CELEX: 52010SC0595
Language: en
Date: 2010-05-12 00:00:00
Title: Recommendation for a Council opinion on the updated stability programme of Cyprus, 2009-2013

EN
EN    EN
 ---pagebreak---      EUROPEAN COMMISSION
                                    Brussels, 12.5.2010
                                    SEC(2010) 595 final
                     Recommendation for a
                     COUNCIL OPINION
   on the updated stability programme of Cyprus, 2009-2013
EN                                                         EN
 ---pagebreak---                                    EXPLANATORY MEMORANDUM
   1.        GENERAL BACKGROUND
   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. The 2005 reform of the Pact acknowledged its usefulness
   in anchoring fiscal discipline but sought to strengthen its effectiveness and economic
   underpinnings as well as to safeguard the sustainability of the public finances in the long run.
   In particular, it introduced greater flexibility in the application of the rules governing the
   excessive deficit procedure, notably with regard to the definition of "exceptional
   circumstances" and the setting of deadlines for the correction of an excessive deficit.
   Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary
   positions and the surveillance and coordination of economic policies1, which is part of the
   Stability and Growth Pact, stipulates that each Member State has to submit, to the Council and
   the Commission, a stability or convergence programme and annual updates thereof. Member
   States that have already adopted the single currency submit (updated) stability programmes
   and Member States that have not yet adopted it submit (updated) convergence programmes.
   In accordance with the Regulation, the Council delivered an opinion on the first stability
   programme of Cyprus on 4 March 2008 on the basis of a recommendation from the
   Commission and after having consulted the Economic and Financial Committee. As regards
   updated stability and convergence programmes, the Regulation foresees that these are
   assessed by the Commission and examined by the Committee mentioned above and,
   following the same procedure as set out above, the updated programmes may be examined by
   the Council.
   2.        BACKGROUND FOR THE ASSESSMENT OF THE UPDATED PROGRAMME
   The Commission has examined the most recent update of the stability programme of Cyprus,
   submitted on 1 April 2010, and has adopted a recommendation for a Council Opinion on it.
   In order to set the scene against which the budgetary strategy in the updated stability
   programme is assessed, the following paragraphs summarise:
   (1)     the Commission Communication of 26 November 2008 (“A European Economic
           Recovery Plan”);
   (2)     the conclusions of the Economic and Financial Affairs Council of 20 October 2009 on
           the “Exit strategy”;
   (3)     the most recent assessment of the country’s position under the preventive arm of the
           Stability and Growth Pact (summary of the Council Opinion on the previous update of
           the stability programme).
   1
           OJ L 209, 2.8.1997, p. 1. The documents referred to in this text are available at:
           http://ec.europa.eu/economy_finance/sgp/index_en.htm.
EN                                                       2                                          EN
 ---pagebreak---    2.1.     The Commission Communication of 26 November 2008 (“A European
            Economic Recovery Plan”)
   In view of the unprecedented scale of the global crisis that hit financial markets and the world
   economy in 2008-2009, the European Commission had called for a European Economic
   Recovery Plan (EERP)2. The plan proposed a co-ordinated counter-cyclical macro-economic
   response to the crisis in the form of an ambitious set of actions to support the economy
   consisting of (i) an immediate budgetary impulse amounting to € 200 bn. (1.5% of EU GDP),
   made up of a budgetary expansion by Member States of € 170 bn. (around 1.2% of EU GDP)
   and EU funding in support of immediate actions of the order of € 30 bn. (around 0.3 % of EU
   GDP); and (ii) a number of priority actions grounded in the Lisbon Strategy and designed to
   adapt our economies to long-term challenges, continuing to implement structural reforms
   aimed at raising potential growth. The plan called for the fiscal stimulus to be differentiated
   across Member States in accordance with their positions in terms of sustainability of
   government finances and competitive positions. In particular, for Member States outside the
   euro area with significant external and internal imbalances, budgetary policy should
   essentially aim at correcting such imbalances. The plan was agreed by the European Council
   on 11 December 2008.
   2.2.     The conclusions of the Economic and Financial Affairs Council of 20 October
            2009 on the “Exit strategy”
   Following first signs of a recovery from the crisis, particularly the halt of the sharp decline in
   economic activity, the stabilisation of financial markets and the improvement in confidence,
   the Council concluded on 20 October 2009 that, while in view of the fragility of the recovery
   it was not yet time to withdraw the support governments provided to the economy and the
   financial sector, preparing a coordinated strategy for exiting from the broad-based policies of
   stimulus was needed. Such a strategy should strike a balance between stabilisation and
   sustainability concerns, take into account the interaction between the different policy
   instruments, as well as the discussion at global level. Early design and communication of such
   a strategy would contribute to underpinning confidence in medium-term policies and anchor
   expectations. Beyond the withdrawal of the stimulus measures of the European Economic
   Recovery Programme, substantial fiscal consolidation was required in order to halt and
   eventually reverse the increase in debt and restore sound fiscal positions. Increasing the
   efficiency and effectiveness of public finances and the intensification of structural reform
   were desirable even in the short term as they would contribute to fostering potential output
   growth and debt reductions. The Council agreed on the following principles of the fiscal exit
   strategy: (i) the strategy should be coordinated across countries in the framework of a
   consistent implementation of the Stability and Growth Pact; (ii) timely withdrawal of fiscal
   stimulus was needed, taking country-specific circumstances into account; (iii) the pace of
   consolidation should be ambitious, in most countries going well beyond the benchmark of
   0.5% of GDP per annum in structural terms; and (iv) the credibility of the strategy should be
   underpinned by measures to enhance the quality of public finances and ambitious structural
   reform efforts to raise employment and potential growth.
   2
           Communication from the Commission to the European Council of 26 November 2008.
EN                                                   3                                                EN
 ---pagebreak---    2.3.      The assessment in the Council Opinion on the previous update
   In its opinion of 3 April 2009, the Council summarised its assessment of the previous update
   of the stability programme, covering the period 2008-2012, as follows. The Council
   considered that "fiscal stance in 2009 will be expansionary due to the adoption of significant
   stimulus measures in 2009 in line with the EERP. In the subsequent years, the fiscal balance
   is projected to continue worsening. The implied fiscal loosening does not appear justified in
   view of the relatively good economic prospects and the existence of a large external
   imbalance. Moreover, against the background of a sharp deterioration in the global economic
   environment, the budgetary strategy is subject to significant downside risks, with the growth
   assumptions underlying the macroeconomic scenario of the programme being favourable. In
   the light of the high external imbalances, maintaining prudent policies and strengthening
   fiscal sustainability should be a major priority. Therefore, controlling current expenditure and
   avoiding procyclicality represents a major challenge for the fiscal policy in Cyprus. In
   addition, fostering the quality of public finances is important also with a view to underpinning
   a smooth adjustment of the economy in the light of the imbalances it is faced with". In view
   of this assessment, the Council invited Cyprus to "(i) implement the 2009 fiscal policy as
   planned in line with the EERP and within the framework of the SGP, while avoiding further
   deterioration of public finances in 2009 compared to the target; (ii) reverse the projected
   increase of the fiscal deficit in 2010 and beyond, by limiting the increase in expenditures in
   order to ensure a sound fiscal position in the medium term; (iii) in view of the projected
   impact of ageing on government expenditure, strengthen the long-term sustainability of public
   finances by pursuing the reform of the pension and health care systems".
EN                                                 4                                                EN
 ---pagebreak---                                             Recommendation for a
                                            COUNCIL OPINION
                       on the updated stability programme of Cyprus, 2009-2013
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union,
   Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of
   the surveillance of budgetary positions and the surveillance and coordination of economic
   policies3, and in particular Article 5(3) (for SP) thereof,
   Having regard to the recommendation of the Commission,
   After consulting the Economic and Financial Committee,
   HAS DELIVERED THIS OPINION:
   (1)       On [DD Month 2010] the Council examined the updated stability programme of
             Cyprus, which covers the period 2009 to 2013.
   (2)       In 2009 economic activity contracted by 1.7%. This is the first time Cyprus has
             experienced negative growth in the last thirty-five years. Weak domestic demand and
             an adverse external environment weighed strongly on growth. In particular, high
             household indebtedness together with tight lending conditions, a worsening labour
             market outlook and negative confidence effects led to a decline in private
             consumption. In parallel, investment recorded a strong correction, amidst a fall in
             foreign demand for housing, low capacity utilisation and the restructuring of
             corporate balance sheets. Government consumption was the only demand component
             supporting economic activity, partly due to the 1½% of GDP stimulus package
             implemented in line with the EERP. In addition to these discretionary measures, the
             contraction of economic activity, the fading out of the asset boom and a less tax-rich
             growth pattern has put public finances under significant pressure. As a result,
             government finances turned into a deficit of 6.1% of GDP from a surplus of 0.9% of
             GDP in 2008. The crisis has also highlighted the accumulation of a high external
             imbalance, which reflects not only the low private sector net savings but also a
             deterioration of the net position of general government and competitiveness losses. A
             weak domestic demand and a sluggish external recovery are expected to weigh on
             recovery prospects. GDP growth is forecast to shrink further, although to a lesser
             extent, in 2010 and to recover mildly in 2011. Therefore, in the medium term,
             Cyprus is facing the challenge of enhancing growth, against the backdrop of a frail
   3
           OJ L 209, 2.8.1997, p. 1. The documents referred to in this text can be found at the following website:
           http://ec.europa.eu/economy_finance/sgp/index_en.htm.
EN                                                       5                                                         EN
 ---pagebreak---          global economic recovery, while addressing the existing macroeconomic imbalances
         through maintaining prudent fiscal policies. In the long term, the country is
         confronted with the need to strengthen the sustainability of public finances, in view
         of an ageing population.
   (3)   Although much of the observed decline in actual GDP in the context of the crisis is
         cyclical, the level of potential output has also been negatively affected. In addition,
         the crisis may also affect potential growth in the medium term through lower
         investment, constraints in credit availability and increasing structural unemployment.
         Moreover, the impact of the economic crisis compounds the negative effects of
         demographic ageing on potential output and the sustainability of public finances.
         Against this background it will be essential to accelerate the pace of structural
         reforms with the aim of supporting potential growth. In particular, for Cyprus it is
         important to undertake reforms in the area of the labour market, especially to
         strengthen lifelong learning opportunities, in particular, with regard to the low-
         skilled, older workers and unemployed people as well as to ensure the timely and
         effective implementation of the planned reforms in technical and vocational
         education. Moreover, there is a need to better align wage growth with productivity,
         employment growth and competitiveness.
   (4)   The macroeconomic scenario underlying the programme envisages that real GDP
         growth will rise from -1.7% in 2009 to 0.5% in 2010, before recovering to an
         average rate of about 2.6% over the rest of the programme period. Assessed against
         currently available information4, this scenario appears to be based on favourable
         growth assumptions throughout the programme period. In particular, private
         consumption is expected to follow a favourable trend, driven by a somewhat
         optimistic employment and wage growth. The Programme projects real construction
         investment growth to remain negative in the short-term and to recover in the second
         half of the programme period. However, forward-looking indicators suggest a
         stronger correction path for the construction sector in the medium-term than the one
         projected by the programme. Moreover, despite the improving economic outlook, the
         fragility of recovery in Cyprus' main trading partners entails non-negligible downside
         risks to the macroeconomic scenario in the programme. Due to the contraction of
         economic activity in 2009 there was a significant, yet partial, correction of the
         external deficit, which nevertheless remains high, at 8.5% of GDP, and is projected
         in the programme to rise again sharply to 12.9% of GDP by 2013 as imports are
         expected to pick up. The external imbalance is likely to weigh on economic growth
         over the medium-term. High public sector dissavings would need to be financed by
         foreign debt or domestic private savings. Thus, the adjustment of the current account
         imbalance would require either higher cost of debt-financing or higher savings from
         the private sector. The latter would imply lower output growth through lower private
         consumption or investment (crowding-out effect). The programme's inflation
         projections appear realistic.
   (5)   According to the programme, the general government deficit deteriorated strongly in
         2009, reaching a deficit of 6.1% of GDP from a surplus of 0.9% of GDP in 2008,
         reflecting mainly the impact of the crisis on government finances but was also
   4
       The assessment notably takes into account the Commission services' spring 2010 forecast, but also other
       information that has become available since then.
EN                                                   6                                                         EN
 ---pagebreak---        brought about by stimulus measures amounting to 1½% of GDP which the
       government adopted in line with the European Economic Recovery Plan (EERP).
       According to the programme, fiscal policy is planned to be restrictive with a view to
       correcting the excessive deficit by 2013 under the assumed growth scenario.
   (6) According to the update, the budgetary target for 2010 is a deficit of 6% of GDP.
       The 2010 budget law (approved by the Parliament on 24 December 2009) targeted a
       deficit of 4.5% of GDP on the basis of an estimated outturn for the deficit in 2009 of
       about 3% of GDP. Given that the final outturn for 2009 was a deficit of 6% of GDP,
       the budget law would imply an even higher deficit. However, the programme
       includes measures which aim to stop further budgetary deterioration and stabilise the
       deficit at the same levels as in 2009. The update projects the revenue-to-GDP ratio to
       rise by about 1¼ percentage points in 2010 compared with the outturn of 2009.
       Public expenditure is expected to increase by 1¼ percentage points of GDP. Primary
       expenditure is planned to rise further mainly driven by a further rise in social
       transfers, subsidies and in the public wage bill. According to the update, interest
       payments are set to continue their declining trend, falling by a ¼ percentage point of
       GDP, despite the rising stock of debt. Public investment is planned to remain at 2009
       levels. Overall, the fiscal policy stance, as measured by the structural balance (i.e. in
       cyclically-adjusted terms net of one-off and other temporary measures), implied by
       the Programme will be tightening in 2010 of an order of ½% of GDP.
   (7) The main goal of the programme's medium-term budgetary strategy is to bring the
       general government balance below the 3% of GDP reference value by 2013. The
       programme projects the nominal budget deficit to decline to 4.5% of GDP in 2011
       (from 6.1% in the previous year) and 3.4% in 2012 before it eventually reaches 2.5%
       in 2013. The primary balance is expected to follow a similar pattern and reach a
       balanced position by the end of the period, from a deficit of 3.7% of GDP in 2010.
       The structural deficit, calculated according to the commonly agreed methodology,
       would continue to improve after 2010, to reach around 3½% of GDP in 2011, just
       below 3% in 2012 and 2¼% in 2013. The annual fiscal effort would average at 3/4%
       of GDP per year over the period 2010-2013. The adjustment appears front-loaded,
       although measures taken in 2010 will have their full effect only in 2011. Moreover,
       measures taken within the context of the EERP will only be phased out by the end of
       2010. Consolidation is planned to be achieved mainly from the revenue side of the
       budget, which is projected to increase by 2.6 pp. of GDP between 2010 and 2013,
       while expenditure retrenchment would contribute an additional percentage point of
       GDP. Revenue supporting measures include the fight against tax evasion, a town
       planning amnesty, harmonisation of the minimum excise duties on petroleum
       products and application of the reduced VAT on foodstuff and pharmaceutical
       products as well as dividend income from semi-governmental organisations. As
       regards expenditure measures, the bulk of the programme's adjustment comes from
       controlling operational expenditure and reducing current transfers. The programme
       lists the targeting of social transfers and the containment of size and the rate of
       growth of public wage bill as expenditure categories for consolidation when
       consensus would be reached among social partners. The update confirms the
       commitment to the country-specific medium-term budgetary objective (MTO), which
       is a balanced budgetary position in structural terms (i.e. in cyclically-adjusted terms
       net of one-off and other temporary measures). The MTO adequately reflects the
EN                                             7                                                 EN
 ---pagebreak---           objectives of the Pact. The structural balances corresponding to the programme’s
          deficit targets imply that the MTO will not be reached within the programme period.
   (8)    The budgetary outcomes could be worse than targeted in the programme. In
          particular, the macroeconomic scenario projected in the update appears to be based
          on favourable growth assumptions throughout the programme period. On the revenue
          side, risks for public finances, particularly in 2010-2011, are higher than in previous
          years and are associated with a possible sharper contraction and rebalancing of
          economic growth towards a less-tax rich composition of growth. In view of the
          expected moderate economic recovery and the pressure to stimulate domestic
          demand through increased public expenditure, the risks of potential overruns are non
          negligible. These risks are mainly associated to the practise of submitting
          expenditure-increasing supplementary budgets during the course of the year which,
          beyond the intended reallocation of funds, has implied an increase in current
          expenditure. Moreover, social transfers might turn higher than expected in view of
          the recent past track record and the absence of a targeting mechanism at place as well
          as of the somewhat optimistic employment (thus unemployment) growth projections.
   (9)    The government gross debt-to-GDP ratio is estimated at 56.2% of GDP in 2009, up
          from 48.4% in the year before. Apart from the increase in the deficit and the decline
          in GDP growth, a stock-flow adjustment accounting for 1 percentage point of GDP
          contributed to the rise in the debt ratio. The latter reflects an accumulation of
          government assets, due to over-financing at the end of 2009 in order to meet
          obligations arising early in January of 2010. The debt ratio is projected to increase
          over the programme period, mainly driven by continued although declining primary
          deficits. The debt ratio will breach the reference value of 60% of GDP in 2010 and is
          projected to remain above the reference value throughout the programme period. It is
          projected to increase to around 63% of GDP in 2011 and 2012, thereafter slightly
          declining. In view of the downward risks to the macroeconomic scenario and the
          budgetary targets, the evolution of the debt ratio may be less favourable than
          projected in the programme.
   (10)   The long-term budgetary impact of ageing is significantly above the EU average,
          mainly as a result of a relatively high increase in pension expenditure as a share of
          GDP over the coming decades partly due to the fact that the pension scheme is still in
          a maturing phase. The programme discusses a pension reform introduced in April
          2009 that is projected to slightly reduce the increase in pension expenditure and,
          more significantly, increase the social security contribution rates. The reform would
          improve the long-term balance of the pension system and reduce risks to
          sustainability, however without having an effect on the overall assessment. The
          budgetary position in 2009 as estimated in the programme compounds the budgetary
          impact of population ageing on the sustainability gap. Improving the primary balance
          over the medium term and implementing further measures aimed at curbing the
          substantial increase in age-related expenditure, especially pension and healthcare
          expenditure, would contribute to reducing the risks to the sustainability of public
          finances, which were assessed in the Commission 2009 Sustainability Report5 as
   5
        In the Council conclusions from 10 November 2009 on sustainability of public finances "the Council
        calls on Member States to focus attention to sustainability-oriented strategies in their upcoming stability
        and convergence programmes" and further "invites the Commission, together with the Economic Policy
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 ---pagebreak---           high. Medium-term debt projections that assume GDP growth rates to gradually
          recover to the values projected before the crisis, tax ratios to return to pre-crisis
          levels, and include the projected increase in age-related expenditure show that the
          budgetary strategy envisaged in the programme, taken at face value and with no
          further policy change, would almost be enough to stabilise the debt-to-GDP ratio by
          2020.
   (11)   In recent years, Cyprus has over-achieved its budgetary targets, albeit in a context of
          buoyant economic activity and tax-rich composition of growth. In the recent past, the
          budgetary framework has been improved by the adoption of the Financial
          Management Accounting System (FIMAS), the gradual introduction of a three-year
          medium-term budgetary framework (MTBF) and of Programme and Performance
          Budgeting (PPB). However, the practice of adopting supplementary budgets during
          the course of the year has implied an increase in current expenditure beyond the
          intended reallocation of funds. According to the Programme, the new budgeting
          framework is expected to cease this practice when fully implemented and lead to a
          more effective and efficient budgeting process, contributing to containing
          expenditure. At the same time, the new budgeting process would set a sound basis
          for reallocating expenditure in favour of growth-enhancing activities consistent with
          the priorities set by the National Reform Programme. However, the new framework
          is still at an early stage of implementation and is only foreseen to be fully in place in
          2012. Therefore, its impact could become effective only in the medium-term. The
          new framework's timely implementation would be critical for a successful and lasting
          consolidation of the public finances.
   (12)   As regards the quality of public finances, the programme acknowledges its
          importance as a means to support potential growth and to ensure the long-term
          sustainability of public finances. In particular, the programme notes the impact the
          MTBF and PPB budgeting will have upon full implementation on the better
          allocation of resources to high-priority, growth enhancing areas in tandem with better
          control of non-productive expenditure. On the expenditure side, the programme
          includes a review of recent projects aimed at enhancing infrastructure, through
          Private Public Partnerships (PPP), as well as measures to improve education, through
          the increased use of computers in primary and secondary education and
          improvements in research and academic institutions. The update also includes the
          allocation of funds to restructure public hospitals into autonomous units and the
          adoption of a National Health Scheme, with the aim of improving effectiveness via
          regulated competition and cost containment. This seems essential as a means to
          control the anticipated expenditure increases associated to an ageing population. On
          the revenue side, the programme emphasizes the positive impact the introduction of
          the MTBF would have on improving the accuracy and sensitivity of revenue
          forecasts over the medium-term. The authorities note that given the volatility of tax
          elasticities in recent years due to the asset boom, revenue projections were adapted to
          take into account the impact of asset prices and the composition of GDP growth. The
          programme also notes the constant monitoring of the tax-benefit system by the
        Committee and the Economic and Financial Committee, to further develop methodologies for assessing
        the long-term sustainability of public finances in time for the next Sustainability report", which is
        foreseen in 2012.
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 ---pagebreak---             authorities in order to endure that work pays while ensuring the support to vulnerable
            social groups.
   (13)     Overall, taking into account the risks to the budgetary targets mentioned above, the
            strategy to maintain supportive fiscal policies also in 2010 can be considered in line
            with the EERP. However, following the negative effects of the economic crisis, the
            general government deficit is to remain at 6% of GDP in 2010, gradually abating
            below the 3% reference value thereafter. While the programme's strategy foresees an
            average annual fiscal effort of ¾ percentage points of GDP over the period 2010-
            2013, this is subject to downside risks. Therefore, in view of the risks, the fiscal
            effort may not be sufficient to bring the deficit below the 3% of GDP reference value
            by 2013 as planned. Moreover, the composition of the consolidation strategy of the
            programme appears to be based largely on revenue-increasing measures with
            expenditure retrenchment being minimal. In fact, the programme projects the
            expenditure-to-GDP ratio to stabilise at a higher level in 2013 than the 2009 outturn.
            Measures that could reverse this situation are still under discussion with the social
            partners and, thus, subject to risks regarding the modalities and the timing of their
            implementation. As a result, the evolution of the debt ratio, which is planned to
            exceed 60% of GDP from 2010 onward, may also be less favourable than projected
            in the update.
   (14)     As regards the data requirements specified in the code of conduct for stability and
            convergence programmes, the programme provides all required and optional data.
   The overall conclusion is that Cyprus' public finances deteriorated significantly as a result of
   the economic downturn and an expansionary fiscal stance due to the adoption of significant
   stimulus measures in line with the EERP. As a result, the budgetary balance turned to a deficit
   of 6.1% of GDP in 2009 from a surplus of 0.9% of GDP in 2008. The programme outlines a
   consolidation path starting in 2010 which aims to bring the general government balance below
   the 3% of GDP reference value by 2013. However, the adjustment is planned to be achieved
   mainly from the revenue side of the budget while the expenditure-to-GDP ratio remains at
   historically high levels. Moreover, against the background of a frail global economic
   recovery, the budgetary strategy is subject to significant downside risks, as the growth
   assumptions underlying the macroeconomic scenario of the programme are favourable. In the
   light of the high domestic and external imbalances, maintaining prudent policies and
   strengthening fiscal sustainability should be a priority. Therefore, controlling current
   expenditure through the implementation of an effective multi-annual budgetary framework
   would be an essential instrument to support the achievement of the consolidation plans and
   budgetary targets. In addition, fostering the quality of public finances is important also with a
   view to underpinning a smooth adjustment of the economy in the light of the imbalances it is
   faced with, notably by lifting potential GDP, enhancing competitiveness and further
   narrowing the external imbalance.
   In view of the above assessment, Cyprus is invited to:
   (i)      limit the 2010 deficit to at most 6% of GDP, if necessary by reinforcing the
            consolidation measures, notably in case macroeconomic developments proves less
            favourable than the programme scenario, and take timely action to define a more
            expenditure-driven consolidation strategy; seize opportunities beyond the announced
            fiscal effort to accelerate fiscal consolidation and the reduction of the gross debt ratio
            back below the reference value;
EN                                                  10                                                 EN
 ---pagebreak---    (ii)  implement, as envisaged, an effective multi-annual budgetary framework in order to
         ensure the adherence to the budgetary targets and to firmly contain expenditure over
         the medium-term;
   (iii) improve the long-term sustainability of public finances by implementing reform
         measures to control pension and health care expenditure in order to curb the
         projected increase in age-related expenditure.
EN                                            11                                              EN
 ---pagebreak---                      Comparison of key macroeconomic and budgetary projections
                                                               2008       2009       2010      2011       2012       2013
                                          SP Apr 2010            3.6       -1.7        0.5       1.5        3.0        3.2
                Real GDP
                                         COM May 2010            3.6       -1.7       -0.4       1.3       n.a.       n.a.
               (% change)
                                          SP Feb 2009            3.8        2.1        2.4       3.0        3.2       n.a.
                                          SP Apr 2010            4.4        0.2        2.7       2.0        2.0        2.0
             HICP inflation
                                         COM May 2010            4.4        0.2        2.7       2.5       n.a.       n.a.
                   (%)
                                          SP Feb 2009            4.4        2.0        2.5       2.5        2.5       n.a.
                                          SP Apr 2010            2.9       -1.3       -2.4      -2.5       -1.6       -0.5
               Output gap1
                                         COM May 2010            3.4       -0.7       -2.1      -1.6       n.a.       n.a.
         (% of potential GDP)
                                          SP Feb 2009            0.8       -0.1       -0.6      -0.5       -0.2       n.a.
    Net lending/borrowing vis-à-          SP Apr 2010          -17.7       -8.5      -11.5     -12.2      -12.6      -12.9
        vis the rest of the world        COM May 2010          -17.6       -8.2       -6.8      -6.7       n.a.       n.a.
              (% of GDP)                  SP Feb 2009          -12.4      -12.1      -11.5     -10.9      -10.2       n.a.
                                          SP Apr 2010           43.5       40.3       41.6      42.8       43.6       44.2
    General government revenue
                                         COM May 2010           43.5       40.3       41.2      41.3       n.a.       n.a.
              (% of GDP)
                                          SP Feb 2009           45.3       43.8       44.0      44.4       44.8       n.a.
          General government              SP Apr 2010           42.6       46.4       47.6      47.2       47.0       46.7
               expenditure               COM May 2010           42.6       46.4       48.3      49.0       n.a.       n.a.
              (% of GDP)                  SP Feb 2009           44.3       44.6       45.5      46.3       47.1       n.a.
                                          SP Apr 2010            0.9       -6.1       -6.0      -4.5       -3.4       -2.5
    General government balance
                                         COM May 2010            0.9       -6.1       -7.1      -7.7       n.a.       n.a.
              (% of GDP)
                                          SP Feb 2009            1.0       -0.8       -1.4      -1.9       -2.2       n.a.
                                          SP Apr 2010            3.7       -3.6       -3.7      -2.1       -1.0        0.1
            Primary balance
                                         COM May 2010            3.7       -3.6       -4.4      -4.8       n.a.       n.a.
              (% of GDP)
                                          SP Feb 2009            3.9        1.5        0.8       0.2       -0.2       n.a.
                                          SP Apr 2010           -0.2       -5.6       -5.1      -3.5       -2.8       -2.3
     Cyclically-adjusted balance1
                                         COM May 2010           -0.4       -5.8       -6.3      -7.1       n.a.       n.a.
              (% of GDP)
                                          SP Feb 2009            0.7       -0.8       -1.2      -1.7       -2.1       n.a.
                                          SP Apr 2010           -0.2       -5.6       -5.2      -3.6       -2.9       -2.3
           Structural balance3
                                         COM May 2010           -0.4       -5.8       -6.3      -7.1       n.a.       n.a.
              (% of GDP)
                                          SP Feb 2009            0.7       -0.8       -1.2      -1.7       -2.1       n.a.
                                          SP Apr 2010           48.4       56.2       61.0      63.2       63.1       62.3
        Government gross debt
                                         COM May 2010           48.4       56.2       62.3      67.6       n.a.       n.a.
              (% of GDP)
                                          SP Feb 2009           49.3       46.8       45.4      44.2       44.2       n.a.
   Notes:
   1
     Output gaps and cyclically-adjusted balances from the programmes as recalculated by Commission services on the basis
   of the information in the programmes.
   2
     Based on estimated potential growth of 2.0%, 2.8%, 2.8%, 2.8% and 2.8% respectively in the period 2009-2013.
   3
     Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are
   0.1% in years 2010, 2011 and 2012(all deficit reducing) according to the most recent programme. There are no one-off and
   other temporary measures in the Commission services' spring 2010 forecast.
     Source:
     Stability programme (SP); Commission services’ spring 2010 forecasts (COM); Commission services’ calculations.
EN                                                             12                                                           EN