COMMUNICATION FROM THE COMMISSION Assessment of action taken by POLAND in response to the Council Recommendation of 10 December 2013 and by CROATIA in response to the Council Recommendation of 28 January 2014 with a view to bringing an end to the situation of excessive government deficit
Date: 2014-06-02
Institutions: European Commission
Subjects: Croatia, Poland, budget deficit, budgetary equilibrium, public debt, stability pact













EUR-Lex - 52014DC0431 - EN











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52014DC0431

COMMUNICATION FROM THE COMMISSION Assessment of action taken by POLAND in response to the Council Recommendation of 10 December 2013 and by CROATIA in response to the Council Recommendation of 28 January 2014 with a view to bringing an end to the situation of excessive government deficit /* COM/2014/0431 final */










1.                      
Introduction

On 10 December
2013 and 28 January 2014, respectively, the Council adopted recommendations to Poland and Croatia, with a view to bringing an end to the situation of their excessive government
deficit. The Council established deadlines of 15 April 2014 and 30 April,
respectively, for these countries to adopt the necessary measures to take
effective action to comply with the recommendations and to report in detail on
their consolidation strategies that they envisage in order to achieve the targets.
Regarding
Poland, on 10 December 2013, the Council decided under Article 126(8) of the
Treaty that Poland had not taken effective action in compliance with the
Council Recommendation of 21 June 2013 to correct its excessive deficit by 2014,
and under Article 126(7) of the Treaty recommended Poland to put an end to the
excessive deficit situation by 2015. In accordance with Article 5(1a) of
Council Regulation (EC) No 1467/97, Poland reported on action taken in both the
context of its convergence programme submitted on 15 April 2014 as well as in a
dedicated report submitted on the same date. 
Regarding
Croatia, on 10 December 2013, having taken into account its report under
Article 126(3) of the Treaty and having regard to the opinion of the Economic
and Financial Committee in accordance with Article 126(4) of the Treaty, the
Commission concluded that an excessive deficit existed in Croatia. The Commission
therefore addressed such an opinion to Croatia and informed the Council accordingly.
On 28 January 2014, considering that according to national plans and the Commission
forecast deficits remained well above the 3% of GDP Treaty reference value in
the period 2013-15 and that the debt ratio was expected to rise above 60% of
GDP in 2014, increasing further over the forecast horizon up to 2015, the Council
decided that an excessive deficit existed in Croatia in accordance with Article
126(6) of the Treaty and issued a recommendation under Article 126(7) of the
Treaty to the country, with a view to end the excessive deficit situation by
2016. In accordance with Article 3(4a) of Council Regulation (EC) No 1467/97, Croatia
reported on action taken in the context of its convergence programme submitted
on 30 April 2014.
Following the
submission of Member States' reports, the Commission has examined them to
assess whether they have complied with their respective Article 126 (7)
recommendation. 

2.                      
Assessment of action taken

According to
Regulation (EC) No 1467/97 and the Code of Conduct[1] 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
budgetary targets and the underlying improvement of its cyclically adjusted
balance, net of one-off and other temporary measures, recommended by the Council.

The methodology
for assessing effective action requires that the Commission first considers
whether the Member State is compliant with the nominal target and the
underlying improvement in the structural balance, as required in the EDP
recommendation. If this is the case, the procedure is held in abeyance. 
If the Member State fails to meet the headline deficit target or the required improvement in the
structural balance, a careful analysis of the reasons of the shortfall is undertaken
to assess whether the Member state has acted in compliance with the
recommendation (or notice). The careful analysis builds on two complementary
fiscal effort measures: (i) the 'top-down' approach, i.e. computing the change
in the structural balance adjusted for the changes stemming from the revision
of potential output growth, revenue windfalls/shortfalls and unexpected events;
and (ii) the 'bottom-up' approach, i.e. estimating the budgetary impact of the individual
fiscal measures implemented by the government. The careful analysis needs to be
complemented by other relevant qualitative considerations that will allow the
Commission to provide a qualified judgment on whether the Member States has
taken enough policy actions to comply with the EDP recommendation (or notice). If
the careful analysis indicates that the Member State concerned has delivered on
its policy commitments, the assessment will conclude that effective action has
been taken, giving the Council a possibility to extend the deadline, even if
the headline deficit target has not been met. If the careful analysis shows that
policy commitments have not been delivered, and the headline deficit target is
not met, the assessment will conclude that effective action has not been taken and
the procedure should be stepped up (with the possibility of setting a new
correction deadline).

2.1.                
Assessment of action taken by Poland

According to the
new Council recommendation issued on 10 December 2013, Poland was
recommended to reach a headline deficit of 4.8% of GDP in 2013, 3.9% of GDP in
2014 and of 2.8% of GDP in 2015 (excluding the impact of the assets transfers
from the second pillar pension system). Based on the macroeconomic forecast
underlying the Council recommendation, this is consistent with an improvement
of the structural balance of 1% of GDP in 2014 and 1.2% of GDP for 2015. Poland was also recommended to implement rigorously the measures it had already
announced and adopted, while complementing them with additional measures to
achieve a sustainable correction of the excessive deficit by 2015. Poland was given a deadline
of 15 April 2014 to take effective action to comply with
the recommendation and to report in detail on the consolidation strategy
envisaged in order to achieve the targets. At the established deadline, the
Polish authorities submitted a report to the Commission presenting the measures
it had taken in response to the Council recommendation and outlining the
consolidation strategy aimed at bringing an end to the situation of an
excessive government deficit. 
The 2013 headline
deficit, at 4.3% of GDP, was lower than the recommended level of 4.8% of GDP. According
to the Commission 2014 spring forecast, the general
government balance is projected to reach a surplus of 5.7% of GDP in
2014. If this projection is adjusted to exclude the transfer of pension assets
(in line with the statistical rules that will be in effect as of September
2014), the general government balance in 2014 stands at -3.6% of GDP, thus
below the headline target set in the recommendation. For 2015, based on the
no-policy-change assumption, the deficit is projected at 3.1% of GDP (excluding
the impact of the asset transfer), thus above the recommended 2.8% target.
Based on
Commission spring forecast, the change in the structural balance is expected to
be just in line with the 1% recommended target in 2014 and, at 0.4% of GDP, below
the target in 2015. 
Table 1. Poland - comparison of budgetary projections 
The Commission
projections take into account the sufficiently specified measures announced by Poland in its report on effective action and convergence programme. Most of these measures
had already been taken before the Council adopted the new recommendation under
the EDP on 10 December 2013, and were already included in the Commission 2013
autumn forecast. According to the Commission's assessment, the additional measures
taken since the time of the EDP recommendation are expected to have a marginal
impact in 2014 and to reduce the deficit by 0.1% of GDP in 2015. 
When corrected
for the downward revision in potential growth as well as for revenue
developments since the time of the Council recommendation, the adjusted
structural improvement is estimated at 0.6% of GDP in 2014, below the effort
required by the Council. This shortfall is confirmed by a bottom-up assessment
which estimates the size of the additional fiscal effort in 2014 on the basis
of the discretionary revenue measures and the expenditure developments between
the baseline scenario underpinning the Council recommendation and the 2014 Commission
spring forecast. It shows an effort of -0.1% of GDP, compared to the required
0.4% of GDP.
In
2015, on
the basis of the usual no-policy-change assumption, the adjusted change in the
structural balance is projected at 0.1% of GDP, well below the 1.2% of GDP
required by the revised EDP recommendation. This shortfall is confirmed in the
bottom-up assessment which, projects an effort of -0.8% of GDP in 2015, well
below the effort estimated as needed at the time of the recommendation
Table 2. Poland - comparison of adjusted change in the structural balance and fiscal efforts based
on Commission 2014 spring forecast
Given that Poland has met the recommended headline balance as well as the recommended change in the
structural balance in 2014, the Commission considers that the
procedure is to be held in abeyance. However, there are risks
to a durable correction of the excessive deficit at the established deadline, as
the fiscal effort measured by both the corrected change in the structural
balance and the bottom-up assessment are well below the recommended level. In
particular, for 2015, and prior to the presentation of the 2015 budget, the
Commission services forecast the headline deficit to decline to 3.1% of GDP
(excluding the transfer of pension assets) and the structural improvement to reach
0.4% of GDP, thus below the targets recommended by the Council. Therefore,
the
2015 budget needs to include structural adjustment measures to ensure
compliance with the Council recommendation. 

2.2.                
Assessment of action taken by Croatia

The Council
opened the Excessive Deficit Procedure for Croatia on 28 January 2014 and
recommended correcting the excessive deficit by 2016. The EDP recommendation
requires Croatia to reach a headline deficit target of 4.6% of GDP in 2014,
3.5% of GDP in 2015 and 2.7% of GDP in 2016.[2]
This is consistent with an 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, and to adopt
consolidation measures for an amount of 2.3% of GDP in 2014 and of 1.0% of GDP
in 2015 and 2016, in order to reach the required adjustment of the structural
balance. Croatia was given a deadline of 30 April 2014 to take
effective action to comply with the recommendation and to report in
detail on the consolidation strategy envisaged in order to achieve the targets. Croatia submitted a report on action taken in the context of its convergence programme.
Table 3. Croatia- comparison of budgetary projections 
On the basis of
current information and the Commission 2014 spring forecast, the general
government deficit is projected to reach 3.8% of GDP in 2014 and 3.1% of GDP in
2015. If these projections are adjusted to exclude the transfer of pension
assets (in line with the statistical rules that will be in effect as of
September 2014), the government deficit is forecast at 4.6% and 3.8% of GDP in
2014 and 2015, respectively. The Commission services' baseline scenario does
however not incorporate the full set of measures in the consolidation package,
because of insufficient specification of some of the measures (such as savings
on subsidies or social transfers) and some uncertainties about the accounting
treatment of some measures (for instance, in the case of withdrawal of profits
from state-owned enterprises). Nevertheless, with this projected adjustment,
the nominal target set in the context of the EDP is expected to be attained in
2014, while in 2015 the nominal target would be missed by ¼% of GDP. The
structural balance improves by 0.4% of GDP in 2014 and by 0.8% of GDP in 2015,
with a small shortfall in both years compared to the improvement of 0.5% and
0.9% of GDP required in the EDP recommendation. 
Table 4. Croatia - comparison of adjusted change in the structural balance and fiscal effort based
on Commission 2014 spring forecast
Proceeding with
a careful analysis based on the adjusted change of structural balance and the bottom-up
approach as required for the assessment of effective action, the former would
show an improvement in 2014 of 0.2% of GDP and an effort of 0.8% of GDP for
2015. This would be below the requirement in both years, but only marginally so
in 2015. At the same time, the bottom-up assessment of the fiscal effort is
estimated to be delivered, both in 2014 and 2015, with measures amounting to
2.3% of GDP in 2014, in line with the requirement, and 1.1% of GDP in 2015,
slightly above the recommended 1% of GDP. This is the
reflection of the fact that the budgetary adjustment envisaged in the programme
is underpinned by a large set of measures, including increases in social
security and pensions contributions and expenditure savings on subsidies,
intermediate consumption and social transfers. In the context of the careful
analysis it should be considered that all of these measures were adopted after
and in response to the January 2014 Council decision on the
existence of excessive deficit. The authorities' strong commitment to adhere to
the Council recommendation is also reflected in the fact that, after it became
evident that the revision of the 2014 budget in March 2014 was not sufficient
to meet the EDP recommendations, the authorities have taken additional measures
of 0.4% of GDP.
In view of the fact
that in 2014 the nominal target is expected to be attained, that the bottom-up
approach shows that Croatia has taken the amount of measures deemed necessary
to reach the structural targets spelled out in the EDP recommendation, and taking
account of the careful analysis and other qualitative factors mentioned above, the
Commission considers that the procedure for Croatia is to be held in abeyance.
However, considering that in 2015, and prior to the
presentation of the 2015 budget, the Commission services expect the headline
balance and the structural improvement to be below the targets recommended by
the Council, the 2015 budget needs to include structural adjustment measures to
ensure compliance with the Council recommendation. 

3.                      
Conclusions

The Commission
considers that Poland and Croatia have taken effective action and that no
further steps in the excessive deficit procedure are needed at present. The
Commission will continue to closely monitor budgetary developments in
accordance with the Treaty and the SGP.
Annex.
EDP related tables
Table A1. Adjustment of apparent
structural effort for the revision in potential growth –
details of calculation
Table A2. Adjustment of apparent
structural effort for the revision in revenue shortfalls/windfalls – details of
calculation
[1]“Specifications on the implementation of the Stability and Growth
Pact and guidelines on the format and content of stability and convergence programmes”,
available at:               
http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm
.
[2]    The targets are not corrected for the impact of the assets
transfer related to the pension reform. However, with the introduction of
ESA2010 in autumn 2014 this impact will be excluded from the figures which will
form the basis of the assessment under the SGP as from then.