  

Despite the fact that fiscal measures are implemented as envisaged in the budget, according to 
the authorities' spring memorandum, published on 28 May 2010, the budget deficit for 2010 is 
expected to come out at 6.6% of GDP. This is 0.3% of GDP higher than foreseen in the 2010 
budget.  The  deficit  does  not  appear  to  benefit  from  the  improved  economic  outlook.  In  the 
2010  budget,  real  GDP  growth  had  been  projected  to  come  out  at  zero  growth  and  in  the 
autumn  forecast  relevant  for  the  Council  recommendation  it  had  been  foreseen  at  0.3%, 
whereas  the  authorities  now  foresee  real  GDP  growth  of  1½%  for  2010.  Based  on  standard 
elasticities, this could have lowered the budget deficit by at least ½% of GDP. However, the 
improved  outlook  is  particularly  concentrated  on  the  tax-poor  external  side.  Furthermore, 
there is a negative base effect, as  the 2009  budget deficit came  out at 5.3%  of GDP,  which 
was  0.5%  of  GDP  worse  than  foreseen  in  the  2010  budget.  Finally,  the  budget  is  adversely 
affected by a recently announced reclassification of a capital injection in a financial institution 
amounting to 0.2% of GDP, which could not be incorporated in the spring forecast.  

EN 

29 

   EN 

The 2010 structural deficit is expected to increase from 3½% of GDP in 2009 to 4¾% of GDP 
in 2010 according to the Commission services' spring 2010 forecast. In these uncertain times 
the  cyclically-adjusted  and  structural  balances  need  to  be  interpreted  with  caution.  The 
deterioration  of  the  structural  balance  in  2010  can  partly  be  explained  by  higher  interest 
expenditure  linked  to  higher  debt  and  decreasing  gas  revenues,  but  most  importantly  by 
lagged  effects,  notably  stemming  from  increasing  unemployment,  which  leads  to  higher 
expenditure and lower tax revenues than would be suggested when using standard elasticities.  

The Dutch government indicated in their programme that consolidation would start in 2011, 
which should result in an improvement of the general government balance of around 1¼% of 
GDP,  leading  to  a  deficit  of  5.0%  of  GDP.  This  is  broadly  in  line  with  the  Commission 
services'  spring  2010  forecast,  which  expects  a  deficit  of  5.1%  of  GDP  in  2011.  It  also 
corresponds  to  an  improvement of  the  structural  balance  of  0.9%  of  GDP,  which  is  slightly 
above  the  required  average  annual  fiscal  effort  of  ¾%  for  the  period  2011-2013  as 
recommended  by  the  Council.  The  budgetary  improvement  comes  from  cyclical  conditions 
(above potential real GDP growth at 1.8% for 2011), a budgetary consolidation consisting of 
the  (partial)  withdrawal  of  the  stimulus  package  amounting  to  approximately  ½%  of  GDP, 
and an additional consolidation package amounting to ¼% of GDP, mainly concentrated on 
the  expenditure  side18.  For  2012,  the  ½%  of  GDP  improvement  of  the  balance  (to  4.5%  of 
GDP) as presented in the programme seems to be essentially based on favourable assumptions 
and is below the required average annual fiscal effort of ¾%. Moreover, the programme did 
not  contain  information  on  2013.  In  a  letter  sent  to  the  Commission  on  1  June  2010  the 
authorities  refer  to  a  deficit  of  3.0%  of  GDP  for  2013,  which  stems  from  the  medium-term 
projections  of  the  Netherlands  Bureau  of  Economic  Policy  Analysis  (CPB),  but  is  not 
underpinned by specified measures. Given the lack of measures for 2012 and 2013, additional 
consolidation  measures  will  be  needed  to  bring  the  deficit  below  3%  of  GDP  by  2013.  The 
Fundamental  Budget  Review  (FBR),  which  presented  structural  reform  and  saving  options, 
could serve as a basis to further specify the measures supporting the consolidation from 2011 
and to strengthen the consolidation effort.  

The  debt  level  increased  sharply  from  45.5%  of  GDP  in  2007  to  60.9%  of  GDP  in  2009, 
mainly as the result of measures to stabilise the financial sector (amounting to around 10% of 
GDP at the end of 2009) and the high deficit in 2009. According to the programme, debt is on 
a further increasing trend, reaching 69.6% of GDP in 2011 and 72.5% of GDP in 2012. The 
evolution of the debt could be less favourable than projected in the programme, in view of the 
risk of higher-than-targeted deficits and from sizeable guarantees to the financial sector. The 
spring forecast projects the debt to increase to 69.6% of GDP in 2011. 

8.3. 

Conclusions 

On current information it appears that the Netherlands has taken action representing adequate 
progress  towards  the  implementation  of  the  Council  Recommendations  under  the  Article 
126(7) TFEU of 2 December 2009. In particular, the Netherlands is implementing the fiscal 
measures in 2010 as envisaged in the 2010 budget.  

The Dutch authorities have outlined in some detail the consolidation strategy that is necessary 
to  progress  towards  the  correction  of  the  excessive  deficit  by  2013,  the  deadline 
recommended  by  the  Council.  In  particular  with  respect  to  2011,  there  is  a  fully  specified 

18 

Mainly relating to local governments, transport infrastructure and education. 

EN 

30 

   EN 

                                                 
consolidation  strategy  leading  to  a  fiscal  effort  of  ¾%  of  GDP,  which  is  in  line  with  the 
annual fiscal effort as requested in the Council Recommendation. However, more information 
on the adjustment path and the broad measures underpinning the envisaged consolidation in 
the outer years will be needed. To this end, the concluded fundamental budget review could 
serve  as  a  basis  for  further  specifying  the  measures  supporting  the  consolidation  from  2011 
onwards  and  strengthening  the  consolidation  effort  to  secure  the  required  average  annual 
fiscal effort for the period 2011-2013 and to bring the deficit below 3% of GDP by 2013 and 
to ensure that the debt ratio embarks on a downward path by the end of the correction period. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive  deficit  procedure  of  the  Netherlands  are  needed  at  present.  The  Commission  will 
continue  to  closely  monitor  budgetary  developments  in  the  Netherlands  in  accordance  with 
the Treaty and the SGP. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 
3.6 
3.6 
2.2 
2.2 
0.2 
0.2 
2.4 
2.4 
-1.0 
-1.0 
-1.0 
-1.0 
45.5 
45.5 

2008 
2.0 
2.0 
2.3 
2.6 
0.7 
0.7 
2.8 
2.8 
-0.5 
-0.8 
-0.5 
-0.6 
58.2 
58.2 

2009 
-4.0 
-4.0 
-3.0 
-2.7 
-5.3 
-4.7 
-3.0 
-2.5 
-3.6 
-3.4 
-3.6 
-3.8 
60.9 
62.3 

2010 
1.3 
1.5 
-2.6 
-2.3 
-6.3 
-6.1 
-4.0 
-3.7 
-4.9 
-4.8 
-4.9 
-4.8 
66.3 
67.2 

2011 
1.8 
2 
-2.0 
-1.9 
-5.1 
-5.0 
-2.8 
-2.6 
-4.0 
-3.9 
-4.0 
-3.9 
69.6 
69.6 

2012 
n.a. 
2 
n.a. 
-1.8 
n.a. 
-4.5 
n.a. 
-2.0 
n.a. 
-3.5 
n.a. 
-3.5 
n.a. 
72.5 

2013 
n.a. 
n.a 
n.a. 
n.a 
n.a. 
n.a 
n.a. 
n.a 
n.a. 
n.a 
n.a. 
n.a 
n.a. 
n.a 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and January 2010 stability programme 
update (SP) 

9. 

AUSTRIA 

9.1. 

Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Austria  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to Austria in accordance with Article 126(7) with a 
view to bringing an end to the situation of an excessive government deficit19. 

19 

EN 

All  EDP 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm 

for  Austria  can  be 

related  documents 

found  at 

the 

following  website: 

31 

   EN 

  
 
                                                 
The Council recommended the Austrian authorities to implement the fiscal measures in 2010 
as envisaged  and, starting  consolidation in 2011, put an  end to  the present excessive deficit 
situation  by  2013.  The  Austrian  authorities  should  bring  the  general  government  deficit 
below 3 % of GDP in a credible and sustainable manner by taking action in a medium-term 
framework.  Specifically,  to  this  end,  the  Austrian  authorities  should:  (a)  ensure  an  average 
annual fiscal effort of ¾ % of GDP over the period 2011-2013, which should also contribute 
to  bringing  the  government  gross  debt  ratio  back  on  a  declining  path  that  approaches  the 
reference value at a satisfactory pace by restoring an adequate level of the primary surplus; (b) 
specify the measures that are necessary to achieve the correction of the excessive deficit by 
2013, cyclical conditions permitting, and accelerate the reduction of the deficit if economic or 
budgetary conditions turn out better than currently expected. 

In  addition,  the  Austrian  authorities  should  seize  opportunities  beyond  the  fiscal  effort 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
back towards the reference value. 

The  Council  established  the  deadline  of  2  June  2010  for  the  Austrian  government  to  take 
effective action to implement the fiscal measures in 2010 as planned and to outline in some 
detail the consolidation strategy that will be necessary to progress towards the correction of 
the  excessive  deficit.  The  assessment  of  effective  action  takes  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission services'  autumn 2009 
forecast. 

9.2. 

Assessment of action taken 

The Commission services' spring 2010 forecast foresees that Austria's GDP will grow in real 
terms by 1.3% and 1.6% in 2010 and 2011 respectively. The negative output gap is projected 
to stay unchanged in 2010 and edge down somewhat the year after. The gradual recovery is 
expected  to  be  led  first  by  net  exports.  Subsequently,  domestic  demand  is  projected  to  take 
over  as  the  main  driver  of  growth  on  the  back  of  gross  fixed  capital  formation  returning  to 
positive growth rates. In comparison to the Commission services' autumn 2009 forecast, the 
spring 2010 forecast constitutes a slight upward revision by 0.1-0.2 pps. in both years. 

According  both  to  the  latest  government  projections  in  the  January  2010  update  of  the 
Stability  Programme  and  the  Commission  services'  spring  2010  forecast,  the  general 
government deficit is set to widen by around 1.3 pps. and reach 4.7% of GDP in 2010. The 
deterioration is due to negative composition effects with growth drivers shifting towards net 
exports,  the  free  operation  of  automatic  stabilisers  and  some  discretionary  measures 
implemented in line with the EERP. In particular, parts of the 2009 tax reform, namely relief 
for families with children and tax cuts for the self-employed, came into force only in 2010 and 
are  expected  to  burden  the  budget  by  about  ¼%  of  GDP.  The  accelerated  depreciation 
provision, adopted in January 2009, will also weigh somewhat on the budget in 2010.  

The main goal of Austria's medium-term budgetary strategy, as presented in the latest update 
of the stability programme, is to reduce the general government deficit to below 3% of GDP 
by 2013, in line with the Council Recommendation of 2 December 2009. However, the targets 
outlined  in  the  programme  were  not  underpinned  by  appropriate  measures.  In  particular  for 
2011, the programme foresees a deficit reduction of 0.7 pps., while the Commission services 
forecast  only  a  slight  consolidation  (0.1  pps.)  as  the  deficit-increasing  and  the  deficit-
decreasing measures, spelled out in the update, almost offset each other. On the one hand, the 
budget  will  be  burdened  by,  among  others,  additional  revenue  shortfall  following  from  the 

EN 

32 

   EN 

2009  tax  reform  as  well  as  the  cost  of  the  prolongation  of  the  access  to  a  special  early 
retirement  channel  for  workers  with  very  long  insurance  periods  (Hacklerregelung).  On  the 
other  hand,  a  small  decrease  in  health-care  expenditure  was  agreed  on  by  the  federal 
government and the public health funds. On top of that, expenditure on labour market relief 
will be reduced as the short-time work scheme is being phased out. 

On  19  May  2010,  the  Austrian  Parliament  adopted  the  federal  expenditure  framework  law 
(Bundesfinanzrahmengesetz), as also explained in the addendum to the January 2010 update 
of  the  stability  programme  submitted  on  1  June.  The  new  law  establishes  fixed  ceilings  for 
about 80% of total expenditure for the period 2011-2014. For 2011, it foresees a drop in the 
federal budget expenditure limit by around 1.7 billion euro (0.6% of GDP). For the remaining 
years,  it  sets  nominally  growing  spending  limits,  but  small  enough  to  ensure  a  decreasing 
federal expenditure-to-GDP ratio. However, it is still unclear how these spending limits will 
be  translated  into  concrete  measures.  The  2011-2014  federal  expenditure  law  was  based  on 
the agreement between the government coalition partners of early March 2010 as to how to 
bring the general government deficit below 3% of GDP by 2013. Next to the decision about 
the extent of the consolidation on the expenditure side, now enshrined in the above-described 
law, it was agreed that 40% of the needed consolidation effort would fall on the revenue side. 
It has not been decided yet where the additional revenue would come from, though. Some of 
the currently discussed sources are: changes to the rules governing the capital income tax and 
the  tax  on  foundations,  introduction  of  a  special  bank  levy  and  financial  transactions  tax,  a 
rise  in  the  petrol  tax,  and  an  increase  in  the  tax  rate  for  high-income  earners.  The  lack  of 
details  concerning  the  consolidation  measures  both  on  expenditure  and  revenue  side  puts  at 
risk the achievement of the budgetary targets. 

According  to  the  January  2010  update  of  the  stability  programme,  government  gross  debt, 
which amounted to 66.5% of GDP in 2009, is projected to grow continuously in the medium-
term, reaching over 74% of GDP in 2013. The evolution of the debt ratio is subject to risks 
stemming, in particular, from uncertainties surrounding the cost of future functioning of the 
country's fifth largest bank, Hypo Alpe Adria (nationalised in December 2008) and the State 
guarantees  issued  for  the  debt  of  the  Austrian  highway  authority  (ASFINAG)  and  Austrian 
Federal  Railways  (ÖBB).  The  Commission  services  spring  2010  forecast  foresees  the  debt 
ratio  of  almost  73%  of  GDP  in  2011,  which  is  slightly  higher  than  the  projection  in  the 
stability programme, due to the difference in the deficit forecast for that year. 

9.3. 

Conclusions 

On current information it appears that Austria has taken action representing adequate progress 
towards the implementation of the Council Recommendations under the Article 126(7) TFEU 
of  2  December  2009.  In  particular,  the  Austrian  authorities  have  implemented  the  fiscal 
stimulus measures as planned in 2010, including relief for families with children and tax cuts 
for the self-employed.  

The  Austrian  authorities  have  outlined  in  some  detail  a  medium-term  budgetary  strategy  to 
correct  the  excessive  deficit  by  2013.  For  the  years  2011-2014,  the  authorities  have  set 
spending  limits  for  the  main  parts  of  the  federal  budget.  However,  in  order  to  correct  the 
excessive deficit by 2013 and to ensure that the debt ratio embarks on a downward path by the 
end of the correction period, the spending limits need to be translated into concrete measures 
and  details  concerning  the  consolidation  on  the  revenue  side  need  to  be  agreed  on  by  the 
government coalition partners. 

EN 

33 

   EN 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Austria are needed at present. The Commission will continue to 
closely  monitor  budgetary  developments  in  Austria  in  accordance  with  the  Treaty  and  the 
SGP. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 

2008 

2009 

2010 

2011 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

3.5 
3.1 
2.6 
2.5 
-0.4 
-0.5 
2.3 
2.3 
-1.6 
-1.7 
-1.6 
-1.7 
59.5 
59.4 

2.0 
2.0 
2.7 
2.8 
-0.4 
-0.4 
2.1 
2.2 
-1.7 
-1.7 
-1.7 
-1.7 
62.6 
62.6 

-3.6 
-3.4 
-2.3 
-1.8 
-3.4 
-3.5 
-0.7 
-0.7 
-2.4 
-2.7 
-2.4 
-2.7 
66.5 
66.5 

1.3 
1.5 
-2.3 
-1.6 
-4.7 
-4.7 
-1.8 
-1.8 
-3.6 
-3.9 
-3.6 
-3.9 
70.2 
70.2 

1.6 
1.5 
-2.1 
-1.5 
-4.6 
-4.0 
-1.7 
-1.2 
-3.6 
-3.3 
-3.6 
-3.3 
72.9 
72.6 

2012 
n.a. 
1.9 
n.a. 
-1.3 
n.a. 
-3.3 
n.a. 
-0.4 
n.a. 
-2.7 
n.a. 
-2.7 
n.a. 
73.8 

2013 
n.a. 
2.0 
n.a. 
-1.0 
n.a. 
-2.7 
n.a. 
0.2 
n.a. 
-2.2 
n.a. 
-2.2 
n.a. 
74.3 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and January 2010 stability programme 
update (SP) 

10. 

PORTUGAL 

10.1.  Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Portugal  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to Portugal in accordance with Article 126(7) with a 
view to bringing an end to the situation of an excessive government deficit20.  

The Council recommended Portugal to put an end to the present excessive deficit situation by 
2013. The Portuguese authorities should bring the general government deficit below 3 % of 
GDP in a credible and sustainable manner by taking action in a medium-term framework. To 
this  end,  the  Portuguese  authorities  should:  (a)  implement  the  consolidation  strategy 
envisaged  in  the  January  2009  update  of  the  Stability  Programme;  (b)  ensure  an  average 
annual fiscal effort of 1¼ % of GDP over the period 2010-2013, which should also contribute 
to  bringing  the  government  gross  debt  ratio  back  on  a  declining  path  that  approaches  the 
reference value at a satisfactory pace by restoring an adequate level of the primary surplus; (c) 
specify the measures that are necessary to achieve the correction of the excessive deficit by 

20 

EN 

All  EDP-related  documents 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

for  Portugal 

can  be 

found 

at 

the 

following  website: 

34 

   EN 

  
 
                                                 
2013, cyclical conditions permitting, and accelerate the reduction of the deficit if economic or 
budgetary conditions turn out better than currently expected. 

In  addition,  the  Portuguese  authorities  should  seize  opportunities  beyond  the  fiscal  effort, 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
back  towards  the  reference  value.  To  limit  risks  to  the  adjustment,  Portugal  would  benefit 
from strengthening the enforceable nature of its medium-term budgetary framework as well as 
from continuing to improve the monitoring of the budget execution throughout the year.  

The Council established the deadline of 2 June 2010 for the Portuguese government to take 
effective  action  necessary  to  implement  the  consolidation  envisaged  in  the  January  2009 
update of the Stability Programme and to outline in some detail the consolidation strategy that 
will be necessary to progress towards the correction of the excessive deficit. The assessment 
of effective action will take into account economic developments compared to the economic 
outlook in the Commission services’ autumn 2009 forecast. 

10.2.  Assessment of action taken 

Portugal's  GDP  contracted  by  2.7%  in  2009,  slightly  less  than  the  outlook  presented  in  the 
Commission services’ autumn 2009 forecast, which had projected GDP to decline by 2.9% in 
2009. As for economic activity in 2010, real GDP was assumed to grow again by 0.3% in the 
Commission services’ autumn 2009 forecast, while in the Commission services’ spring 2010 
forecast, the GDP growth prospects were revised upwards to a rate of 0.5%. Concerning 2011, 
GDP  was  projected  to  expand  by  1%  according  to  the  Commission  services’  autumn  2009 
forecast  and  by  0.7%  according  to  the  spring  2010  forecast.  Overall,  the  macroeconomic 
backdrop  against  which  fiscal  developments  have  taken  place  is  not  substantially  different 
from the one expected at the time the Council issued its recommendations.  

Fiscal developments in 2009 were subject to a combination of adverse forces: the severity of 
the recession with a much stronger-than-expected impact on fiscal revenue, the operation of 
automatic  stabilisers,  and  a  discretionary  fiscal  expansion,  part  of  it  in  the  context  of  the 
European Economic Recovery Plan, coupled with an acceleration in underlying spending. In 
all,  the  general  government  deficit  reached  9.4%  of  GDP  in  2009.  That  compares  with  a 
deficit projection of 8% of GDP in the Commission services’ autumn 2009 forecast and with a 
deficit target of 5.9% of GDP included in the EDP notification of late September 2009, with 
the  slippage  owed  to  lower-than-expected  revenue  as  all  categories  of  tax  and  non-tax 
proceeds  declined  sharply  over  the  entire  year  of  2009,  whereas  the  observed  level  of 
expenditure was broadly in line with the autumn forecast projections. In all, the 2009 deficit 
outturn  was  much  worse  than  expected  at  the  time  the  Council  issued  its  recommendations 
under Article 126(7) TFEU. Thus, the fiscal efforts needed in order to achieve the Council's 
overarching objective of a correction of the excessive deficit situation by 2013 are larger than 
previously assumed. 

The March 2010 update of the stability programme of Portugal targeted a general government 
deficit at 8.3% of GDP for 2010, under the assumption of real GDP growth of 0.7%. In the 
Commission services’ spring 2010 forecast, the government deficit was projected at 8.5% of 
GDP  in  2010,  with  the  GDP  growth  being  expected  to  be  at  0.5%,  i.e.  slightly  above  the 
official target prevailing at that time.  

On 8 May 2010, Portugal announced a revised target of 7.3% of GDP for the 2010 deficit, 2.1 
pps. below the 2009 deficit outturn. The revision of the deficit target for 2010 and 2011 was 

EN 

35 

   EN 

supported  by  consolidation  measures  announced  by  the  Portuguese  authorities  on  13  May. 
These measures, discussed in more detail in Annex 2, are assumed to yield a deficit reduction 
of 1.2% of GDP in 2010 in comparison with the plans in the March 2010 stability programme 
(a  small  part  of  those  measures  is  the  frontloading  into  2010  of  initiatives  planned  in  the 
programme for 2011, which had already been included in the Commission services’ forecast 
for  2010).  The  revenue  and  the  expenditure  sides are  set  to  contribute on  equal  parts  to  the 
consolidation  effort.  They  add  to  some  efforts  already  taken,  such  as  the  discontinuation  of 
temporary stimulus measures adopted for 2009 and some reining in of expenditure in 2010, 
notably by a nominal freeze in government wages for the current year21.  

The  March  2010  stability  programme  aimed  at  an  improvement  in  the  structural  balance  in 
2010 of just over ¾ pp. of GDP. According to the Commission services’ spring 2010 forecast, 
the  structural  deficit  could  improve  by  some  ½  pp.  of  GDP  on  account  of  a  slightly  more 
cautious  scenario  for  the  nominal  deficit.  The  announcement  of  the  new  wave  of 
consolidation  measures  on  13  May  made  those  two  earlier  outlooks  outdated:  the 
improvement  in  the  structural  balance  is  now  expected  to  be  larger  than  before,  possibly 
coming close to 1½ pps of GDP. A broadly similar conclusion is warranted when looking at 
the  sum  of  the  possible  deficit-reducing  effect  of  the  different  consolidation  measures  for 
2010 put forward by Portugal up to this date.  

As  for  2011,  the  March  2010  update  of  the  stability  programme  of  Portugal  targeted  a 
government deficit of 6.6% of GDP, under an assumed GDP growth rate of 0.9%. The 2011 
deficit reduction outlined in the March 2010 update of the stability programme was based on a 
number  of  consolidation  measures  mostly  to  restrain  expenditure  in  various  areas  of 
government  action  such  as  social  transfers  and  the  wage  bill  of  the  government,  and,  to  a 
lesser extent, to raise additional tax revenue, while spending containment would be partially 
mitigated  by  fast-rising  interest  expenditure.  In  the  Commission  services’  spring  2010 
forecast, the 2011 government deficit was projected at 7.9% of GDP, which was 1¼% of GDP 
above the stability programme target; the GDP growth rate was set at 0.7%.  

On 13 May, the 2011 deficit target was revised to 4.6% of GDP reflecting the consolidation 
measures  announced  on  that  day,  i.e.,  2.7  pps.  below  the  revised  2010  deficit  target.  These 
measures  would  lead  to  a  largely  parallel  improvement  in  the  Commission  services'  deficit 
forecast of 2011 by 2.2% of GDP, so essentially leaving unchanged the original gap between 
the two projections. In all, taking into account the concrete measures announced both in the 
March 2010 stability programme and on 13 May, total consolidation effort for both 2010 and 
2011 is equally divided between expenditure and revenue.  

The stability programme plans aimed at an improvement of the structural balance of 1½ pp of 
GDP in 2011, in comparison with 2010. According to the Commission services' spring 2010 
forecast, and under a no-policy change assumption, the structural deficit could improve by ¾ 
pp. of GDP in 2011. In the light of the announcement of the additional measures in mid May, 
the improvement in the structural balance can now be expected to be close to 1¾ pp. of GDP.  

This  overall  outlook  for  fiscal  consolation  in  2010  and  2011  compares  with  the  call  in  the 
Council  Recommendation  under  Article  126(7)  TFEU  for  an  average  annual  fiscal  effort  of 
1¼% of GDP over the period 2010-2013. However, given that the 2009 budgetary outcome 
was worse than the deficit projected in the Commission autumn 2009 forecast, the size of the 

21 

Improvement in the nominal fiscal balance between 2009 and 2010 reflects also the expiration of some 
deficit-increasing one-off measures in 2009 and the implementation of deficit-reducing ones in 2010. 

EN 

36 

   EN 

                                                 
appropriate  fiscal  adjustment  must  be  seen  also  against  the  need  of  having  larger-than-
recommended  fiscal  efforts  to  meet  the  objective  of  bringing  the  government  deficit  below 
3%  of  GDP  in  a  credible  and  sustained  manner  by  2013.  Moreover,  in  order  to  reach  the 
revised government deficit target for 2010, a strict implementation of budgetary plans for the 
rest of 2010 is needed, namely by avoiding any expenditure slippage and saving any better-
than-expected  tax  inflow,  which  should  also  benefit  from  the  higher-than-expected  GDP 
outturn  in  the  first  quarter  of  2010  (on  the  basis  of  the  quarterly  national  accounts  figures 
published on 9 June 2010)22,23. 

As for the revised 2011 government deficit target, a consolidation effort – in addition to all 
the detailed measures announced up to this date – amounting to 1½ pp. of GDP, reflecting the 
earlier  identified  budgetary  gap  between  the  March  2010  stability  programme  and  the 
Commission spring 2010 forecasts outlooks would need to be enshrined in the 2011 Budget 
Law. While  both  expenditure and revenue measures may have comparable impact on short-
term  fiscal  consolidation,  further  measures  could  be  tilted  towards  spending  cuts  given  the 
current weights of expenditure and revenue in terms of GDP and the need to implement fiscal 
policies that contribute to restore competitiveness. 

Concerning  2012  and  2013,  the  March  2010  update  of  the  stability  programme  targeted 
government  deficits  of  4.6%  and  2.8%  of  GDP  respectively.  The  structural  balance  was 
projected to improve by an annual average of almost 1¾ pp. of GDP in those two years. Part 
of deficit reduction was planned to reflect discretionary efforts on basis of the consolidation 
measures already outlined in the programme, largely to contain spending. In addition, fiscal 
consolidation would be further helped by a gradually accelerating GDP and by a visibly rising 
tax  burden.  Though  the  deficit  targets  for  2012  and  2013  have  not  been  changed,  one  may 
expect them to be revised in line with the new targets for 2010 and 2011. 

Portugal's government debt rose to 76.8% of GDP at the end of 2009. The March 2010 update 
of the stability programme envisaged the debt-to-GDP ratio to increase further up to 90.7% by 
2012  reflecting  high  deficits  and  low  economic  growth  before  bending  slightly  down  to 
89.8% in 2013. As for the stock-flow adjustment (SFA), it was planned to be neutral to the 
change  of  debt  ratio  between  end  2009  and  end  2013,  adding  to  the  ratio  in  2010  but 
subtracting  from  it  thereafter.  On  the  one  hand,  the  SFA  will  benefit  from  privatisation 
proceeds amounting to a cumulative 3% of GDP between 2010 and 2013. On the other hand, 
that is planned to be offset by debt-increasing financial transactions and a positive difference 
between the cash- and accrual-based deficits. The Commission services’ spring 2010 forecast 
projects  the  debt  ratio  at  85.8%  of  GDP  in  2010  and  at  91.1%  of  GDP  in  2011.  The  more 
recent consolidation measures should result in lower debt levels. 

Plans  to  reform  the  budgetary  framework  were  outlined  in  the  March  2010  update  of  the 
stability  programme,  with  a  major  element  being  a  move  towards  a  multi-annual  budgetary 
framework.  A  working  party  has  been  established  meanwhile  with  a  view  to  redesign  the 

22 

23 

In  addition,  the  results  of  the  long-planned  revision  in  GDP  series  published  on  9  June  2010  work 
towards the achievement of lower deficit-to-GDP ratios, to the extent that the level of GDP at current 
market prices for the period 1995-2009 is now some 3¼% higher than previously estimated.  
The Council Opinion on the March 2010 update of the stability programme invited Portugal to "achieve 
the  2010  deficit  target  of  8.3%  of  GDP,  if  necessary  by  reinforcing  the  consolidation  by  adopting 
additional  measures;  back-up  the  strategy  to  bring  the  deficit  below  3%  by  2013  by  the  timely 
implementation of concrete measures; stand ready to adopt further consolidation measures in case the 
macroeconomic  scenario  proves  more  favourable  than  the  scenario  underpinning  the  Article  126(7) 
recommendation and/or any slippages emerge(…)". 

EN 

37 

   EN 

                                                 
framework, with a draft being expected by end June 2010. The working party was mandated 
to take into account: i) the definition of the set of entities to be affected by the government 
budgetary process; ii) the proposal of a calendar for the budgetary process; iii) the definition 
of  a  multi-year  budgetary  framework  allowing  also  for  performance  budgeting;  and,  iv)  the 
reinforcement  of  data  reporting  mechanisms.  In  addition,  some  further  changes  towards  a 
more integrated reporting of budgetary execution on an accrual basis were already envisaged 
in the stability programme.  

10.3.  Conclusions 

On  current  information  it  appears  that  Portugal  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council. In particular, the Portuguese authorities have taken measures that represent an annual 
fiscal effort of significantly more than 1¼% of GDP in both 2010 and 2011.  

The  Portuguese  authorities  have  announced  with  detail  a  number  of  fiscal  consolidation 
measures  to  underpin  the  consolidation  path  up  to  2013,  for  which  implementation  has 
already started in some cases.  

However, achieving the plans to correct the excessive deficit by the deadline crucially relies 
upon a quick and effective implementation of all corrective measures announced in both the 
March 2010 stability programme and on 13 May. Moreover, further corrective efforts should 
be included in the 2011 Budget Law in order to attain the annual deficit targets, also so as to 
take a decisive step to ensure that the debt ratio embarks on a downward path before the end 
of  the  correction  period.  Those  efforts  will  have  to  be  designed  taking  into  account  the 
possibility  that  fiscal  restraint  takes  a  toll  on  economic  growth  over  the  short  and  medium 
term  before  the  benefits  of  a  sounder  macroeconomic  setting  allowed  by  more  sustainable 
public finances materialises. The timing of additional measures can only benefit from bearing 
in  mind  the  need  to  bolster  confidence  and  credibility  at  early  stages  of  the  consolidation 
process.  Also  steps  have  been  taken  to  strengthen  the  budgetary  framework,  notably  to 
develop  its  multi-annual  elements  –  pursuing  due  efforts  in  this  area  can  be  instrumental  to 
facilitate fiscal consolidation over the coming years.  

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Portugal are needed at present. The Commission will continue 
to closely monitor budgetary developments in Portugal in accordance with the Treaty and the 
SGP. 

EN 

38 

   EN 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 

Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

COM  
SP 
COM  
SP 
COM  
SP 
New target3 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2007 
1.9 

0.8 

-2.7 

0.2 

-3.0 

-3.1 

63.6 

2008 
0.0 
0.0 
0.2 
0.5 
-2.8 
-2.7 

0.1 
0.2 
-2.9 
-2.9 
-3.8 
-2.9 
66.3 
66.3 

2009 
-2.7 
-2.7 
-2.5 
-2.2 
-9.4 
-9.3 

-6.6 
-6.4 
-8.3 
-8.3 
-8.1 
-8.3 
76.8 
77.2 

2010 
0.5 
0.7 
-2.4 
-1.9 
-8.5 
-8.3 
-7.3 
-5.5 
-5.1 
-7.5 
-7.5 
-7.7 
-7.5 
85.8 
86.0 

2011 
0.7 
0.9 
-2.2 
-1.6 
-7.9 
-6.6 
-4.6 
-4.4 
-2.8 
-7.0 
-5.9 
-7.0 
-5.9 
91.1 
89.4 

2012 
n.a. 
1.3 
n.a. 
-1.3 
n.a. 
-4.6 
n.a. 
n.a. 
-0.6 
n.a. 
-4.0 
n.a. 
-4.0 
n.a. 
90.7 

2013 
n.a. 
1.7 
n.a. 
0.8 
n.a. 
-2.8 
n.a. 
n.a. 
1.3 
n.a. 
-2.5 
n.a. 
-2.5 
n.a. 
89.8 

Note:  
1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 
2 Cyclically-adjusted balance excluding one-off and other temporary measures. 
3 New targets for the government balance for 2010 and 2011 as announced by the authorities on 13 May 2010 
Source: Commission services’ 2010 spring forecast (COM) and March 2010 stability programme update (SP) 

11. 

SLOVENIA 

11.1.  Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Slovenia  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to Slovenia in accordance with Article 126(7) with a 
view to bringing an end to the situation of an excessive government deficit24. 

The Council recommended Slovenia to put an end to the present excessive deficit situation by 
2013.  The  Slovenian  authorities  should  bring  the  general  government  deficit  below  3%  of 
GDP  in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically,  to  this  end,  the  Slovenian  authorities  should:  (a)  implement  the  fiscal 
consolidation measures in 2010 as planned; (b) ensure an average annual structural budgetary 
adjustment of ¾% of GDP over the period 2010-2013; and (c) specify the measures that are 
necessary  to  achieve  the  correction  of  the  excessive  deficit  by  2013  cyclical  conditions 
permitting and accelerate the reduction of the deficit if economic or budgetary conditions turn 
out better than currently expected. 

24 

All EDP-related documents for Slovenia can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

EN 

39 

   EN 

  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
                                                 
To reduce the risks to the long-term sustainability of public finances, Slovenia should further 
reform  the  pension  system  with  a  view  to  curbing  age-related  expenditures  as  soon  as 
possible. 

The  Council  established  the  deadline  of  2  June  2010  for  the  Slovenian  government  to  take 
effective  action  to  implement  the  fiscal  consolidation  measures  in  2010  as  planned  and  to 
outline  the  measures  that  would  be  necessary  to  progress  towards  the  correction  of  the 
excessive  deficit.  The  assessment  of  effective  action  takes  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission  services'  autumn  2009 
forecast. 

11.2.  Assessment of action taken 

Real  GDP  fell  by  7.8%  in  2009,  more  than  projected  in  the  Commission  services'  autumn 
2009  forecast  (7.4%).  The  Commission  services'  spring  2010  forecast  revised  slightly 
downwards the outlook for real GDP growth in 2010 and 2011 compared to the Commission 
services'  autumn  2009  forecast,  which  underpinned  the  Council  recommendation  (1.1%  vs. 
1.3%  and  1.8%  vs.  2.0%,  respectively).  This  mainly  reflects  a  downward  revision  in  the 
contribution  of  net  exports  to  GDP  growth  for  all  three  years.  Inflation  and  employment 
projections from the spring 2010 forecast diverge only slightly from the previous projections.  

According to the April 2010 EDP notification, the general government deficit in 2009 stood at 
5.5% of GDP, slightly lower than in both the Commission services' autumn 2009 forecast and 
the January 2010 stability programme update. The deficit target for 2010 was set at 5.8% of 
GDP, slightly higher than 5.7% of GDP set in the stability programme on account of a higher 
deficit  in  the  Health  Insurance  Fund.  The  target  incorporates  the  measures  adopted  by  the 
government  in  the  context  of  the  budget  for  2010  to  restrain  primary  expenditure  growth, 
confirming its intention to pursue an expenditure-based fiscal consolidation. These measures 
include an agreed postponement of public sector wage increases, less generous indexation of 
social benefit rates, including pensions, and lower capital transfers due to increased reliance 
on  EU  funds.  Together,  they  are  expected  to  generate  savings  of  around  1¼%  of  GDP 
compared  to  a  no-policy-change  scenario.  The  Commission  services’  spring  2010  forecast 
projects  the  2010  general  government  deficit  at  6.1%  of  GDP,  corresponding  to  lower 
nominal GDP, more cautious assumptions regarding indirect tax buoyancy and slightly higher 
capital expenditure projections. 

Given  a  sharp  rise  in  the  interest  burden  and  still  strong  inherent  primary  expenditure 
dynamics in spite of the above-mentioned savings, the structural balance, i.e. the cyclically-
adjusted  balance  net  of  one-off  and  other  temporary  measures,  is  estimated  to  worsen  by 
around ¾ pp. of GDP in 2010 according to the spring forecast. This contrasts with the average 
annual  fiscal  effort  of  ¾  pp.  of  GDP  as  recommended  under  Article  126(7),  which  would 
require  an  above-average  fiscal  effort  for  the  period  2011-2013.  Still,  as  the  consolidation 
measures  for  2010  are  being  implemented  as  planned,  the  budgetary  strategy  in  2010  is 
broadly  consistent  with  the  Council  recommendation.  Furthermore,  on  10  June  2010,  in 
reaction to the worse economic outlook compared to when the budget for 2010 was presented 
and lower-than-budgeted revenues over the first five months in cash terms25, the government 
adopted additional consolidation measures in a supplementary budget with a view to bringing 

25 

This  revenue  shortfall  may  also  imply  an  upward  revision  of  the  2009  general  government  deficit 
outturn in ESA95 terms. 

EN 

40 

   EN 

                                                 
the 2010 central government deficit-to-GDP ratio in cash terms back in line with the target in 
the 2010 budget.  

The  main  aim  of  the  Slovenian  medium-term  budgetary  strategy,  laid  down  in  the  stability 
programme, is to reduce the deficit below the 3% of GDP deficit reference value by 2013, the 
correction deadline set by the Council. This strategy relies on a broad-based containment of 
primary expenditure involving enhanced public sector efficiency and the rationalisation of the 
provision  of  public  services  and  social  protection  and  the  broad  measures  underpinning  it 
from 2011 onwards are indicated in the stability programme. The budgetary projections in the 
programme also incorporate the expiry of all remaining temporary stimulus measures. In its 
opinion  of  27  April  2010  on  the  stability  programme,  the  Council  highlighted  risks  to  the 
budgetary targets in the programme related to (i) possible expenditure overruns in view of the 
scale  of  the  envisaged  retrenchment  coupled  with  the  strong  observed  dynamics  in  recent 
years  of  especially  the  wage  bill  and  social  transfers;  (ii)  the  fact  that  the  expenditure-
containment  measures  have  not  yet  been  fully  specified  and  adopted;  and  (iii)  lower-than-
foreseen revenues after 2011 in view of the favourable macroeconomic scenario. 

Concerning the Council recommendation on long-term sustainability, the government’s “Exit 
Strategy 2010-2013” adopted in February 2010 sets out plans for a comprehensive two-step 
pension  reform,  which  is  currently  being  negotiated  with  social  partners.  Also,  the  recently 
established  fiscal  council  presented  its  first  assessment  of  Slovenia’s  fiscal  policy  in  April, 
following which there may be further developments in the fiscal framework. 

11.3.  Conclusions 

On  current  information  it  appears  that  Slovenia  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council.  In  particular,  the  consolidation  measures  in  the  budget  for  2010,  estimated  to 
generate expenditure savings of around 1¼% of GDP in 2010 compared to a no-policy change 
scenario  are  being  implemented  as  planned.  Furthermore,  the  government  adopted  a 
supplementary  budget  on  10  June  to  reconfirm  the  targeted  deficit  ratio  for  central 
government in cash terms in the light of worse economic and budgetary developments since 
the adoption of the budget. 

For  the  period  2011-2013,  the  Slovenian  authorities  have  outlined  in  some  detail  a 
consolidation  strategy  based  on  a  broad-based  containment  of  primary  expenditure  to 
gradually  bring  the  deficit  below  3%  of  GDP  by  2013,  the  deadline  recommended  by  the 
Council.  In  order  to  achieve  the  targets  it  will be  important  to  fully  spell  out  and  adopt  the 
underlying  measures  and  to  address  possible  expenditure  slippages  or  revenue  shortfalls. 
Regarding  the  recommendation  to  reduce  the  risks  to  the  long-term  sustainability  of  public 
finances, a comprehensive two-step pension reform is currently being negotiated with social 
partners. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Slovenia are needed at present. The Commission will continue 
to closely monitor budgetary developments in Slovenia in accordance with the Treaty and the 
SGP. 

EN 

41 

   EN 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 
6.8 
n.a. 
6.3 
n.a. 
0.0 
n.a. 
1.3 
n.a. 
-2.9 
n.a. 
-2.9 
n.a. 
23.4 
n.a. 

2008 
3.5 
3.5 
6.6 
5.7 
-1.7 
-1.8 
-0.6 
-0.7 
-4.8 
-4.3 
-4.8 
-4.3 
22.6 
22.8 

2009 
-7.8 
-7.3 
-3.7 
-3.4 
-5.5 
-5.7 
-4.1 
-4.6 
-3.8 
-4.2 
-3.7 
-4.2 
35.9 
34.4 

2010 
1.1 
0.9 
-3.7 
-3.9 
-6.1 
-5.7 
-4.3 
-3.9 
-4.4 
-4.0 
-4.4 
-4.0 
41.6 
39.6 

2011 
1.8 
2.5 
-3.2 
-3.2 
-5.2 
-4.2 
-3.3 
-2.3 
-3.8 
-2.8 
-3.8 
-2.8 
45.4 
42.0 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2012 
n.a. 
3.7 
n.a. 
-1.5 
n.a. 
-3.1 
n.a. 
-1.1 
n.a. 
-2.4 
n.a. 
-2.4 
n.a. 
42.7 

2013 
n.a. 
3.5 
n.a. 
0.1 
n.a. 
-1.6 
n.a. 
0.4 
n.a. 
-1.6 
n.a. 
-1.6 
n.a. 
42.1 

1 Output gaps and cyclically-adjusted balances according to the programme as recalculated by Commission 
services on the basis of the information in the programme. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and January 2010 stability programme 
update (SP) 

12. 

SLOVAKIA 

12.1.  Excessive deficit procedure and most recent recommendations 

On  2  December  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Slovakia  in 
accordance  with  Article  126(6)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) and addressed recommendations to Slovakia in accordance with Article 126(7) with a 
view to bringing an end to the situation of an excessive government deficit26. 

The Council recommended Slovakia to put an end to the present excessive deficit situation by 
2013. The Slovak authorities should bring the general government deficit below 3 % of GDP 
in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically,  to  this  end,  the  Slovak  authorities  should:  (a)  implement  the  deficit  reducing 
measures in 2010 as planned in the draft budget for 2010-2012; (b) ensure an average annual 
fiscal  effort  of  1  %  of  GDP  over  the  period  2010-2013;  (c)  specify  the  measures  that  are 
necessary  to  achieve  the  correction  of  the  excessive  deficit  by  2013,  cyclical  conditions 
permitting,  and  accelerate  the  reduction  of  the  deficit  if  economic  or  budgetary  conditions 
turn out better than currently expected. 

To limit risks to the adjustment, Slovakia should strengthen the enforceability of its medium-
term  budgetary  framework  as  well  as  improve  the  monitoring  of  the  budget  execution 
throughout the year, in particular to avoid expenditure overruns compared to budget plans. 

26 

EN 

All  EDP-related  documents 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

for  Slovakia 

can  be 

found 

at 

the 

following  website: 

42 

   EN 

  
 
                                                 
The  Council  established  the  deadline  of  2  June  2010  for  the  Slovak  government  to  take 
effective  action  to  implement  the  deficit  reducing  measures  in  2010  as  planned  in  the  draft 
budget  for  2010-2012  and  to  outline  in  some  detail  the  consolidation  strategy  that  will  be 
necessary  to  progress  towards  the  correction  of  the  excessive  deficit.  The  assessment  of 
effective  action  will  take  into  account  economic  developments  compared  to  the  economic 
outlook in the Commission services' autumn 2009 forecast. 

12.2.  Assessment of action taken 

According to the Commission services' 2010 spring forecast, real GDP in 2010 is expected to 
increase by 2.7%, compared to 1.9% projected in the autumn forecast which was the basis for 
the Council Recommendation. The upward revision is to be attributed  to  stronger  economic 
performance from the end of 2009 reflecting dynamic foreign demand. For 2011, real GDP is 
foreseen to grow by 3.6% as compared to 2.6% in the autumn forecast, reflecting a faster pick 
up in demand from households and foreign trading partners. Nevertheless, the output gap is 
projected to remain negative in 2010 and 2011. 

In its tri-annual draft budget published in September 2009, the Slovak government presented a 
consolidation  strategy  for  public  finances  starting  in  2010.  The  general  government  deficit 
would  be  reduced  to  5.5%  of  GDP  in  2010  (from  an  estimated  6.3%  of  GDP  in  2009). 
Continued consolidation efforts in subsequent years would bring the nominal deficit to 3% of 
GDP already in 2012, one year before the deadline recommended by the Council.  

The  January  2010  update  of  the  stability  programme  confirmed  the  target  of  a  general 
government  deficit  of  5.5%  of  GDP  in  2010,  assuming  real  GDP  growth  of  1.9%.  The 
improvement  of  the  deficit  in  2010  would  primarily  reflect  expenditure-reducing  measures. 
Savings in goods and services together with cuts in public investment amount to 1.2% of GDP 
in  2010.  The  2010  budget  foresees  a  moderate  increase  in  public  wages  by  1%  (except  for 
employees  of  the  regional  school  system),  and  a  nominal  freeze  in  salaries  of  ministers, 
members of parliament and other political office holders. Moreover, the programme foresaw a 
reduction of central government employees by some 2% in connection with reorganization of 
armed forces and a decrease of regional schools’ employees. The revenue to GDP ratio was 
projected to decline by 0.3 percentage point of GDP in 2010 in view of a temporary increase 
of tax allowances and in-work benefits, and a decline in dividends from public companies. 

The  Commission  services'  2010  spring  forecast  projects  the  deficit  at  6.0%  of  GDP  (0.5 
percentage points of GDP higher than in the stability programme), based on real GDP growth 
of 2.7%. The difference from the deficit forecast in the stability programme reflects primarily 
a  base  effect  given  the  upward  revision  of  the  deficit  estimate  for  2009  in  the  April  2010 
notification (from 6.3% to 6.8% of GDP). The higher growth in the Commission forecast is 
not  expected  to  translate  into  higher  revenues,  reflecting  unfavourable  growth  composition 
effects. The implied fiscal effort in 2010, as measured by the change in the structural balance, 
amounts  to  1.2  percentage  point  of  GDP,  which  is  slightly  above  the  average  annual  fiscal 
effort  of  1%  of  GDP  recommended  by  the  Council.  The  expected  improvement  in  the 
structural balance reflects broadly the envisaged expenditure-cutting measures. 

Currently available central government cash-based figures suggest that expenditures have not 
deviated substantially from the budget plan. Nevertheless, these data do not include spending 
of  social  security  funds,  public  health  care  insurances  and  local  governments.  However, 
developments  on  the  revenue  side  point  to  downside  risks  in  2010.  Firstly,  the  government 
reduced  the  excise  duty  on  diesel  fuels  in  January  2010,  leading  to  an  expected  loss  of 

EN 

43 

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revenues  of  0.1-0.2  percent  of  GDP.  Secondly,  figures  on  tax  collections  for  the  first  four 
months  of  2010  point  to  a  significant  underperformance  of  personal  income  and  corporate 
taxes (even compared to the Commission spring forecast). Although no detailed information 
is available,  revenue from social contributions may underperform too given the worse-than-
expected labour market developments. 

After  2010,  the  consolidation  strategy  assumes  the  withdrawal  of  anti-crisis  measures  (i.e. 
increase in tax allowance and in-work benefits) and further reduction of expenditure on goods 
and  services.  The  supporting  measures  have  however  not  yet  been  fully  specified.  The 
authorities also plan a reduction in capital expenditure from 1.6% of GDP in 2010 to 1.2% of 
GDP  in  2012.  According  to  the  authorities,  these  measures  will  be  sufficient  to  bring  the 
deficit  down  to  3%  of  GDP  in  2012,  one  year  earlier  than  recommended  by  the  Council. 
However, in  view  of favourable macroeconomic assumptions for these years in the stability 
programme  and  corresponding  possible  negative  surprises  in  tax  revenues,  achievement  of 
these targets may require additional consolidation measures. 

The  authorities  have  announced  in  the  stability  programme  their  intention  to  strengthen  the 
current three-year fiscal framework.  The government contemplates the  introduction of more 
binding expenditures ceilings covering a large share of government expenditure, adoption of a 
constitutional law setting an upper limit on government debt, and a strengthened monitoring 
of the budget execution during the year. These measures are welcome, and would result in a 
more robust institutional set-up for the conduct of fiscal policy. Nevertheless, little concrete 
progress has been done in this respect until now. 

12.3.  Conclusions 

On  current  information  it  appears  that  Slovakia  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council.  In  particular,  the  Slovak  authorities  have  implemented  several  deficit  reducing 
measures  in  2010,  which  are  expected  to  result  in  a  sizeable  improvement  of  the  structural 
balance amounting to 1.2 percentage point of GDP. 

The  Slovak  authorities  have  outlined  in  some  detail  a  medium-term  consolidation  strategy 
envisaging  correction  of  the  excessive  deficit  by  2012,  a  year  ahead  of  the  deadline 
recommended by the Council. In order to achieve this target, it will be important to rigorously 
implement the 2010 budget and stand ready to adopt additional measures if necessary to reach 
the  deficit  target  of  5.5%  of  GDP.  The  2011  budget  should  include  measures  necessary  to 
reach the fiscal targets presented in the stability programme and, to the extent possible, avoid 
cuts  in  public  investment.  Furthermore,  the  Slovak  authorities  have  initiated  work  to 
strengthen the enforceability of the medium-term fiscal framework through the introduction of 
expenditure  ceilings,  a  limit  on  general  government  debt,  and  stronger  budget  execution 
monitoring.  These  measures  are  welcome  and  the  authorities  are  invited  to  continue  their 
efforts in this area. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Slovakia are needed at present. The Commission will continue 
to closely monitor budgetary developments in Slovakia in accordance with the Treaty and the 
SGP. 

EN 

44 

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Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Note:  

2007 
10.6 
n.a. 
6.3 
n.a. 
-1.9 
n.a. 
-0.5 
n.a. 
-3.7 
n.a. 
-3.7 
n.a. 
29.3 
n.a. 

2008 
6.2 
6.4 
7.6 
8.9 
-2.3 
-2.3 
-1.1 
-1.1 
-4.5 
-4.9 
-4.7 
-4.2 
27.7 
27.7 

2009 
-4.7 
-5.7 
-1.2 
-1.1 
-6.8 
-6.3 
-5.3 
-4.5 
-6.4 
-6.0 
-6.6 
-6.0 
35.7 
37.1 

2010 
2.7 
1.9 
-2.3 
-2.9 
-6.0 
-5.5 
-4.5 
-3.6 
-5.4 
-4.7 
-5.4 
-4.7 
40.8 
40.8 

2011 
3.6 
4.1 
-2.3 
-3.0 
-5.4 
-4.2 
-3.9 
-2.3 
-4.7 
-3.3 
-4.7 
-3.3 
44.0 
42.5 

2012 
n.a. 
5.4 
n.a. 
-1.0 
n.a. 
-3.0 
n.a. 
-1.1 
n.a. 
-2.7 
n.a. 
-2.7 
n.a. 
42.2 

2013 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 

COM 
SP 
COM 
SP 
COM 
SP 
COM 
SP 
COM 
SP 
COM 
SP 
COM 
SP 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by Commission 
services on the basis of the information in the programmes. 

2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and January 2010 stability programme 
update (SP) 

EN 

45 

   EN 

  
 
 
ANNEX  2:  ASSESSMENT  OF  NEW  TARGETS  AND  ADDITIONAL  MEASURES  BY  SPAIN  AND 

PORTUGAL 

1. 

SPAIN 

On  9  May,  the  ECOFIN  Council  agreed  that  plans  for  fiscal  consolidation  and  structural 
reforms would have to be accelerated and strongly supported the commitment of Spain to take 
significant additional consolidation measures in 2010 and 2011. In addition, it was agreed that 
the adequacy of such measures would be assessed by the Commission in June in the context 
of the excessive deficit framework.  

As  a  reaction  to  the  agreement  at  the  ECOFIN  Council,  Spain  announced  on  12  May  a 
number  of  additional  consolidation  measures,  which  underpinned  a  downward  revision  of 
government  deficit  targets  by  0.5%  of  GDP  in  2010  and  of  1.5%  of  GDP  in  2011  (in 
cumulative  terms),  in  comparison  with  the  plans  outlined  in  the  February  2010  stability 
programme. The fiscal targets are now a deficit of 9.3% of GDP for 2010 and one of 6% of 
GDP for 2011 (revised from previous deficit targets of 9.8% and 7.5% of GDP for 2010 and 
2011 respectively in the February 2010 stability programme). The measures are all made up 
of expenditure cuts and the most sizeable ones concern: government wages, with a cut by 5% 
in nominal wages on average as of mid 2010, and their freeze in 2011; a reduction of public 
investment; a freeze on pensions (except for the lowest pension outlays); phasing out of the 
tax allowance in the personal income tax for birth or adoption of a child; and, cuts in transfers 
to regional and local governments. (See Table 1 for more details on the measures outlined by 
Spain and their budgetary impact as announced by the authorities). 

Table 1: Spain: Consolidation measures announced on 12 May 

Revenue-increasing measures (a) 

Expenditure-decreasing measures (b) 
- Cut in public wages (5% on average, up to 15% to higher wages) 
- Non indexation of pensions (excluding minimum pensions) from January 2011 
- Abrogation of temporary rules for partial retirement (law 40/2007) 
- Elimination of birth allowance (EUR 2500 per birth) 
- Reduction in medical expenditure  
- Reduction in other social benefits (dependency law) 
- Reduction in investment 
- Reduction in transfers to regional and local governments  
- Reduction in official development aid 
Grand total (a+b) 
Notes:  
–: nil 
…: negligible 

Impact 
(% of GDP) 
(compared with plans 
of SP of February 
2010) 

2010 
– 

2011 
– 

0.5 
0.2 
– 
… 
– 
…  
… 
0.2 
… 
… 
0.5 

1.5 
0.4 
0.1 
… 
0.1 
0.1 
… 
0.4 
0.1 
0.1 
1.5 

The  assessment  of  the  new  budget  deficit  targets  and  of  the  adequacy  of  the  underlying 
consolidation measures should take into account several criteria: not only the adequacy of the 
announced  measures  to  meet  the  new  fiscal  targets  for  both  2010  and  2011,  but  also  the 
quality and composition of the measures, and accompanying structural reforms. In addition, it 

EN 

46 

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is also assessed whether the new targets are suffice to stabilise, and reverse, the debt ratio by 
2013. 

The measures announced by Spain on 12 May correspond to the revisions in the government 
targets, when one takes the quantification of the measures announced by Spain27 (See Table 1 
for  details  on  the  announced  measures  and  their  quantification.),  taking  into  account  the 
deviations between projections and targets identified in the Commission services' spring 2010 
forecasts,  as  well  as  the  fact  that  the  acceleration  in  fiscal  consolidation  will  weigh  on 
economic activity, the conclusion is that the recently announced measures might not suffice to 
reach the revised targets for 2011. 

Table 2 below presents the order of magnitude of the fiscal consolidation measures that Spain 
will have to specify in the 2011 budget in order to reach its new government deficit targets. 
The tables takes into account the announcements made by the Spanish authorities concerning 
their revised targets, as well as the new consolidation measures. The tables should be read as 
follows: Line (1) shows the target fiscal deficit for 2010 and 2011 in the latest update of the 
stability  programme  (March  2010).  Line  (2)  shows  the  Commission  services’  projection  for 
the same variable (spring 2010 forecasts). Line (3) shows the new fiscal targets. The revision 
in targets is in line (4), while the difference between the Commission forecasts and the new 
target features in line (5). The measures that are necessary to reach the new targets are in line 
(6); this variable takes into account not only line (5), but also second-round effects: the fact 
that  the  acceleration  in  consolidation  will  weigh  on  economic  activity,  which  will  then 
partially offset of the deficit-decreasing impact on the consolidation measures28. The recently 
announced measures are in line (7), while line (8) indicates the measures in addition of those 
announced on 13 May that would be necessary to reach the new targets. 

The  tables  also  contain  information  on  government  debt  developments  in  the  stability 
programme (line 9), in the spring forecasts (10) and assuming that the new deficit targets are 
fully  achieved  (11).  Lines  (12)  and  (13)  show  the  real  GDP  growth  rates  in  the  stability 
programme and in the spring forecast. 

27 

28 

The risks on the implementation and quantification of the announced measures are relatively small but 
cannot simply be discarded. For example, the cut in transfers to regional and local governments may not 
imply a similar reduction in regional and local expenditure. 
Total  government  revenues  can  be  expected  to  fall  short  of  expectations  as  the  effects  on  output  of 
consolidation  may  be  sizeable  owing  to  persistent  credit  and  liquidity  constraints,  while  some 
expenditure components may be higher than assumed so far. 

EN 

47 

   EN 

                                                 
Table 2: Spain: measures required to meet the 2010 and 2011 targets 

1 

2 

3 

4 = 3 – 1  

5 = 3 – 2 

6 

7 

8 = 6 – 7  

8a 

8b 

9 

10 

11 

12 

13 

SPAIN 

Government balance 
(target in the Stability programme) 
Government balance 
(COM spring forecast) 
Government balance 
(New target) 
Revision in targets 
Difference  between  COM  forecasts  and  new 
target 
Measures to reach new target taking into account 
second round effects on economic activity (*) 
Measures announced on 13 May 
Additional  measures  needed  on  top  of  those 
announced on 13 May 
o/w:  Measures  to  be  taken  in  2010  (on  top  of 
those already announced on 13 May) 
o/w:  measures  to  be  taken  in  2011  (on  top  of 
those already announced on 13 May) 

measures  to  be  spelled  out  to  achieve 
the 
ceilings 
announced on 28 May 

expenditure 

new 

new measures  

Government debt 
(target in the stability programme)  
Government debt 
(COM spring forecasts)  
Government debt 
(assuming achievement of revised targets)  
Real GDP (growth % change) 
(Stability programme) 
Real GDP (growth % change) 
(COM spring forecasts) 

% of GDP (u.o.i) 

2010 

-9.8 

-9.8 

-9.3 

0.5 

0.5 

0.6 

0.5 

marginal 

marginal 

– 

65.9 

64.9 

64.3 

-0.3 

-0.4 

2011 

-7.5 

-8.8 

-6.0 

1.5  

2.8 

3¼  

1.5 

1¾  

– 

1¾ 

1 

¾ 

71.9 

72.5 

70.6 

1.8 

0.8 

Note: 
(*)  Figures  in  line  (6)  take  into  account  the  impact  of  consolidation  measures  on  short-term  GDP 
growth prospects as compared with the 2010 spring forecast. These effects are based on Commission 
estimates of economic multipliers, although they ignore possible positive confidence effects of fiscal 
consolidation on GDP growth 

For 2010, no additional measures would be necessary. Table 2 shows that, to reach the revised 
deficit  targets  for  2011,  measures  amounting  to  some  1¾%  of  GDP  in  2011  should  be 
presented in the 2011 budget. Part of this consolidation would be achieved by respecting the 
expenditure  ceilings  announced  on  28  May  2010,  which  would  imply  a  deficit  reduction  of 
1%  of  GDP.  However,  the  individual  measures  for  achieving  this  target  still  need  to  be 
specified. For 2011, the measures reflect both the gap identified in the spring forecasts29, as 
well as their impact on economic activity.  

An assessment of the measures announced by Spain should also consider the composition of 
those measures, their durability and whether they are accompanied by appropriate structural 
measures. The new measures announced by Spain are all on the expenditure side; they add to 
measures  in  the  2010  budget  (and  in  the  February  stability  programme)  that  were  in  equal 

29 

Furthermore,  the  latest  revenue  developments  appear  stronger  than  projected  in  the  Commission 
services’ 2010 spring forecast.  

EN 

48 

   EN 

 
 
 
 
 
 
 
                                                 
shares on the expenditure and revenue sides. Therefore, for 2010, total measures are ca. four-
tenths  revenue  increasing  and  six-tenths  expenditure  cuts.  For  2011,  concrete  consolidation 
measures announced so far are expenditure cuts. 

While  both  expenditure  and  revenue  measures  have  the  same  impact  on  short-term  fiscal 
consolidation,  experience  shows  that  expenditure  cuts  are  more  effective  in  a  medium-term 
perspective than revenue increases. This is all the more true for countries that need to recover 
competitiveness,  as  revenue  increases  will  directly  or  indirectly  add  to  production  costs. 
Although the consolidation needs of Spain are such that they need to contain both revenue and 
expenditure measures, it would be advisable further consolidation measures to be focused on 
expenditure cuts.  

The  implementation  of  structural  measures  is  key  to  increase  GDP  growth  potential. 
Structural measures should help counter some of the drag in economic activity resulting from 
sizeable fiscal consolidation. Although such measures will produce full results in a medium- 
to long-term horizon, some positive short-term impact can be expected on confidence, so they 
should  be  enacted  without  delay.  Particularly  important  for  Spain  are  reforms  aimed  at 
addressing  labour  market  segmentation  and  improving  flexibility  through  reforms  of 
employment protection legislation and wage formation. The rapid implementation of such a 
reform  may  lead  to  higher  employment  growths,  which  can  lower  the  current  high  level  of 
precautionary savings and accelerate private consumption. Product market reforms to improve 
business  conditions  and  spur  competition  in  key  sectors  of  the  economy  are  also  important, 
particularly in the case of services and network industries. Last but not least, improving the 
skills basis is also  essential. Spain  is expected to announce labour-market measures shortly. 
An ambitious pension reform has been under discussion for some time; it would be advisable 
to  announce  details  without  further  delay;  a  pension  reforms  may  decisively  contribute  to 
fiscal sustainability without short-term costs for growth or the fiscal accounts. 

Consolidation efforts should consider the need to stabilise the government debt ratio by 2013. 
At the end of 2009, the government debt ratio in Spain was 17 percentage points higher than 
two  years  earlier.  Table  2  shows  that  the  new  targets  will  not  be  enough  to  reverse  the 
increasing trend in the debt ratio by next year. In 2011, the debt ratio may increase by more 
than 6 percentage points to above 70% of GDP, despite a sizable improvement in the fiscal 
position. These trends illustrate the urgency of reversing debt developments.  

2. 

PORTUGAL 

On  9  May,  the  ECOFIN  Council  agreed  that  plans  for  fiscal  consolidation  and  structural 
reforms would have to be accelerated and strongly supported the commitment of Portugal to 
take  significant  additional  consolidation  measures  in  2010  and  2011.  In  addition,  it  was 
agreed that the adequacy of such measures would be assessed by the Commission in June in 
the context of the excessive deficit framework.  

As  a  reaction  to  the  agreement  at  the  ECOFIN  Council,  Portugal  revised  its  government 
deficit  targets  for  2010  and  2011  down  by  1%  and  2%  of  GDP  respectively,  in  comparison 
with the March 2010 stability programme plans, and underpinned this revision by a number of 
additional consolidation measures. Portugal now targets a government deficit of 7.3% of GDP 
for 2010 and 4.6% of GDP for 2011 (revised from previous deficit targets of 8.3% and 6.6% 
of GDP for 2010 and 2011 respectively in the stability programme).  

EN 

49 

   EN 

On 13 May, the Portuguese authorities presented a number of consolidation measures, which 
are expected to yield a deficit reduction of 1.2% of GDP in 2010 and of 2.2% of GDP in 2011 
(in  cumulative  terms),  in  comparison  with  the  plans  outlined  in  the  March  2010  stability 
programme (a small part of those measures is the frontloading into 2010 of initiatives already 
planned  in  the  programme  for  2011).  The  new  measures  are  mostly  on  the  revenue  side  as 
increases in revenue are assumed to yield an improvement in the government balance of 1.4% 
of GDP by 2011 (cumulative terms) and the expenditure cuts are expected to yield budgetary 
savings  of  0.8%  of  GDP  in  cumulative  terms  by  2011.  Major  revenue-increasing  measures 
include hikes in all VAT rates and surcharges on personal and on corporate income taxes. The 
expenditure  side  includes  a  wide  range  of  individually  small  measures,  inter  alia  a  quasi 
freeze  in  hiring  by  the  central  government,  lower  transfers  to  public  enterprises  and  cuts  in 
capital  spending,  reductions  in  transfers  to  regional  and  local  governments,  tighter  rules  on 
social  benefits,  or  introduction  of  tolls  in  a  number  of  motorways  operating  under  public-
private partnerships. Taking into account the concrete measures announced both in the March 
2010 stability programme and on 13 May, total consolidation effort for both 2010 and 2011 is 
equally divided between the expenditure and revenue sides (see Table 1 for more details on 
the  additional  measures  outlined  by  Portugal  on  13  May  and  their  budgetary  impact  as 
announced by the authorities). 

EN 

50 

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Table 1: Portugal: Consolidation measures announced on 13 May 

Revenue-increasing measures (a) 
- Increase of VAT rates by 1 percentage point (from 5, 12 and 20 to 6, 13 and 21%, 

respectively) 

Impact 
(% of GDP) 
(compared with plans 
of SP of March 2010) 

2010 
0.6 
0.3 

2011 
1.4 
0.7 

- Additional taxation on personal income (an additional 1 p.p. for up to the third income 

0.2 

bracket of personal income tax (PIT) and additional 1.5 p.p. for the other income 
brackets. Additional 1.5 p.p. in the PIT withholding rates 

- Additional corporate income tax of 2.5 p.p. to profits over EUR 2 million 
- Additional taxation on contracts for consumer credit loans 
- Introduction of tolls in a number of motorways 
Expenditure-decreasing measures (b) 

- Introduction of means tests and strengthen mechanisms to allocate and control the 

eligibility to social benefits 

- Changes in the unemployment benefit scheme 
- Anticipated phasing-out of temporary stimulus measures  
- Reduction in transfers to State-owned enterprises by adopting measures of 

rationalisation and financial sustainability. 

- Reduction in the central government expenditure (hiring freezing, work-related 

allowances, thresholds to the expenditure of autonomous funds and services, blocking 
of non-compulsory wage supplements; telecommunications) 

- Reduction by 5% in the wages of holders of political and public management offices  
- Reduction in capital expenditure 
- Reduction in transfers to regional and local governments  
Grand total (a+b) 

0.1 
... 
– 
0.6 
(0.4 **) 
0.1 (*) 

0.1 (*) 
0.2 

0.1 

… 
0.1 
0.1 
1.2 
(1.0 **) 

0.4 

0.2 
… 
0.1 
0.8 

– 

– 
0.2 

0.2 

… 
0.2 
0.1 
2.2 

Notes: 
–: nil 
…: negligible 
*: Measures already taken into account into the Commission services’ spring 2010 forecast. 
**: 0.4 expenditure-decreasing measures and 1.0 total measures, if measures already considered in the spring 
forecasts are excluded 

The  assessment  of  the  new  budget  deficit  targets  and  of  the  adequacy  of  the  underlying 
consolidation  measures  should  take  into  account  not  only  the  adequacy  of  the  announced 
measures  to  meet  the  new  fiscal  targets  for  both  2010  and  2011,  but  also  the  quality  and 
composition of the measures, and accompanying structural reforms. In addition, this section 
also assesses whether the new budget deficit targets represent a substantial and adequate step 
towards debt stabilisation by 2013. 

The  direct  impact  of  the  measures  announced  and  quantified  by  Portugal  on  13  May  is 
consistent  with  the  revisions  in  the  government  targets30  (see  Table  1  for  details  on  the 
announced  measures  and  their  quantification).  However,  taking  into  account  the  deviations 
between projections and targets identified in the Commission services' spring 2010 forecasts, 

30 

The risks on the implementation and quantification of the announced measures are relatively small but 
cannot simply be discarded. For example, the cut in transfers to regional and local governments may not 
imply  a  similar  reduction  in  regional  and  local  expenditure.  Likewise,  the  reduction  in  transfers  to 
public enterprises will have to be accompanied by measures to improve the financial sustainability of 
those companies. 

EN 

51 

   EN 

 
                                                 
as  well  as  the  fact  that  the  acceleration  in  fiscal  consolidation  will  weigh  on  economic 
activity, the conclusion is that the recently announced measures might not suffice to reach the 
revised targets for 2011.  

Table  2  below  presents  the  order  of  magnitude  of  the  fiscal  consolidation  measures  that 
Portugal will have to specify in the 2011 budget in order to reach its new government deficit 
targets. The tables takes into account the announcements made by the Portuguese authorities 
concerning their revised targets, as well as the new consolidation measures. The table should 
be  read  as  follows:  Line  (1)  shows  the  target  fiscal  deficit  for  2010  and  2011  in  the  latest 
update  of  the  stability  programme  (March  2010).  Line  (2)  shows  the  Commission  services’ 
projection for the same variable (spring 2010 forecasts). Line (3) shows the new fiscal targets 
as  of  13  May.  The  revision  in  targets  is  in  line  (4),  while  the  difference  between  the 
Commission forecasts and the new target features in line (5). The measures that are necessary 
to reach the new targets are in line (6); this variable takes into account not only line (5), but 
also  second-round  effects:  the  fact  that  the  acceleration  in  consolidation  will  weigh  on 
economic  activity,  which  will  then  partially  offset  the  deficit-decreasing  impact  of  the 
consolidation measures31. Line (5) takes also into account the long-planned revision in GDP 
series published on 9 June 2010, which resulted in a level of GDP at current market prices for 
the period 1995-2009 that is now some 3¼% higher than previously estimated. The recently 
announced measures are in line (7), while line (8) indicates the measures in addition of those 
announced  on  13  May  that  would  be  necessary  to  reach  the  new  targets.  The  table  also 
contains information on government debt developments in the stability programme (line 9), in 
the spring forecasts (10) and assuming that the new deficit targets are fully achieved against 
the  backdrop  of  the  new  GDP  series  figures  (11).  Lines  (12)  and  (13)  show  the  real  GDP 
growth rates in the stability programme and in the spring forecasts. 

31 

Total  government  revenues  can  be  expected  to  fall  short  of  expectations  as  the  effects  on  output  of 
consolidation  may  be  sizeable  owing  to  persistent  credit  and  liquidity  constraints,  while  some 
expenditure components may be higher than assumed so far. 

EN 

52 

   EN 

                                                 
Table 2: Portugal: measures required to meet the 2010 and 2011 targets 

PORTUGAL 

Government balance 
(target in the Stability programme) 
Government balance 
(COM spring forecast) 
Government balance 
(New target) 
Revision in targets 
Difference  between  COM  forecasts  and  new 
target 
Measures to reach new target taking into account 
second  round  effects  on  economic  activity  and 
taking  into  account  the  upward  revision  in  the 
GDP series (***) 
Measures announced on 13 May 
Additional  measures  needed  on  top  of  those 
announced on 13 May 
o/w:  Measures  to  be  taken  in  2010  (on  top  of 
those already announced on 13 May) 
o/w: Additional measures to be taken in 2011 (on 
top of those already announced on 13 May) 
Government debt 
(target in the stability programme)  
Government debt 
(COM spring forecasts)  
Government debt 
(assuming  achievement  of  revised  targets  and 
taking  into  account  the  upward  revision  in  the 
GDP series)  
Real GDP (growth % change) 
(Stability programme) 
Real GDP (growth % change) 
(COM spring forecasts) 

1 

2 

3 

4 = 3 – 1  

5 = 3 – 2 

6 

7 

8 = 6 – 7 

8a 

8b 

9 

10 

11 

12 

13 

Notes: 

(*) On the basis of the old GDP series.  

% of GDP (u.o.i) 

2010 

-8.3(*) 

2011 

-6.6(*) 

-8.5(*) 

-7.9(*) 

-7.3 

1.0 

1.2 

-4.6 

2.0 

3.3 

1.1(**) 

3.6(**) 

1.0 

marginal 

marginal 

– 

2.2 

1½ 

– 

1½ 

86.0(*) 

89.4(*) 

85.8(*) 

91.1(*) 

82.0(**) 

85.6(**) 

0.7 

0.5 

0.9 

0.7 

(**) The long-planned revision in GDP series published on 9 June 2010 resulted in a level of GDP at 
current market prices for the period 1995-2009 that is some 3¼% higher than previously estimated. 

(***) Figures in line (6) take into account the impact of consolidation measures on short-term GDP 
growth prospects as compared with the 2010 spring forecast. These effects are based on Commission 
estimates of economic multipliers, although they ignore possible positive confidence effects of fiscal 
consolidation on GDP growth. 

For 2010, no additional measures would be necessary. To reach the revised deficit target for 
2010,  a  strict  implementation  of  budgetary  plans  for  the  rest  of  2010  is  needed,  namely  by 
avoiding  any  expenditure  slippage  and  saving  any  better-than-expected  tax  inflow,  which 
should also benefit from the higher-than-expected GDP outturn in the first quarter of 2010 (on 
the basis of the quarterly national accounts figures published on 9 June 2010)32.  

Table 2 shows that, to reach the revised deficit targets for 2011, measures amounting to some 
1½% of GDP in 2011 should be presented in the 2011 budget. For 2011, the measures reflect 
both the gap identified in the spring forecasts, as well as their impact on the economy. 

32 

In  addition,  the  long-planned  revision  in  GDP  series  published  on  9  June  2010  work  towards  the 
achievement of lower deficit-to-GDP ratios, to the extent that the level of GDP at current market prices 
for the period 1995-2009 is now some 3¼% higher than previously estimated.  

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53 

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An  assessment  of  the  measures  should  also  consider  their  composition,  their  durability  and 
whether  they  are  accompanied  by  appropriate  structural  reforms.  Taking  into  account  the 
concrete  measures  in  the  stability  programme,  total  consolidation  effort  for  both  2010  and 
2011 is half on expenditure, half on the revenue side.  

While  both  expenditure  and  revenue  measures  have  the  same  impact  on  short-term  fiscal 
consolidation,  experience  shows  that  expenditure  cuts  are  more  effective  in  a  medium-term 
perspective than revenue increases. This is all the more true for countries that need to recover 
competitiveness,  as  revenue  increases  will  directly  or  indirectly  add  to  production  costs. 
Although the consolidation needs of Portugal are such that they need to contain both revenue 
and  expenditure  measures,  it  would  be  advisable  that  further  consolidation  is  focused  on 
expenditure cuts.  

The implementation of structural measures is key to increase GDP growth potential. Further 
structural measures should help counter some of the drag in economic activity resulting from 
sizeable fiscal consolidation. Although such measures will produce full results in a medium- 
to long-term horizon, some positive short-term impact can be expected on confidence, so they 
should  be  enacted  without  delay.  Particularly  important  for  Portugal  are  reforms  aimed  at 
addressing  labour  market  segmentation  and  further  improving  flexibility  through  reforms  of 
insurance 
employment  protection 
mechanisms.  In  parallel,  product  market  reforms  to  improve  business  conditions  and  spur 
competition in key sectors of the economy are equally important, particularly in the case of 
services and network industries. Last but not least, improving further the skills basis and the 
levels of formal education is also essential. 

formation  and  unemployment 

legislation,  wage 

In  parallel  to  the  announcement  of  fiscal  measures  on  13  May  2010,  the  Portuguese 
government  stated  its  intention  to  accelerate  structural  reforms  in  the  areas  of  healthcare, 
education,  energy,  reducing  red  tape  and  e-government,  with  the  aim  of  accelerating 
economic  activity,  increasing  employment  and  restoring  competitiveness.  However,  no 
specific steps have yet been announced. 

Consolidation  efforts  should  consider  the  need  to  stabilise  the  government  debt  ratio  before 
2013. At the end of 2009, the government debt ratio in Portugal was 14¼ percentage points 
higher than two years earlier. Table 2 shows that the new targets will not be enough to reverse 
the  increasing  trend  in  the  debt  ratio  by  next  year.  In  2011,  the  debt  ratio  may  increase  by 
almost  4  points  to  above  88½%  of  GDP  in  Portugal.  These  trends  illustrate  the  urgency  of 
reversing debt developments. 

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54 

   EN