CELEX: 52013DC0396
Language: en
Date: 2013-05-29 00:00:00
Title: Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Slovenia

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		52013DC0396
		
			Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Slovenia /* COM/2013/0396 final */
			
				
		
		
			
			   	Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the
situation of an excessive government deficit in Slovenia
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 2 December 2009, the
Council decided, in accordance with Article 126(6) of the TFEU, that an
excessive deficit existed in Slovenia and issued a recommendation[1] to correct the excessive
deficit by 2013 at the latest, in accordance with Article 126(7) of the TFEU
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 below 3% of GDP in a credible and sustainable manner, the
Slovenian authorities were recommended to implement the fiscal consolidation
measures in 2010 as planned, ensure an average annual structural budgetary
adjustment of ¾% of GDP over the period 2010-2013, and 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 expected at that time.
(4)       On 15 June 2010, the
Commission concluded that based on the Commission services' 2010 Spring
Forecast, Slovenia had taken effective action in compliance with the Council
recommendation of 2 December 2009 to bring its government deficit below the 3%
of GDP reference value and considered that no additional step in the excessive
deficit procedure was therefore necessary. 
(5)       According to Article 3(5)
of Regulation (EC) No 1467/97, the Council may decide, on a recommendation from
the Commission, to adopt a revised recommendation under Article 126(7) of the
TFEU, if effective action has been taken and unexpected adverse economic events
with major unfavourable consequences for government finances occur after the
adoption of that recommendation. The occurrence of unexpected adverse economic
events with major unfavourable budgetary effects shall be assessed against the
economic forecast underlying the Council recommendation.
(6)       In accordance with Article
126(7) of the 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.
(7)       On the basis of the
Commission’s 2013 in-depth review on Slovenia the Commission considers that Slovenia is experiencing excessive macroeconomic imbalances. Sustainable improvements in
fiscal, macroeconomic and labour market outcomes require simultaneous progress
in reducing macroeconomic imbalances and correcting the excessive deficit.
(8)       The Commission services’
2009 Autumn Forecast, which was underlying the Council recommendation under
Article 126(7) of the TFEU of 2 December 2009, projected that the Slovenian
economy would expand by 1.3% in 2010 and 2.0% in 2011. The years 2012 and 2013
were beyond that forecast's horizon, but under the hypothesis of a gradual
closure of the large negative output gap by 2015, higher growth than in 2011
was expected for 2012 and 2013. While GDP growth in 2010 was almost at par with
that expected in the Commission services' 2009 Autumn Forecast, in 2011 it was
below the projected 2.0%. The Slovenian economy slipped back into recession in
2012. The Commission services' updated 2013 Spring Forecast[3] implies a much more adverse
scenario than the one foreseen at the time of the Council recommendation also
for 2013. Overall, GDP growth turned out to be markedly lower than projected in
the Commission services' 2009 Autumn Forecast. This is having adverse effects
on both the revenue and expenditure sides compared to what was expected at the
time of the Council recommendation.
(9)       Slovenia has seen real GDP falling considerably
more abruptly than in the euro area as a whole as a result of the global
economic and financial crisis as well as domestic imbalances. The real GDP drop
of 7.8% in 2009 was driven mainly by trends in gross capital formation. The
export-led recovery Slovenia enjoyed in 2010 and 2011, when real GDP grew by
1.2% and 0.6%, respectively, was modest due to the drag from weak domestic demand.
In 2012 the Slovenian economy slipped into a double dip
recession with a negative real GDP growth of -2.3%. A positive contribution to
growth from net external demand was a result of robust growth of export to
non-EU markets and a sharp decline in imports due to weak domestic demand.
(10)     The Commission services' updated 2013 Spring Forecast projects a further drop in real GDP by 2.0% in 2013 because of
falling employment, negative real wage growth and a continued decline in
investment. The deleveraging of non-financial corporations and rehabilitation
of the banking sector are assumed to progress, but not yet sufficiently to
support the start of a new investment cycle. Thus, private consumption and
investment are forecast to remain the main drag on growth. The positive
contribution to growth from net foreign demand is projected to slightly
decline. The forecast continued recession with GDP growth of -0.1% in 2014 is a
result of delays in resolving the banking crisis and restructuring the highly indebted
corporate sector. Real GDP growth is projected at 1.3% in 2015 on the back of
gradually strengthened domestic demand resulting mainly from a rehabilitation
of the banking sector, progress in the deleveraging of corporations and
improved consumer confidence.
(11)     The general government
deficit had soared to 6.2% of GDP in 2009 due to strong, in-built expenditure
dynamics mainly of interest expenditure and social transfers. The largely
ad-hoc consolidation measures in 2010 targeted lower growth of the public
sector wage bill and social transfers in particular. The indexation of social
benefit rates, including pensions, and of public sector wages was halved for
2010 and some work related bonuses were restrained. On the revenue side, excise
duty rates on alcohol, cigarettes and mineral oils increased. These measures,
approved before the adoption of the Council EDP recommendation, contributed to
the slight reduction of the headline deficit in 2010 to 5.9% of GDP. 
(12)     The 2011 budget extended and
strengthened the consolidation measures on the expenditure side from 2010 for
mostly another year. On the revenue side, excise duty rates on cigarettes were further
increased. Nonetheless, the headline deficit peaked at 6.4% of GDP in 2011 when
capital support operations to loss-making state-owned enterprises and one-offs contributed
1.4% of GDP to the deficit.
(13)     The March 2013 EDP
notification as validated by the Commission (Eurostat) reported the 2012
general government deficit at 4.0% of GDP. This outturn covers another
recapitalisation of the largest bank by some 0.2% of GDP in June 2012, being
treated as one-off. The government implemented a major current expenditure
restraint through cuts in public sector wages and social transfers. However,
most consolidation measures are again valid only temporarily. In addition,
public investment was reduced again, resulting in a drop totalling to 45% in
real terms since 2009. Finally, capital injections, including one-offs, to
public corporations were markedly lower than in 2011. On the revenue side, the
government cut the corporate income tax rate and introduced more generous
investment and R&D allowances. 
(14)     The Commission services' updated
2013 Spring Forecast projects the general government deficit in 2013 at 5.5% of
GDP. However, without two one-off conversions of hybrid debt-equity instruments
into equity of the two largest banks, amounting to 1.2% of GDP, the deficit for
2013 would be projected at 4.3% of GDP. The forecast deficit of 5.5% of GDP compares
with the national deficit target for 2013 at 7.9% of GDP from the 2013 update
of the stability programme, which includes recapitalisations of banks at 3.7%
of GDP. Public finances in 2013 are expected to benefit from the full-year
effects of savings measures in the Act on Balancing Public Finances, which
entered into force in June 2012, and new approved revenue increasing measures
from the 2013 budget. The worsening labour market is forecast to result in
falling social contributions. By contrast, social transfers are projected to
increase again because of a still high number of new pensioners at the end of
2012 and in early 2013.
(15)     The Commission services'
updated 2013 Spring Forecast projects the 2014 deficit at 4.9% of GDP under a
no-policy change assumption. The 2014 budget does not incorporate new
discretionary measures, except for a drop in the corporate income tax rate to
16% and broad stabilisation of the public sector wage bill at the 2013 level.
On the expenditure side, in particular interest expenditure and social
transfers are projected to keep increasing because of higher debt, growing
number of old-age pensioners and indexation of pensions. Under a no-policy
change scenario, the deficit is projected at 5.5% of GDP in 2015. The forecast
incorporates further increases in interest expenditure, higher public sector
wage bill after the expiry of temporary measures curbing salaries of public
sector employees and the final step of the gradual decrease in corporate income
tax rate by 1 pp. to 15%.
(16)     Excluding additional fiscal resources to strengthen banks, risks
to the deficit projections seem balanced. Upside risks result from announced
new savings measures in the 2013 supplementary budget, while downside risks
stem from a weak budget implementation and the court judgement, still
challenged by the government, stipulating the payment of the salary increase to
public employees postponed in 2010.
(17)     According to the Commission
services' 2013 Spring Forecast the average annual fiscal effort taken at face
value is estimated at 0.5% of GDP over the period 2010 – 2013. The
consolidation was backloaded to 2012 and 2013. When adjusted for the impact of
revisions in potential output growth between the current forecast and that
underlying the Council recommendations of 2 December 2009 as well as for the
impact of revenue developments as compared to those implied by standard
elasticities, the average annual adjusted structural effort between 2010 and
2013 is estimated at 1.1% of GDP. This is above the recommended average annual
fiscal effort of ¾% of GDP. 
(18)     The total amount of
additional consolidation measures implemented by Slovenian authorities in
response to the Council EDP recommendation over 2010-2013 is estimated at
around 6¾% of GDP based on a bottom-up approach. This estimate excludes
consolidation measures amounting to around 0.8% of GDP from the 2010 budget
already included in the Commission services' 2009 Autumn Forecast. Measures
amounting to some 5% of GDP have included in particular lowered indexation
mechanisms and cuts in the public sector wages and social benefit rates as well
as higher indirect taxes. In addition, the authorities significantly cut public
investment by around 1¾% of GDP over 2010-2012.
(19)     Slovenia faces steeply
increasing public debt due to persistently large primary deficits and to a
lesser extent stock-flow adjustments and higher interest payments. From as low
as 22% of GDP in 2008, debt increased to 54% of GDP in 2012. The Commission
services’ updated 2013 Spring Forecast projects it to increase to 61% of GDP in
2013, thus breaching the Treaty reference value. Based on a no-policy-change
scenario, debt is forecast to increase further to 69% of GDP in 2015. These
projections do not include up to 11% of GDP of state
guarantees for asset transfers to a Bank Asset Management Company and up to 3%
of GDP of cash for recapitalisations as stipulated in
the Banking Stability Act.
(20)     Slovenia was hit with
unexpected adverse economic developments. The economy is in a double dip
recession projected to last into 2014. Employment has been affected negatively,
unemployment has risen sharply and real wage growth became negative. Slovenia is also experiencing excessive macroeconomic imbalances which seriously hamper
investment. Thus, domestic demand continues to decline. This is having adverse
effects on both the revenue and expenditure sides compared to what was expected
at the time of the Council recommendation. In line with the rules of the
Stability and Growth Pact, this suggests that a new deadline for the correction
of the excessive deficit in Slovenia by 2015 is appropriate.
(21)     Granting two additional
years for the correction of the excessive deficit would be commensurate with
intermediate headline deficit targets of 4.9% of GDP for 2013 (3.7% of GDP without 1.2% of GDP one-off expenditure to
recapitalise the two largest banks), 3.3% of GDP for 2014 and 2.5% of GDP for 2014.
The underlying improvement in the structural budget balance implied by
these targets is 0.7% of GDP in 2013, 0.5% of GDP in 2014 and 0.5% of GDP in 2015, the last two corresponding
to the minimum improvement required by Article 5(1) of Council
Regulation (EC) No 1466/97 of 7 July 1997. In total, to
reach the above-mentioned structural targets, the Slovenian authorities would
need to implement additional consolidation measures of 1% of GDP in 2013, 1½%
of GDP in 2014 and 1½% of GDP in 2015 on top of the measures already included
in the baseline scenario. 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 GDP growth. 
(22)     The European Commission
Fiscal Sustainability Report 2012 shows that Slovenia is at high sustainability
risk in the medium and long term. The 2012 Ageing Report shows a high projected
increase in total age-related public expenditure over the years 2010-60. To
this end, additional containing of age-related expenditure growth by further
adjusting all relevant parameters of the pension and social security systems appears
necessary to contribute to the sustainability of public finances in the long
term.
(23)     Slovenia fulfils the
conditions for the extension of the deadline for correcting the excessive
general government deficit as laid out in Article 3(5) of Regulation (EC) No
1467/97 on speeding up and clarifying the implementation of the excessive
deficit procedure,
HAS ADOPTED THIS RECOMMENDATION:
(1)                   
Slovenia should bring an
end to the present excessive deficit situation by 2015.
(2)                   
Slovenia should reach a
headline general government deficit target of 4.9% of GDP in 2013 (3.7% of GDP
without 1.2% of GDP one-off expenditure to recapitalise the two largest banks),
3.3% of GDP in 2014 and 2.5% of GDP in 2015, which is consistent with an annual
improvement of the structural balance of 0.7% of GDP in 2013, 0.5% of GDP
in 2014 and 0.5% of GDP in 2015, in order to bring the headline government
deficit below the 3% of GDP threshold by 2015, based on the Commission
services' updated 2013 Spring Forecast. 
(3)                   
Slovenia should rigorously
implement the measures already adopted to increase mainly indirect tax revenue
and reduce the public sector wage bill and social tranfers, while standing
ready to complement them with additional measures if their yield would prove
less than foreseen or if any measure is repealed by the justice system. 
(4)                   
In addition, Slovenia should specify, adopt and
implement new structural consolidation measures, on top of those already
included in the Commission services' updated 2013 Forecast that are necessary
to achieve the correction of the excessive deficit by 2015.
(5)                   
The Council establishes the deadline of [1 October
2013] for Slovenia 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 Slovenian authorities
should (i) accelerate the reduction of the headline deficit in 2014 and 2015 if
economic or budgetary conditions turn out better than currently expected; (ii) specify,
adopt and implement structural consolidation measures which gradually decrease
the current expenditure ratio to GDP, secure a lasting improvement in the
general government structural balance, support growth potential of the economy
including through avoiding further cuts in public investment, and gradually put
the debt ratio on a downward path. Finally, to ensure the success of the fiscal
consolidation strategy, it will be also important to back the fiscal
consolidation by comprehensive structural reforms, in line with the Council
recommendations addressed to Slovenia in the context of the European Semester
and Macroeconomic Imbalances Procedure.
Beyond the report foreseen in
recommendation (5), the Slovenian 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 stability programmes, until full correction of
the excessive deficit has taken place. 
This recommendation is addressed to the Republic of   Slovenia.
Done at Brussels, 
                                                                       For
the Council
                                                                       The
President
[1]               All documents related to the
excessive deficit procedure of Slovenia can be found at:          
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/slovenia_en.htm
[2]               OJ L 209, 2.8.1997, p. 6.
[3]               This forecast is based on the
Commission services’ 2013 Spring Forecast, whose horizon has been extended to
2015. In addition, the update incorporates two bonds issued on the US market on 2 May 2013 with an impact on interest expenditure, deficit and debt.