Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Poland
Date: 2013-11-15
Institutions: European Commission
Subjects: Poland, budget deficit, budgetary equilibrium, gross domestic product, retirement conditions, stability pact, tax reform













EUR-Lex - 52013PC0906 - EN











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52013PC0906

Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Poland /* COM/2013/0906 final */









Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the
situation of an excessive government deficit in Poland

THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the
Treaty on the Functioning of the European Union, and in particular Article
126(7) thereof,
Having regard to the
recommendation from the European Commission,
Whereas:
(1)       According to Article 126
of the Treaty on the Functioning of the European Union (TFEU) Member States
shall avoid excessive government deficits.
(2)       The Stability and Growth
Pact is based on the objective of sound government finances as a means of
strengthening the conditions for price stability and for strong sustainable
growth conducive to employment creation.
(3)       On 7 July 2009, the
Council decided, in accordance with Article 104(6) of the Treaty establishing
the European Community (TEC), that an excessive deficit existed in Poland and
issued a recommendation to correct the excessive deficit by 2012 at the latest[1], in accordance with Article 104(7)
TEC and Article 3 of Council Regulation (EC) No 1467/97 of 7 July 1997 on
speeding up and clarifying the implementation of the excessive deficit
procedure[2].
In order to bring the general government deficit at or below 3% of GDP in a
credible and sustainable manner, the Polish authorities were recommended to implement
the fiscal stimulus measures in 2009 as planned, ensure an average annual
structural budgetary adjustment of at least 1¼% percentage points of GDP
starting in 2010, spell out detailed measures that are necessary to bring the
deficit below the reference value by 2012 and introduce reforms to contain
primary current expenditure over the following years. The Council established a
deadline of 7 January 2010 for effective action to be taken.
(4)       On 3 February 2010, the
Commission concluded that based on the Commission 2009 autumn forecast, Poland had taken necessary action in compliance with the Council recommendation of 7 July
2009 to bring its government deficit within the Treaty reference value and
considered that no additional step in the excessive deficit procedure was
therefore necessary. On the basis of its 2011 autumn forecast, the Commission
considered that Poland was not on track and asked for additional measures,
which Poland adopted and publicly announced until 10 January 2012. Thus, on 11
January 2012 the Commission confirmed the Polish authorities had taken
effective action towards a timely and sustainable correction of the excessive
deficit and no further steps in the excessive deficit procedure of Poland were needed at the time[3].
(5)       On 21 June 2013, the
Council concluded that Poland had taken effective action but adverse economic
events with major implications on public finances had occurred, and issued
revised recommendations[4].
Thus, Poland fulfilled the conditions for the extension of the deadline for
correcting the excessive general government deficit as laid down in Article
3(5) of Regulation (EC) No 1467/97. The Council recommended that Poland should put an end to the excessive deficit situation by 2014. Poland should reach a headline general government deficit target of 3.6% of GDP in 2013 and
3.0% of GDP in 2014, which is consistent with an annual improvement of the
structural budget balance of at least 0.8% of GDP and 1.3% of GDP in 2013 and
2014, respectively, based on the Commission updated 2013 spring forecast. Poland should rigorously implement the measures already adopted, while complementing them
with additional measures sufficient to achieve a correction of the excessive deficit
by 2014. Poland should use all windfall gains for deficit reduction. The
Council established the deadline of 1 October 2013 for Poland to take effective action and, in accordance with Article 3(4a) of Regulation (EC) No
1467/97, to report in detail the consolidation strategy that is envisaged to
achieve the targets. On 2 October 2013, Poland submitted the report on
effective action, which was subsequently analysed by the Commission. 
(6)       On [10 December 2013], the
Council established in accordance with Article 126(8) TFEU that Poland had not taken effective action in 2013 in response to the Council recommendation
according to Article 126(7) of the Treaty of 21 June 2013.
(7)       In accordance with Article
126(7) TFEU and Article 3 of Council Regulation (EC) No 1467/97, the Council is
required to make recommendations to the Member State concerned with a view to
bringing the situation of an excessive deficit to an end within a given period.
The recommendation has to establish a maximum deadline of six months for
effective action to be taken by the Member State concerned to correct the
excessive deficit. Furthermore, in a recommendation to correct an excessive
deficit the Council should request the achievement of annual budgetary targets
which, on the basis of the forecast underpinning the recommendation, are
consistent with a minimum annual improvement in the structural balance, i.e.
the cyclically-adjusted balance excluding one-off and other temporary measures,
of at least 0.5% of GDP as a benchmark.
(8)       After recording an an
average real GDP growth of 4% per year over 2001-2011, the pace of economic
activty slowed down in 2012 to 1.9%. The macroeconomic scenario underpinning
the report on effective action projects real GDP growth to slow down further in
2013 to 1.5% before rebounding in 2014 and 2015 with real GDP expanding by 2.5%
and 3.8%, respectively. According to the Commission 2013 autumn forecast, real
GDP is set to grow at 1.3% in 2013 and accelerate to 2.5% in 2014 and 2.9% in
2015. Compared to the Polish authorities, the Commission has a less optimistic
view on domestic demand growth over the forecast horizon, private consumption
and private investment in particular. 
(9)       The Polish authorities
foresee a general government deficit of 4.8% of GDP in 2013, up from 3.9% of
GDP in 2012. Subsequently, the Polish Ministry of Finance projects a surplus of
4.5% of GDP in 2014 on the back of the planned pension reform, which in
particular results in a one-off transfer of assets worth 8.5% of GDP. In 2015,
the general government balance is expected to turn back into a deficit of 3% of
GDP.
(10)     For 2013 and 2014, the
Commission forecast is similar to the Polish authorities'. It also projects a
deficit of 4.8% of GDP in 2013. The deterioration compared to the 3.9% of GDP
in the EDP baseline scenario is mainly due to revenue shortfalls. In 2014, the
general government balance is projected to be in surplus (+4.6% of GDP) as a
consequence of the planned pension reform. For 2015 the Commission is less
optimistic than the Polish authorities and expect a general government deficit
of 3.3% of GDP. The 0.3 pp. of GDP difference is mainly due to lower current
revenues based on a lower projection for nominal GDP growth as well as higher
government expenditure on intermediate consumption. The deficit targets are
subject to implementation risks. 
(11)     Moreover, it has to be
noted that the current deficit forecast is based on ESA-95. As of autumn 2014,
a new set of rules will be in place (ESA-2010). Under the new set of rules, a
transfer of assets would no longer count as general government revenue, thus,
the general government balance is expected to show a deficit of 4.2% of GDP in
2014 and 3.9% of GDP in 2015[5].
Since the Council will decide on an abrogation based on the EDP figures
assessed by Eurostat in spring 2015 under ESA2010, additional measures are required
to compensate for those elements of the pension reform, which will not reduce
the deficit any longer under ESA2010.
(12)     Both the Polish authorities
and the Commission projects the general government gross debt to remain below
the 60% threshold over the entire period under consideration. According to the
Commission 2013 autumn forecast, the debt-to-GDP ratio is forecast to fall from
55.6% in 2012 to 51% in 2014, mainly as an effect of the announced transfer of
pension funds' assets of 8.5% of GDP, before edging up to 52.5% in 2015.
(13)     In order to correct the
excessive deficit by the 2014 deadline under the then prevailing ESA-2010 rules
and ensure its sustainability, the required additional structural effort for
2014 would amount to at least 1.6% of GDP, on top of the measures already
included in the Commission 2013 autumn forecast (which under ESA2010 would yield
an improvement in structural deficit of 0.6% of GDP in 2014). Since part of the
adjustment need is the result of the change from ESA-95 to ESA-2010 and in
addition, such an annual effort (higher than requested in the Council
Recommendation of 7 July 2009 (1¼ % of GDP) and higher than the 1.3% of GDP
requested in the Council Recommendation of 21 June 2013) would result in a
significant output loss at a time when the output gap is still negative, it is
appropriate to set the deadline of 2015.
(14)     Against the background of
high uncertainties regarding economic and budgetary developments, the budgetary
target recommended for the final year of the correction period should be set at
a level clearly below the reference value, in order to guarantee an effective
and lasting achievement of the correction within the requested deadline.
(15)     Therefore, correcting the
excessive deficit by 2015 would be commensurate with the intermediate headline
deficit target of 3.9% of GDP for 2014 (net of pension asset transfer) and the
final target of 2.8% of GDP in 2015. The underlying improvement in the
structural budget balance implied by these targets is 1% of GDP in 2014 and 1.2%
of GDP in 2015, taking into account the measures included in the Commission 2013
autumn forecast yielding an improvement in structural balance under ESA2010 of
0.6% of GDP in 2014 and 0.2% of GDP in 2015. This implies a need of additional
measures of 0.4% of GDP in 2014 and 1% of GDP in 2015, on top of those already
included in the Commission 2013 autumn forecast (excluding the asset transfers
of the pension reform),
HAS ADOPTED THIS RECOMMENDATION:
(1)                   
Poland should bring an
end to the excessive deficit situation by 2015 in a credible and sustainable
manner. 
(2)                   
Poland should reach a
headline deficit target of 4.8% of GDP in 2013, a deficit of 3.9% of GDP in 2014
and of 2.8% of GDP in 2015 (excluding the impact of the assets transfer of the
pension reform). For 2014 this is consistent with an improvement of the
structural balance of 1% of GDP and 1.2% of GDP for 2015, based on the
Commission 2013 autumn forecast. 
(3)                   
Poland should rigorously
implement the measures already announced and adopted, while complementing them
with additional measures sufficient to achieve a correction of the excessive
deficit by 2015 in a sustainable manner. Poland should use all windfall gains for
deficit reduction. 
(4)                   
The Council establishes the deadline of 15 April
2014 for Poland to take effective action and, in accordance with Article 3(4a)
of Council Regulation (EC) No 1467/97, to report in detail the consolidation
strategy that is envisaged to achieve the targets.
Furthermore, the Polish authorities should
(i) improve the quality of public finances, in particular through minimising
cuts in growth-enhancing infrastructure investments, a careful review of social
expenditures and their efficiency; (ii) improve tax compliance and increase the
efficiency of tax administration and (iii) make the institutional framework of
public finances more binding and transparent, including through adjusting the
definitions used in national accounting to ESA standards and ensuring
sufficiently broad coverage, improving intra-annual monitoring of budget
execution and ensuring an effective and timely monitoring of compliance with
the permanent expenditure rule, based on reliable and independent analysis
carried out by independent bodies or bodies endowed with functional autonomy
vis-à-vis the fiscal authorities. Finally, to ensure the success of the fiscal
consolidation strategy, it will be important to back the fiscal consolidation
by comprehensive structural reforms, in line with the Council recommendations
addressed to Poland in the context of the European Semester. Beyond the
report foreseen in recommendation (4), the Polish authorities should report on
progress made in the implementation of these recommendations at least every [six
months] as well as in a separate chapter in the convergence programmes, until
full correction of the excessive deficit has taken place.
This recommendation is addressed to the Republic of   Poland.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               All documents related to the
excessive deficit procedure of Poland can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/poland_en.htm
[2]               OJ L 209, 2.8.1997, p. 6.
[3]               Communication from the
Commission to the Council on assessment of budgetary implementation in the
context of the ongoing Excessive Deficit Procedures after the Commission
services' 2011 autumn forecast - COM(2012) 4 final, 11.1.2012.
[4]               Council Recommendation with a
view to bringing an end to the situation of an excessive government deficit in Poland, 21 June 2013.
[5]               Under ESA-2010 the following
effects of the planned pension reform would not result any longer in a deficit
reduction: one-off asset transfer of 8.5% of GDP in 2014, regular asset
transfer in 2014 (0.3% of GDP) and 2015 (cumulated effect of 0.6% of GDP). Only
the change in the number of contributors to the first pillar would remain under
the new rules (0.2% of GDP in 2014, cumulated effect of 0.4% of GDP in 2015).
While the switch to ESA2010 is estimated to have a positive impact on GDP
figures, the size of the impact of higher GDP on fiscal figures is expected to
be negligible.