CELEX: 52008SC2011
Language: en
Date: 2008-06-11 00:00:00
Title: Recommendation for a Council Decision abrogating Decision 2005/183/EC on the existence of an excessive deficit in Poland

EN
EN    EN
 ---pagebreak---                 COMMISSION OF THE EUROPEAN COMMUNITIES
                                                Brussels, 11.6.2008
                                                SEC(2008) 2011 final
                                Recommendation for a
                               COUNCIL DECISION
   abrogating Decision 2005/183/EC on the existence of an excessive deficit in Poland
                            (presented by the Commission)
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 ---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. As explained in the box below,
   Poland was among the countries which 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 the 1999 pension reform
   (currently amounting to around 2% of GDP annually) until March 2007. Since then, deficit
   and debt figures have been notified in accordance with the Eurostat decision. Unless
   mentioned explicitly, all figures quoted in this document are in accordance with the Eurostat
   decision.
                                    Box: The classification of pension schemes
   There are typically different pillars within a country’s pension system, such as pay-as-you-go or
   unfunded systems and funded systems; furthermore, pension schemes can be of the defined-benefit
   (DB) or defined-contribution (DC) variety.
   If a pension scheme is classified in the government sector, contributions collected and benefits paid by
   the scheme are government revenue and expenditure and contribute to the government balance. If a
   pension scheme is classified in a sector other than government, its contributions and benefits do not
   contribute to the government balance. The ESA95 accounting rules state that pension schemes
   classified within government are those which are “imposed, controlled and financed by government”.
   On 2 March 2004, Eurostat clarified that funded DC pension schemes do not fulfil these criteria
   because pensions paid by such schemes (i) depend primarily on financial markets performance (i.e. not
   under government control) and (ii) are financed by reserves that are not economically owned by
   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 Poland can be found at:
            http://epp.eurostat.ec.europa.eu/portal/page?_pageid=2373,58110711&_dad=portal&_schema=portal.
EN                                                         2                                                  EN
 ---pagebreak---    government. Even if they are mandatory or if they are managed by government (for example, managed
   by the same government agency in charge of the pay-as-you-go pillar) or if there is some government
   guarantee of a minimum pension, funded DC schemes should not be classified within government (*).
   A transition period, expiring in spring 2007 (first notification of 2007), was granted to implement this
   decision (**).
   (*) Eurostat News Release No 30/2004 of 2 March 2004.
   (**) Eurostat News Release No 117/2004 of 23 September 2004.
   On 12 May 2004, the Commission initiated the EDP for Poland with the adoption of a report
   under Article 104(3), based on a general government deficit of 4.1% of GDP (excluding
   pension reform cost) in 20034. On 5 July 2004, the Council decided, on a recommendation
   from the Commission, that Poland was in excessive deficit according to Article 104(6)5. The
   Council decision stated that the deficit and the debt figures would have to be adjusted upward
   if the funded pension schemes were excluded from the general government sector following
   the Eurostat decision on the classification of the funded pension schemes (see box). At the
   same time, and also based on a Commission recommendation, the Council addressed
   recommendations under Article 104(7) to Poland with a view to bringing the situation of an
   excessive government deficit to an end, by 2007 at the latest6. On 28 November 2006, the
   Council decided under Article 104(8), on a recommendation from the Commission, that
   action taken until then by the Polish authorities was inadequate7. On 27 February 2007, the
   Council issued new recommendations under Article 104(7) based on a recommendation by
   the Commission.
   In its second recommendation under Article 104(7), the Council recommended that the Polish
   authorities put an end to the excessive deficit situation by the original deadline of 2007 and
   reduce the general government deficit in a credible and sustainable manner and to this end
   ensure an improvement of the structural balance (i.e. the cyclically-adjusted balance net of
   one-off and other temporary measures) by at least 0.5 percentage points of GDP between
   2006 and 2007. The Council established the deadline of 27 August 2007 for the Polish
   authorities to take effective action. In addition, the Council invited Poland to ensure that
   budgetary consolidation towards its medium-term objective of a structural deficit of 1% of
   GDP was sustained after the excessive deficit would have been corrected.
   4
             SEC(2004) 826.
   5
             OJ L 62, 9.3.2005, p. 18.
   6
             All EDP-related documents for Poland can be found at the following website:
             http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm.
   7
             OJ L 414, 30.12.2006, p. 81.
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 ---pagebreak---    Table 1: Adjustment endorsed by the Council on 27 February 2007
   % of GDP, unless indicated otherwise                                      2006                    2007
   General government balance                                                −3.9            deficit close to 38
   change in structural balance                                                                 at least +0.5
   p.m.: Real GDP growth (%)                                                  5.4                     5.1
   Note: Structural balance = cyclically-adjusted balance excluding one-off and other temporary measures.
   Source: Council recommendation under Article 104(7) and, for real GDP growth, Council opinion on the
   November 2006 update of the convergence programme, both adopted on 27 February 2007.
   On 20 November 2007, 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 the action taken by Poland in response to the Council recommendation was consistent
   with the recommendation. While the Commission expressed concern about the durability of
   the correction of the excessive deficit in 2008 and 2009, no further steps under the EDP were
   recommended at that stage9. In its meeting of 4 December 2007, the Council concurred with
   this assessment. Both the Commission and the Council invited the Polish authorities to submit
   as soon as possible an updated convergence programme describing their medium-term
   strategy for the whole legislature, consistent with a durable correction of the excessive deficit
   and further progress towards the medium-term objective. A new programme was submitted at
   the end of March 2008. The Commission is recommending a Council opinion on this
   programme together with this recommendation for a Council decision.
   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
   Since peaking at 6.3% of GDP in 2003, the general government deficit declined by more than
   1 percentage point annually on average to reach 2% of GDP in 2007, based on the data
   provided by the Commission (Eurostat) following the reporting by Poland before April
   200810, 11,12. The outturns were generally better than targeted thanks to positive growth
   8
            In its recommendation, the Council referred to the November 2006 update of the convergence
            programme, which targeted a deficit of 3.4% of GDP in 2007 and which “assumes that, for the purpose
            of abrogating the decision on the existence of an excessive deficit under Article 104(12), the
            Commission and the Council could, as foreseen in Article 2(7) of Regulation (EC) No 1467/97, consider
            the cost to the budget of the 1999 pension reform [estimated at around 2% of GDP in 2007] according
            to a linear degressive scale amounting to 60 % in 2007. The Council recalls that for Poland to benefit
            from this provision, the deficit should have declined substantially and continuously and have reached a
            level that comes close to the reference value. As the deficit has declined substantially and continuously
            over the period 2004-2006, the outcome for the 2007 deficit and the outlook thereafter will determine
            whether this provision can be applied to Poland”.
   9
            SEC(2007) 1543.
   10
            Eurostat News Release No 54 of 18 April 2008.
   11
            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. In view of the distance between the currently
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 ---pagebreak---    surprises resulting in windfall revenues as well as the incomplete execution of expenditure
   plans.
   The 2007 general government deficit outturn was 2.0% of GDP, compared to 3.4% projected
   in the November 2006 convergence programme. Much higher real and nominal GDP growth
   than assumed in November 2006 was the main reason, but also expenditure was restrained. In
   particular, high profitability of companies allowed for growth in subsidies to be contained,
   while the rapid fall in unemployment and the lack of indexation imposed by the Hausner
   plan13 curtailed growth in social transfers. In addition, compensation of public sector
   employees was lower than planned. Finally, government investment was lower than projected
   because of a slower absorption of EU funds than planned. Overall, the expenditure-to-GDP
   ratio was 1.5 percentage point lower than projected in November 2006. On the revenue side,
   revenue from indirect taxes and social contributions turned out better than envisaged in
   November 2006, mainly thanks to a much higher employment and wage growth. These
   positive surprises were offset by a lower performance of other revenue items (direct taxes due
   to an increase in tax brackets). Overall, this led to a revenue ratio slightly below the planned
   one.
   3.        DEFICIT PROJECTIONS FOR 2008-2009 AND BEYOND
   For 2008, the Commission services’ spring 2008 forecast projects that the general government
   deficit will increase to 2.5% of GDP, in line with the target in the March 2008 convergence
   programme. GDP is expected to grow by 5.3% and 5% in 2008 and 2009, respectively. The
   Commission services foresee that private consumption accelerates in 2008 to 5.6% supported
   by the social contributions cuts and decelerates to 4.7% in 2009 because of a deteriorating
   external environment weighing on consumers’ confidence.
   The increasing general government deficit results from the Polish 2008 budget, which targets
   a worsening of the central state balance (non ESA95) by about 0.8% of GDP in 2008
   compared to the 2007 outturn because of a number of deficit-increasing measures adopted
   before the parliamentary elections of October 2007. Most of them will reduce government
   revenues: a second cut in social contributions and personal income tax relief for families. On
   the expenditure side, the 2008 budget envisages higher public investment and restores the
   generous (inflation plus wage growth) annual indexation of pensions and disability benefits.
   The deficit-increasing measures will be partly offset by improved tax compliance, higher
   taxable income, and excise duty hikes related to the EU tax harmonisation.
           reported deficit for 2007 and the deficit reference value, there is a very low probability that potential
           future revisions in government accounts would raise the 2007 deficit ratio in excess of 3% of GDP.
   12
           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.
   13
           The most comprehensive and specific attempt at expenditure reform so far, proposed in 2003 and aimed
           at reducing public expenditure on social protection, public administration and state aids. Among other
           things, the Hausner plan replaced annual indexation with an indexation after cumulated inflation
           exceeds 5% or every three years (whatever comes first).
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 ---pagebreak---    In 2009, the general government deficit ratio is expected to rise marginally to 2.6% of GDP
   according to the spring 2008 Commission forecast, which is based on the no-policy-change
   assumption. The March 2008 convergence programme, which assumes the implementation of
   some deficit-decreasing measures that remain to be specified, envisages a general government
   deficit of 2.0% of GDP.
   The spring forecast projects the structural deficit to widen by approximately ¼ percentage
   point of GDP in 2008 but to narrow by about ⅓ percentage point in 2009, resulting from the
   improvement in the labour market stimulated by the cuts in the tax wedge14.
   The main goal of the budgetary strategy presented in the March 2008 convergence
   programme is to reach the MTO, a structural deficit of 1% of GDP, by 2011, i.e. one year
   after the end of the programme period. The budgetary adjustment is expenditure-based and
   back-loaded to 2009 and 2010.
   4.        DEBT DEVELOPMENTS AND PROJECTIONS
   After having reached its peak of 47.6% of GDP in 2006, the debt ratio appears to be on a
   declining path. Significant debt reduction was achieved in 2007, when the ratio decreased by
   almost 2½ percentage points to 45.2% of GDP mainly thanks to high nominal GDP growth
   but also to the appreciation of the złoty. Gross debt is projected to fall more slowly this year
   and next to about 44% of GDP in 2009, according to the spring 2008 forecast under the no-
   policy-change assumption.
   5.        CONCLUSIONS
   The general government deficit decreased from 6.3% of GDP in 2003 to 2.0% in 2007, below
   the 3% of GDP reference value. The deficit reduction in 2007 mainly reflected higher
   economic growth, which together with expenditure restraint (partly due to an incomplete
   execution of investment plans) reduced the expenditure ratio compared to budget plans. The
   revenue ratio came in close to target, with windfall revenues from favourable economic
   conditions offset by direct tax cuts and underperformance in other revenue categories. The
   structural balance, i.e. the cyclically-adjusted balance net of one-off and other temporary
   measures, improved by about 1½ percentage point of GDP, well above the fiscal effort of at
   least 0.5 percentage point recommended by the Council. According to the Commission
   services’ spring 2008 forecast, the headline deficit is expected to increase to 2.5% of GDP in
   2008 and, on a no-policy change basis, to 2.6% 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 47.6% of GDP in 2006 to 45.4% in 2007,
   below the 60% of GDP reference value. According to the Commission services’ spring 2008
   14
           There seems to be a particularly high potential for reducing the shadow economy and stimulating labour
           activity in Poland, as suggested by the significant difference between the registered unemployment rate
           and the unemployment rate from labour force surveys (about 3 percentage points in the beginning of
           2008). Furthermore, Poland has one of the lowest activity rates in the EU (63½% compared to almost
           71% in the EU in the second half of 2007), especially for those aged 55+. Moreover, the steep increase
           in corporate-income and small-business personal-income tax revenues in the recent years in Poland may
           be partly explained with a better compliance following a reduction of initially high tax rates.
EN                                                         6                                                       EN
 ---pagebreak---    forecast, the debt ratio is expected to fall further to around 44% of GDP by 2009 (on a no-
   policy change basis).
   From an overall assessment, it follows that the excessive deficit situation in Poland has been
   corrected. Accordingly, the Commission recommends to the Council to abrogate its decision
   on the existence of an excessive deficit in Poland.
   Table 2: Budgetary developments, 2003-2009
   % of GDP, unless indicated           2003     2004    2005    2006    2007        2008            2009
   otherwise                                                                    COM CP(2)        COM(3) CP(2)
   General government balance            −6.3    −5.7     −4.3   −3.8    −2.0    −2.5     −2.5    −2.6     −2.0
   Total revenues                        38.4     36.9    39.0    40.0    40.4   40.1     40.0    39.7      39.2
   Total expenditure                     44.6     42.6    43.3    43.8    42.4   42.6     42.5    42.3      41.2
     Of which: − interest expenditure      3.0     2.8      2.8    2.7     2.6     2.7     2.3     2.7       2.3
        – gross fixed capital formation    3.3     3.4      3.4    3.9     4.1     4.5     5.2     4.8       5.0
   Primary balance                       −3.3    −2.9     −1.5   −1.1      0.6     0.2    −0.2     0.1       0.3
   One-off and temporary measures          0.0     0.0      0.0    0.0     0.0     0.0     0.0     0.0       0.0
   Structural balance(1)                 −5.9    −5.9     −4.2   −4.0    −2.5    −2.7     −2.8    −2.3     −1.9
   Structural primary balance(1)         −2.9    −3.1     −1.4   −1.3      0.1     0.0    −0.5     0.3       0.4
   Pm       Real GDP growth (%)            3.9     5.3      3.6    6.2     6.5     5.3     5.5     5.0       5.0
   Pm       Output gap                   −1.0      0.4    −0.4     0.6     1.2     0.5     0.7    −0.7     −0.2
   (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 March 2008 update of the convergence
             programme (CP).
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 ---pagebreak---                                           Recommendation for a
                                         COUNCIL DECISION
       abrogating Decision 2005/183/EC on the existence of an excessive deficit in Poland
   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 2005/183/EC of 5 July 200415, following a recommendation
           from the Commission in accordance with Article 104(6) of the Treaty, it was decided
           that an excessive deficit existed in Poland. The Council noted that the general
           government deficit was 4.1% of GDP in 2003, above the 3% of GDP Treaty reference
           value, while general government gross debt stood at 45.4% of GDP, below the 60 % of
           GDP Treaty reference value. The Council decision stated that the deficit and the debt
           figures would have to be adjusted upward if the funded pension schemes were
           excluded from the general government sector following the Eurostat decision on the
           classification of the funded pension schemes16.
   (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 procedure17, the Council made, based on a
           recommendation from the Commission, a recommendation addressed to Poland with a
           view to bringing the excessive deficit situation to an end by 2007 at the latest. The
           recommendation was made public.
   (3)     On 28 November 2006, the Council decided under Article 104(8), on a
           recommendation from the Commission, that action taken until then by the Polish
           authorities was inadequate18. On 27 February 2007, the Council issued a new
           recommendation under Article 104(7), on a recommendation from the Commission,
           confirming the 2007 deadline for the correction. The recommendation was made
           public.
   15
           OJ L 62, 9.3.2005, p. 18.
   16
           Eurostat News Releases No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004.
   17
           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).
   18
           OJ L 414, 30.12.2006, p. 81.
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 ---pagebreak---    (4) 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.
   (5) 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
       Community19.
   (6) Based on data provided by the Commission (Eurostat) in accordance with Article
       8g(1) of Regulation (EC) No 3605/93 following the notification by Poland before 1
       April 2008 and on the Commission services’ spring 2008 forecast, the following
       conclusions are warranted:
         –     the general government deficit was reduced from 3.8% of GDP in 2006 to
               2.0% of GDP in 2007, which is below the 3% of GDP deficit reference value.
               This compares with a target of 3.4% of GDP set in the November 2006 update
               of the convergence programme,
         –     the much better 2007 deficit outturn compared to the target was supported by
               much higher real GDP growth than assumed in the November 2006
               convergence programme. In addition, relative to GDP, the government spent
               less on social transfers (due to lack of indexation in 2007), subsidies,
               investment and compensation of employees. Overall, total expenditure was by
               1.5 percentage point lower than planned in the November 2006 convergence
               programme. The improvement in the structural balance (i.e. the cyclically-
               adjusted balance net of one-off and other temporary measures) is estimated at
               1½ percentage point of GDP in 2007,
         –     with lower GDP growth than in 2007, the spring 2008 forecast projects the
               deficit to increase in 2008 to 2.5% of GDP, but remain below the reference
               value, driven mainly by cuts in social contributions, personal income tax relief
               and an increase of social transfers together with higher investment. This is the
               same as the official deficit target set in the March 2008 update of the
               convergence programme. For 2009, the spring forecast projects the deficit to
               broadly stabilise on a no-policy change basis. This indicates that the deficit has
               been brought below the 3% of GDP reference value in a credible and
               sustainable manner,
         –     nonetheless, the structural balance is projected to deteriorate slightly by ¼
               percentage point of GDP in 2008 and, on a no-policy change basis, improve by
               about ⅓ percentage point in 2009. This has to be seen against the need to make
   19
       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                                                   9                                                   EN
 ---pagebreak---                  progress towards the medium-term objective (MTO) for the budgetary position,
                 which for Poland is a structural deficit of 1% of GDP,
            –    government debt declined from 47.6% of GDP in 2006 to 45.2% in 2007.
                 According to the spring 2008 forecast, the debt ratio is projected to remain well
                 below the 60% of GDP threshold and fall further to around 44% by end-2009.
   (7)    In the view of the Council, the excessive deficit in Poland has been corrected and
          Decision 2005/183/EC should therefore be abrogated.
   HAS ADOPTED THIS DECISION:
                                              Article 1
   From an overall assessment it follows that the excessive deficit situation in Poland has been
   corrected.
                                              Article 2
   Decision 2005/183/EC is hereby abrogated.
                                              Article 3
   This Decision is addressed to the Republic of Poland.
   Done at Brussels,
                                               For the Council
                                               The President
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