Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Croatia
Date: 2013-12-10
Institutions: European Commission
Subjects: Croatia, budget deficit, budgetary equilibrium, gross domestic product, public debt, tax reform













EUR-Lex - 52013PC0914 - EN











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52013PC0914

Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Croatia /* COM/2013/0914 final */









Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the
situation of an excessive government deficit in Croatia
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 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 X January 2014, the Council decided, in accordance with Article
126(6) TFEU, that an excessive deficit existed in Croatia.
(4)       In accordance with Article
126(7) TFEU and Article 3 of Council Regulation (EC) No 1467/97 on speeding up
and clarifying the implementation of the excessive deficit procedure (EDP)[1], the Council is
required to address 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. In addition, in accordance with Article
2 of Council Regulation (EC) No 1467/97 specifying the requirement under the
debt criterion, the budgetary target recommended for the final year of the
correction period must ensure that the required reduction in the differential
between the debt to GDP level and the 60% of GDP Treaty reference value will
occur over the two years following the correction of the excessive deficit,
based on the Commission forecast.
(5)       According to the
Commission 2013 Autumn forecast, the general government deficit is projected to
remain above the 3% of GDP reference value in the period 2013-2015, and the
structural balance is projected to continue deteriorating throughout the
forecast period, from around 4% of GDP in 2013 to nearly 6% of GDP in 2015. These
developments result mainly from increases on the expenditure side such as
interest outlays combined with revenue shortfalls. The Commission 2013 Autumn forecast
did not include the budgetary consolidation programme announced in September 2013
with the release of the Economic and Fiscal Policy Guidelines, as the
information on measures underpinning this announced consolidation package was
very limited. Measures presented in the second revision of the 2013 budget and the
draft 2014 budget adopted by the government on 14 November 2013 and sent to the
Parliament do not have a substantial impact on
budgetary trends. Indeed, the projections for government
revenues and expenditures and general government debt in the Commission 2013
Autumn forecast updated to reflect the new information that has become
available since the publication, show only very modest changes. The revised
projections constitute the Commission's new baseline.
(6)       Regarding
general government debt developments, according to the revision of the 2013
budget and the draft 2014 budget the planned general government debt-to-GDP ratio at the end of 2014 is expected to reach 62% and to increase
further to about 64% and 64¾% in 2015 and 2016. The
Commission 2013 Autumn forecast projects the government debt ratio to breach
the Treaty reference value in 2014, reaching close to 65%, and increasing
further over the forecast. An update of the 2013 Autumn forecast to incorporate
additional information that became available after the forecast release, most
notably a new USD-denominated bond issuance in November
2013, brings the general government debt ratio above the 60% of GDP threshold
already in 2013. 
(7)       Against the background of
high uncertainites 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 ensure compliance with
the debt reduction benchmark in the final year of the EDP period.
(8)       According to Regulation
1467/97, the correction of the excessive deficit should be completed in the
year following its identification, unless there are special circumstances. In
order to correct the excessive deficit by the 2015 deadline consistent with
this approach and ensure the joint compliance with the debt reduction benchmark,
the required structural effort would amount to at least 1.3% of GDP both in
2014 and 2015. This would result in a significant output loss and aggravate an already
protracted and deep recession. Longer deadlines could be set, in particular in
the case of excessive deficit procedures based on the debt criterion, when the
government deficit requested to comply with the debt criterion is significantly
lower than 3% of GDP. 
(9)       In light of this, setting
the deadline for the correction of the excessive deficit by 2016 is warranted. In
particular, a credible and sustainable adjustment path under this extended
deadline would require Croatia to reach a headline general government target of
4.6% of GDP for 2014, 3.5% of GDP in 2015 and 2.7% of GDP in 2016, which is
consistent with an annual improvement in the structural balance of 0.5% of GDP
in 2014, 0.9% of GDP in 2015 and 0.7% of GDP in 2016, based on the EDP
scenario. The scenario for the adjustment path has been built on the Commission
2013 Autumn forecast updated to reflect new information, including from the revision
of the 2013 budget and draft 2014 budget, and extended up to 2018 relying on
standard assumptions about the closure of the output gap and the sensitivity of
the budget to the cycle. This adjustment path would allow bringing the headline
government deficit below the 3% of GDP reference value by 2016 while at the
same time ensuring that the debt to GDP ratio will approach the 60% reference
value at a satisfactory pace, thus complying with the government debt
criterion. Based on the EDP scenario, to reach the above-mentioned structural
targets Croatia would need to adopt consolidation measures of 2.3% of GDP in
2014, 1% of GDP in 2015 and 2016. These targets take into account the need to
compensate for the negative second-round effects of fiscal consolidation on public
finances, through its impact on economic activity. 
(10)     Budgetary consolidation
measures should secure a lasting improvement in the general government balance,
while being geared towards enhancing the quality of public finances. In
particular, measures to prioritise growth-enhancing expenditure and investments
including through the use of EU cohesion and structural funds, enhance tax
compliance, and strenghten the fiscal framework would be supportive in this
respect.
(11)     In order to ensure an
outcome most conducive to economic prosperity in the medium to long run, the
correction of the excessive deficit would benefit from accompanying
macro-structural reforms. These measures should aim to reinforce the growth
potential of the economy by creating a more flexible labour market, improving
the quality of the business environment and increasing the efficiency of public
administration,
HAS ADOPTED THIS RECOMMENDATION:
(1)                   
Croatia should put an
end to the present excessive deficit situation by 2016. 
(2)                   
Croatia should reach
headline general government deficit targets of 4.6% of GDP for 2014, 3.5% of
GDP in 2015 and 2.7% of GDP in 2016, which is consistent with an annual
improvement in the structural balance of 0.5% of GDP in 2014, 0.9% of GDP in 2015
and 0.7% of GDP in 2016.
(3)                   
Croatia should specify
and rigorously implement the measures that are necessary to achieve the
correction of the excessive deficit by 2016, and use any windfall gains for
deficit reduction.
(4)                   
The Council establishes the deadline of 30 April
2014 for Croatia 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; thereafter the authorities
should report on progress made in the implementation of these recommendations
at least every six months, until full correction of the excessive deficit has
taken place. 
Furthermore, the Council invites the
Croatian authorities to (i) carry out a thorough expenditure review with the
objective to rationalise wage, social security and subsidy outlays and to
provide sufficient fiscal space for implementation of growth-enhancing expenditure,
including co-financing of EU-funded projects; (ii) further improve tax
compliance and increase the efficiency of tax administration and (iii) improve
the institutional framework of public finances, including through enhancing
multi-annual budgetary programming, strengthening the role and independence of
the Fiscal Policy Committee, and ensuring compliance with fiscal rules. In
addition, the Council invites the Croatian authorities to implement structural reforms,
notably as regards addressing labour market rigidities and an unfavourable
business environment and improving the quality of public administration, with a
view to raising potential GDP growth.
This Recommendation
is addressed to the Republic of Croatia.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 6.