CELEX: 52008SC0572
Language: en
Date: 2008-05-07 00:00:00
Title: Recommendation for a Council Decision abrogating Decision 2005/182/EC on the existence of an excessive deficit in Slovakia

EN
EN    EN
 ---pagebreak---                  COMMISSION OF THE EUROPEAN COMMUNITIES
                                                 Brussels, 7.5.2008
                                                 SEC(2008) 572 final
                                 Recommendation for a
                                COUNCIL DECISION
   abrogating Decision 2005/182/EC on the existence of an excessive deficit in Slovakia
                             (presented by the Commission)
EN                                                                                      EN
 ---pagebreak---                                     EXPLANATORY MEMORANDUM
   1.        BACKGROUND
   Article 104 of the Treaty establishes that Member States should avoid excessive deficits and
   lays down a procedure for their identification and correction. The excessive deficit procedure
   (EDP) is further specified in Council Regulation (EC) No 1467/97 on “speeding up and
   clarifying the implementation of the excessive deficit procedure”1, which is part of the
   Stability and Growth Pact. According to Article 104(2) of the Treaty, the Commission has to
   monitor compliance with budgetary discipline on the basis of two criteria, namely: (a)
   whether the planned or actual government deficit exceeds the reference value of 3% of GDP
   (unless either the deficit ratio has declined substantially and continuously and reached a level
   that comes close to the reference value; or, alternatively, the excess over the reference value is
   only exceptional and temporary and the ratio remains close to the reference value); and (b)
   whether government debt exceeds the reference value of 60% of GDP (unless the debt ratio is
   sufficiently diminishing and approaching the reference value at a satisfactory pace).
   In accordance with the Protocol on the excessive deficit procedure annexed to the Treaty, the
   Commission provides the data for the implementation of the EDP. As part of the application
   of this Protocol, Member States have to notify data on government deficits and debt and other
   associated variables twice a year, namely before 1 April and before 1 October, in accordance
   with Article 4 of Council Regulation (EC) No 3605/932,3,4.
   On 12 May 2004, the Commission initiated the EDP for Slovakia with the adoption of a report
   under Article 104(3), based on a general government deficit of 3.6% of GDP in 20035. On 5
   July 2004, the Council decided, on a recommendation from the Commission, that Slovakia
   was in excessive deficit according to Article 104(6)6. At the same time, and also based on a
   Commission recommendation, the Council addressed recommendations under Article 104(7)
   to Slovakia with a view to bringing the situation of an excessive government deficit to an end,
   by 2007 at the latest7.
   1
           OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174,
           7.7.2005, p. 5).
   2
           OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337,
           22.12.2005, p. 1).
   3
           The most recent notification of Slovakia can be found at:
           http://epp.eurostat.ec.europa.eu/portal/page?_pageid=2373,58110711&_dad=portal&_schema=portal.
   4
           Slovakia benefited from a transition period for implementing the Eurostat decision of 2 March 2004 on
           the classification of funded pension schemes and as a result notified deficit and debt figures without the
           net cost of its 2005 pension reform until April 2006 (Eurostat News Release No 117/2004 of 23
           September 2004 on the transition period to implement the decision in Eurostat News Release No
           30/2004 of 2 March 2004). As the different documents under the EDP, including in particular the
           Council recommendation under Article 104(7), took the implications of the March 2004 Eurostat
           decisions fully into account, all deficit and debt figures quoted in this document include the pension
           reform cost and are thus fully comparable.
   5
           SEC(2002) 131.
   6
           OJ L 62, 9.3.2005, p. 16.
   7
           All EDP-related documents for Slovakia can be found at the following website:
           http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm.
EN                                                        2                                                           EN
 ---pagebreak---    In its recommendation under Article 104(7), the Council recommended the Slovak authorities
   to "take action in a medium-term framework in order to achieve their objective of bringing the
   deficit below 3% of GDP in a credible and sustainable manner by 2007 at the latest, in
   accordance with the path for deficit reduction as specified in the Council Opinion of 5 July
   2004 on the convergence programme submitted in May 2004"; to "implement with vigour the
   measures envisaged in the May 2004 convergence programme, in particular those related to
   the proposed further health care reforms and further public sector rationalisation"; to
   "accelerate the fiscal adjustment if the implemented structural reforms result in higher growth
   than expected in the convergence programme of May 2004, in particular by dedicating any
   higher-than-budgeted revenues primarily to faster deficit reduction"; and to "take effective
   action by 5 November 2004 regarding the measures envisaged to achieve the 2005 deficit
   target".
   In addition, the Council invited the Slovak authorities to "strengthen the binding character of
   the three-year budgetary framework by introducing detailed medium-term expenditure
   ceilings to be adopted by parliament".
   Table 1: Adjustment endorsed by the Council on 5 July 2004
   % of GDP, unless indicated otherwise          2003      2004        2005        2006       2007
   General government balance                     -3.6     -4.0         -3.9       -3.9        -3.0
   p.m.: Real GDP growth (%)                       4.2      4.1          4.3        5.0        4.7
   Source: Council recommendation under Article 104(7) and Council opinion on the May 2004 convergence
   programme, both adopted on 5 July 2004
   On 22 December 2004, i.e. after the expiry of the deadline for taking action set in the Council
   recommendation, the Commission adopted a communication to the Council, which concluded
   that action taken until then by Slovakia was consistent with the Council recommendation and
   that no further steps under the EDP were necessary at that stage8. In its meeting of 18 January
   2005, the Council concurred with this assessment.
   According to Article 104(12), a Council decision on the existence of an excessive deficit is to
   be abrogated, on the basis of a Commission recommendation, when the excessive deficit in
   the Member State concerned has, in the view of the Council, been corrected.
   2.        RECENT DEFICIT DEVELOPMENTS
   The data available in May 2004, when the Commission initiated the EDP for Slovakia,
   indicated that the 2003 deficit was at 3.6% of GDP and the deficit was expected to remain
   above the reference value in subsequent years. According to the data provided by the
   Commission (Eurostat) following the reporting by Slovakia before April 20089 the general
   government deficit remained below 3% of GDP in the years 2003-2005 due to a subsequent
   data revision (in the April 2007 notification) mainly resulting from a change in the
   accrualization method for tax revenue. The headline deficit increased to 3.6% of GDP in 2006
   (mostly due to a substantial increase in government consumption of 1% of GDP, the 2005
   8
            SEC(2004) 1630.
   9
            Eurostat News Release No 54 of 18 April 2008.
EN                                                      3                                              EN
 ---pagebreak---    pre-stocking with cigarettes in view of an imminent excise tax hike and increased pension
   reform costs) before falling to 2.2% of GDP in 200710.
   A pension reform was launched in 2005, affecting social contributions by redirecting 9% of
   gross wages to a funded (second) pension pillar. Due to widespread public interest in this
   pillar and a gradual transition, these revenue transfers are estimated to have increased from
   0.8% of GDP in 2005 to 1.2% and 1.3% of GDP in 2006 and 2007 respectively.
   Slovakia committed itself to gradually increase taxes on cigarettes up to the minimum levels
   required by the EU. As a result, taxes were increased in May 2004, January 2006 and January
   2008 and are planned to be raised again in December 2008. All increases so far were preceded
   by a sizeable pre-stocking with cigarettes at various stages of the distribution chain. This has
   led to shifts in tax revenue resulting in extra tax revenue of some 0.1%, 0.3% and 0.5% of
   GDP in 2003, 2005 and 2007 respectively followed by equivalent revenue shortfalls in the
   subsequent years. Moreover, Slovakia has claims on several foreign countries. In 2003, 2005
   and 2007 cancellations of some of these claims had a deficit-increasing effect of 0.4%, 0.9%
   and 0.1% of GDP respectively.
   Given the better-than-originally-estimated 2003 deficit, headline deficit developments were
   consistent with the deadline for correction of the excessive deficit set by the Council in its
   104(7) recommendation although the consolidation path was quite different. In particular, in
   2007 the headline deficit fell by almost 1½% of GDP to 2.2% of GDP. The fiscal
   consolidation has benefited from buoyant GDP, employment and revenue growth, allowing
   the expenditure-to-GDP ratio to fall faster than the revenue-to-GDP ratio. The fall in the
   expenditure-to-GDP ratio from 40.2% of GDP in 2003 to 36.9% of GDP in 2007 was also
   induced by expenditure restraint and expenditure reforms. These included restrictions on
   social and unemployment benefits, tightening of conditions for early retirement and a gradual
   increase in the pension retirement age. The creation of the National Motorway Company in
   2005 has enabled the government to partly finance motorway construction through private
   sector borrowing. On the revenue side, a comprehensive tax reform was introduced in 2004,
   shifting the weight from income to consumption taxation. Together with the 2005 pension
   reform it has contributed to a fall in the revenue-to-GDP ratio from 37.4% of GDP in 2003 to
   34.7% of GDP in 2007.
   10
           Deficit ratios are usually revised - upwards or downwards - after the publication of the first outcome in
           the spring notification. For the EU Member States as a whole, the revisions are usually relatively small
           and on average insignificantly different from zero. For Slovakia, in view of the distance between the
           currently reported deficit for 2007 and the deficit reference value, there is a low probability that
           potential future revisions in government accounts would raise the 2007 deficit ratio in excess of 3% of
           GDP. The fact that there are pending issues on the sectoral delimitation of general government in
           Slovakia (notably on the appropriate sectoral classification of health-care related units, such as hospitals
           and health-insurance companies in general government or the corporate sector) has not a significant
           impact on the upward and downard risks of deficit revisions in future. Though detailed data are not
           available, there are indications that the financial balance of the units that need to be re-classified inside
           government or outside government, to be in line with ESA95 rules, is very small. (See Eurostat findings
           of the dialogue visit to Slovakia on 10 and 11 March 2008:
           http://epp.eurostat.ec.europa.eu/portal/page?_pageid=2373,47631456&_dad=portal&_schema=PORTA
           L, available soon.)
EN                                                          4                                                            EN
 ---pagebreak---    The 2007 deficit outcome was below the official target of 2.9% of GDP set in the December
   2006 update of the convergence programme. The over-performance was mainly induced by
   higher-than-foreseen GDP and employment growth, lower-than-budgeted co-financing for the
   EU funds and a larger-than-expected pre-stocking with cigarettes at the end of 2007, triggered
   by a hike in the excise tax on tobacco in January 2008 and resulting in additional revenue of
   ½% of GDP compared to ¼% of GDP expected by the programme.
   Nevertheless, the cyclical upswing and growth dividends from structural reforms were not
   fully exploited for fiscal consolidation. As a result, the structural deficit (i.e. the cyclically-
   adjusted deficit net of one-off and other temporary measures) deteriorated from some 1½% of
   GDP in 2003 to around 3% of GDP in 2006 before improving to around 2½% of GDP by
   2007. However, the creation of the second funded pension pillar in 2005 has contributed to
   the structural deterioration11.
   3.        DEFICIT PROJECTIONS FOR 2008 AND BEYOND
   According to the Commission services’ spring 2008 forecast the headline deficit is expected
   to narrow further to 2.0% of GDP in 2008 before increasing to 2.3% of GDP in 2009 (under
   the customary "no-policy-change" assumption) against the background of markedly slowing
   but still robust GDP and decelerating employment growth. Revenue-increasing measures
   included in the 2008 budget such as a broadening of the corporate and personal income tax
   base and an increase in the maximum ceiling on social contributions are foreseen to generate
   additional revenue of around ¼% of GDP in 2008. The revenue shortfall induced by the 2007
   pre-stocking with cigarettes is likely to be broadly offset by a further hoarding of cigarettes
   motivated by a lower excise tax hike planned for the end of 2008. Moreover, a temporary
   opening up of the second pension pillar in the first half of 2008, allowing all current
   participants to leave and new participants to join, should result in an one-off revenue of
   around 0.1% of GDP as savings accumulated in previous years in the second pillar will be
   transferred to the pay-as-you-go pillar if participants decide to leave. On the expenditure side,
   farming subsidies are set to continue increasing substantially. The main reason for the 2009
   deterioration projected in the spring forecast is a likely revenue shortfall of some ½% of GDP
   due to aforementioned expected further substantial pre-stocking with cigarettes in 2008.
   While the forecast for 2008 is in line with the latest official target of 2% of GDP (set by the
   Ministry of Finance in February 2008 as a reaction to the February 2008 Council opinion on
   the November 2007 update of the convergence programme) the forecast for 2009 is
   significantly above the latest national target of 1.7% of GDP (set in April 2008 in the outline
   for the new budget proposal), which is not yet underpinned by explicit measures.
   11
           In accordance with Article 2(7) of Regulation (EC) No 1467/97, a decision to abrogate a decision on the
           existence of an excessive deficit should take into account the net cost of a pension reform introducing a
           multi-pillar system that includes a mandatory, fully funded pillar if the deficit has declined substantially
           and continuously and has reached a level that comes close to the reference value. Since the 2007 general
           government deficit was below the 3%-reference value there is no need to consider the application of this
           Article.
EN                                                         5                                                            EN
 ---pagebreak---    The structural deficit is expected to deteriorate from around 2½% to some 2¾% of GDP
   between 2007 and 2008 which is not in line with the Stability and Growth Pact, which
   specifies that, for euro-area and ERM II Member States, the annual improvement in the
   structural balance should be 0.5% of GDP as a benchmark and that the adjustment should be
   higher in good economic times. In 2009, under the customary no-policy-change assumption
   the structural deficit is foreseen to deteriorate further to some 3% of GDP mainly due to the
   cigarette pre-stocking related revenue shortfall.
   According to the February 2008 Council opinion12 on the November 2007 update of the
   convergence programme the budgetary stance in the programme seems insufficient to ensure
   that the medium-term objective (MTO) for Slovakia, set as a structural deficit of just below
   1% of GDP, is achieved by the end of the programme period (2010), as envisaged in the
   programme. Moreover, the Council concluded that the envisaged change in the structural
   balance for 2008 is not in line with the Pact and should be more ambitious.
   4.        DEBT DEVELOPMENTS AND PROJECTIONS
   The debt ratio decreased gradually from 42.4% of GDP in 2003 to 29.4% of GDP in 2007, i.e.
   well below the 60% of GDP reference value, mainly thanks to privatisation revenue.
   According to the Commission services’ spring 2008 forecast, gross public debt is expected to
   remain broadly stable over the forecast horizon (on a no-policy change basis).
   5.        CONCLUSIONS
   The data available in May 2004 indicated that the 2003 deficit was at 3.6% of GDP and the
   deficit was expected to remain above the reference value in subsequent years. According to
   the latest data, the general government deficit remained below 3% of GDP in the years 2003-
   2005 before increasing to 3.6% of GDP in 2006 mainly due to a substantial increase in
   government consumption. The headline deficit then fell to 2.2% of GDP in 2007. The
   structural balance, i.e. the cyclically-adjusted balance net of one-off and other temporary
   measures, deteriorated in 2006 by some 2% of GDP but improved again by around ½% of
   GDP in 2007. According to the Commission services’ spring 2008 forecast, the headline
   deficit is expected to narrow to 2.0% of GDP in 2008 and, on a no-policy change basis, to
   increase to 2.3% in 2009. This indicates that the deficit has been brought below the 3% of
   GDP ceiling in a credible and sustainable manner.
   General government gross debt declined from 42.4% of GDP in 2003 to 29.4% in 2007, well
   below the 60% of GDP reference value. According to the Commission services’ spring 2008
   forecast, the debt ratio is expected to remain broadly stable over the forecast horizon (on a no-
   policy change basis).
   From an overall assessment, it follows that the excessive deficit situation in Slovakia has been
   corrected. Accordingly, the Commission recommends to the Council to abrogate its decision
   on the existence of an excessive deficit in Slovakia.
   12
           OJ C 49, 22.2.2008, p. 44.
EN                                                  6                                                EN
 ---pagebreak---    Table 2: Budgetary developments, 2003-2009
                                                   2003 2004 2005 2006 2007                  2008           2009
   % of GDP, unless indicated otherwise                                                COM CP(2) COM(3) CP(2)
                                                                                                 -2.3           -1.8
   General government balance                      -2.7 -2.4 -2.8 -3.6 -2.2             -2.0           -2.3
                                                                                                (-2.0)         (-1.7)
   - Total revenues                                37.4 35.4 35.3 33.5 34.7 34.3                 33.0  33.8     31.8
   - Total expenditure                             40.2 37.8 38.1 37.2 36.9 36.3                 35.3  36.1     33.7
     Of which : - interest expenditure              2.5    2.2    1.7     1.5    1.4     1.4      1.4   1.4      1.5
                  - gross fixed capital formation 2.6      2.4    2.1     2.2    1.9     1.9      1.8   1.9      1.4
   Pension reform costs                             0.0    0.0    0.8     1.2    1.3     1.3      1.3   1.3      1.3
   Pre-stocking with cigarettes (net impact)        0.1 -0.1 0.3 -0.3 0.5               -0.1      n.a. -0.4      n.a.
   Primary balance                                 -0.2 -0.2 -1.1 -2.2 -0.8             -0.6     -0.9  -1.0     -0.3
   One-off and temporary measures                  -0.4 0.0 -0.9 0.0 -0.1                0.1      0.1   0.0      0.0
   Structural balance(1)                           -1.4 -1.4 -1.0 -3.1 -2.6             -2.8     -3.1  -3.1     -2.4
   Structural primary balance(1)                    1.1    0.8    0.8 -1.7 -1.2         -1.5     -1.7  -1.7     -0.9
   Government gross debt                           42.4 41.4 34.2 30.4 29.4 29.2                 30.8  29.7     30.5
   Pm        Real GDP growth (%)                    4.8    5.2    6.6     8.5 10.4       7.0      6.8   6.2      5.8
   Pm        Output gap                            -3.2 -3.4 -3.2 -1.6 1.9               2.7      2.3   2.5      2.1
   (1)
              Cyclically-adjusted (primary) balance excluding one-off and temporary measures.
   (2)
              Cyclically-adjusted and structural balances and output gaps according to the programme as calculated by
              Commission services on the basis of the information in the programme.
   (3)
              No-policy change assumption.
   Sources: Commission services’ spring 2008 forecast (COM) and November 2007 update of the convergence
              programme (CP) (In brackets the latest national targets set in February and April 2008)
EN                                                          7                                                         EN
 ---pagebreak---                                            Recommendation for a
                                          COUNCIL DECISION
      abrogating Decision 2005/182/EC on the existence of an excessive deficit in Slovakia
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty establishing the European Community, and in particular
   Article 104(12) thereof,
   Having regard to the recommendation from the Commission,
   Whereas:
   (1)     By Council Decision 2005/182/EC13, following a recommendation from the
           Commission in accordance with Article 104(6) of the Treaty, it was decided that an
           excessive deficit existed in Slovakia. The Council noted that the general government
           deficit was 3.6% of GDP in 2003, above the 3% of GDP Treaty reference value.
   (2)     On 5 July 2004, in accordance with Article 104(7) of the Treaty and Article 3(4) of
           Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the
           implementation of the excessive deficit procedure14, the Council made, based on a
           recommendation from the Commission, a recommendation addressed to Slovakia with
           a view to bringing the excessive deficit situation to an end by 2007 at the latest. The
           recommendation was made public.
   (3)     In accordance with Article 104(12) of the Treaty, a Council Decision on the existence
           of an excessive deficit is to be abrogated when the excessive deficit in the Member
           State concerned has, in the view of the Council, been corrected.
   (4)     In accordance with the Protocol on the excessive deficit procedure annexed to the
           Treaty, the Commission provides the data for the implementation of the procedure. As
           part of the application of this Protocol, Member States are to notify data on
           government deficits and debt and other associated variables twice a year, namely
           before 1 April and before 1 October, in accordance with Article 4 of Council
           Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol
           on the excessive deficit procedure annexed to the Treaty establishing the European
           Community15.
   13
           OJ L 62, 9.3.2005, p. 16.
   14
           OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174,
           7.7.2005, p. 5).
   15
           OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337,
           22.12.2005, p. 1).
EN                                                       8                                                   EN
 ---pagebreak---    (5) Based on data provided by the Commission (Eurostat) in accordance with Article
       8g(1) of Regulation (EC) No 3605/93 following the notification by Slovakia before 1
       April 2008 and on the Commission services’ spring 2008 forecast, the following
       conclusions are warranted:
        –     due to data revisions after the 2004 Council decision on the existence of an
              excessive deficit, the general government deficit remained below 3% of GDP
              in the years 2003-2005. After increasing to 3.6% of GDP in 2006 it was
              reduced to 2.2% of GDP in 2007, which is below the 3% of GDP deficit
              reference value. This compares with a target of 2.9% of GDP set in the
              December 2006 update of the convergence programme,
        –     the fiscal consolidation has benefited from buoyant GDP, employment and
              revenue growth, allowing the expenditure-to-GDP ratio to fall faster than the
              revenue-to-GDP ratio. The falling expenditure-to-GDP ratio was also induced
              by expenditure restraint and expenditure reforms such as substantial
              restrictions on social benefits. Nevertheless, the cyclical upswing and growth
              dividends from structural reforms were not fully exploited for fiscal
              consolidation. As a result, the structural deficit (i.e. the cyclically-adjusted
              balance net of one-off and other temporary measures) is estimated to have
              deteriorated from some 1½% of GDP in 2003 to around 3% of GDP in 2006
              before improving to around 2½% of GDP by 2007. However, part of the
              structural deterioration can be attributed to the introduction of the second
              funded pension pillar in 2005 with transfers to this pillar estimated to have
              increased from 0.8% of GDP in 2005 to 1.2% and 1.3% of GDP in 2006 and
              2007 respectively. In addition, increases in taxes on cigarettes preceded by
              sizeable pre-stocking with cigarettes at various stages of the distribution chain
              led to sizeable shifts in tax revenue resulting in extra tax revenue in 2003, 2005
              and 2007 followed by equivalent revenue shortfalls in the subsequent years,
        –     for 2008, the Commission services’ spring 2008 forecast projects the headline
              deficit to be reduced further, to 2.0% of GDP, driven mainly by continued
              strong growth prospects and some revenue-increasing measures such as a
              broadening of the corporate and personal income tax base and an increase in
              the maximum ceiling on social contributions. This is in line with the official
              deficit target of 2.0% of GDP set in February 2008. For 2009, the spring
              forecast projects, on a no-policy change basis, an increase in the deficit to 2.3%
              of GDP. This indicates that the deficit has been brought below the 3% of GDP
              ceiling in a credible and sustainable manner. The structural balance is projected
              to deteriorate by some ¼ percentage point of GDP in 2008 and, on a no-policy
              change basis, by around ¼ percentage points in 2009. This has to be seen
              against the need to make progress towards the medium-term objective (MTO)
              for the budgetary position, which for Slovakia is a structural deficit of just
              below 1% of GDP,
        –     government debt remains well below the 60% of GDP reference value. It
              declined from 42.4% of GDP in 2003 to 29.4% in 2007. According to the
              spring 2008 forecast, the debt ratio is projected to remain broadly stable over
              the forecast horizon (on a no-policy change basis).
EN                                              9                                                EN
 ---pagebreak---    (6)    In the view of the Council, the excessive deficit in Slovakia has been corrected and
          Decision 2005/182/EC should therefore be abrogated.
   HAS ADOPTED THIS DECISION:
                                             Article 1
   From an overall assessment it follows that the excessive deficit situation in Slovakia has been
   corrected.
                                             Article 2
   Decision 2005/182/EC is hereby abrogated.
                                             Article 3
   This Decision is addressed to the Slovak Republic.
   Done at Brussels,
                                               For the Council
                                               The President
EN                                               10                                                EN