CELEX: 52013DC0393
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 Poland

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		52013DC0393
		
			Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Poland /* COM/2013/0393 final */
			
				
		
		
			
			   	Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the
situation of an excessive government deficit in Poland

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 7 July 2009, the
Council decided, in accordance with Article 104(6) of the Treaty establishing
the European Community (TEC), that an excessive deficit existed in Poland and
issued a recommendation to correct the excessive deficit by 2012 at the latest[1], in accordance with Article 104(7)
TEC 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 Polish authorities were recommended to implement
the fiscal stimulus measures in 2009 as planned, ensure an average annual
structural budgetary adjustment of at least 1¼% percentage points of GDP
starting in 2010, spell out detailed measures that are necessary to bring the
deficit below the reference value by 2012 and introduce reforms to contain
primary current expenditure over the following years. The Council established a
deadline of 7 January 2010 for effective action to be taken.
(4)       On 3 February 2010, the
Commission concluded that based on the Commission services' 2009 autumn forecast,
  Poland had taken necessary action in compliance with the Council
recommendation of 7 July 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. On the basis of its 2011 autumn
forecast, the Commission considered that Poland was not on track and asked for
additional measures, which Poland provided. Thus, on 11 January 2012 the
Commission confirmed the Polish authorities had taken effective action towards
a timely and sustainable correction of the excessive deficit and no further
steps in the excessive deficit procedure of Poland were needed at the time[3].
(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) 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) 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)       The Commission services’
2009 spring forecast, which was underlying the Council recommendation under Article
104(7) TEC of 7 July 2009, projected that the Polish economy would expand by 0.8%
in 2010, while the years 2011 and 2012 were beyond that forecast's horizon. In
2009, real GDP increased by 1.6% and it was mainly driven by fiscal and
monetary policy easing, inflows of EU funds financing infrastructure
investments and a currency depreciation. The pick-up in exports and the rebound
of domestic demand led to a recovery in 2010 and 2011, when real GDP grew by
3.9% and 4.5%, respectively, thus GDP growth in 2010 was well above the 0.8% of
GDP expected in the Commission services' 2009 spring forecast. The Commission
services' 2009 spring forecast, which expected the closure of the output gap
beyond the forecast horizon, implicitly assumed a growth rate of the Polish
economy around its potential one in outer years. However, the Polish economy
slowed down sharply in 2012 with real GDP growth of 1.9%. Investment,
especially construction, was held back by government consolidation, subdued
credit growth and households refraining from real estate purchases. Overall, Poland has seen relatively resilient economic activity in 2009-2012, albeit with real GDP
growth below potential in 2012, mainly resulting from the global economic and
financial crisis.
(8)       The Commission services'
2013 spring forecast projects an increase in real GDP of only 1.1% in 2013.
Private consumption is forecast to grow by 0.8% due to falling employment,
subdued wage growth and households rebuilding their savings. The trend in gross
fixed capital formation, particularly in infrastructural construction, is set
to remain negative with a decline of 2.6%, reflecting further fiscal
consolidation, weak external demand and subdued credit growth. In 2014, some
pick up of the economy with a real GDP growth of 2.2% is expected, although
this is subject to risks in both directions depending on the speed of global
recovery. 
(9)       The
general government deficit had jumped to 7.4% of GDP in 2009 (from 3.7% of GDP
in 2008) due to a sizeable fiscal stimulus and strong, in-built expenditure dynamics
predicated on high growth. After the excessive deficit procedure was launched,
consolidation measures in 2010 targeted the public sector wage bill, current
spending and increased excise duties. Despite these consolidation measures of 0.6
% the headline deficit increased to 7.9% of GDP in 2010, driven by a sizeable
increase in public investment (0.4% of GDP) and intermediate consumption (0.5%
of GDP). Since 2011, the headline deficits have been influenced by continued
consolidation effort, including cuts in social contributions transferred to
open pension funds, increases in VAT rates and revenue-increasing changes in
other taxes, the introduction of a temporary expenditure rule and cuts in
spending on active labour market policies. Thus, the headline deficit decreased
to 5% of GDP in 2011. 
(10)     The general government
deficit, according to actual data reported in the Eurostat notification of
April 2013, reached 3.9% of GDP in 2012. The 2012 deficit outturn is higher
than the expected 3.5% of GDP publicly announced by the Polish authorities in
September 2012. In particular, interest expenditure and social transfers were
higher than projected. On the revenue side, indirect taxes, VAT in particular,
were substantially lower than forecast. An even worse outcome was prevented by
lower execution of public investments, partly counterbalanced by lower capital
transfers received.
(11)     The Commission services'
2013 spring forecast projects the general government deficit at 3.9% of GDP in
2013 (against Poland's deficit target for 2013 of 3.5% of GDP) and, under a
no-policy-change assumption, at 4.1% of GDP in 2014. Taking into account
additional measures contained in the 2013 update of the Polish Convergence
Programme (CP), which was published after the cut-off date of the Commission
services' 2013 spring forecast hardly change the assessment. For 2013 the CP does
not incorporate new discretionary measures. Although the CP envisages keeping
VAT rates at their current level instead of lowering them, the inclusion of
this measure would, according to Commission estimates, reduce the 2014 deficit
to 3.7% of GDP. Therefore, the Commission service’s spring forecast has been
updated with the measures included in the CP in order to have an accurate
baseline scenario for the new recommendation. 
(12)     The main downside risk to
budgetary targets in 2013 and beyond is – based on past evidence –strong
procyclicality of indirect and direct tax revenues, below standard revenue
elasticities used in the forecast. In particular, it was experienced in 2012
when, despite an increase in the tax base, indirect tax revenues fell driven by
an increase in VAT refunds and VAT arrears. 
(13)     The structural deficit
decreased from 8.3% of GDP in 2010 to 5.4% in 2011 and 3.8% in 2012. Consolidation measures implemented over this period targeted in particular indirect taxes, disability contributions,
contributions to open pension funds, public sector (excluding local government)
wage bill and intermediate consumption. These measures were sizeable and
covered both, revenue and expenditure side. Cumulatively they amounted to 2.1 %
of GDP in 2011 and to 1.6% of GDP in 2012.
(14)     The average annual apparent
fiscal effort over the period 2010-2012 is estimated at 1.5% of GDP. When
adjusted for the significant upward revision in potential output growth since
the time when the recommendation was issued (-0.3pp) and because of revenue
unexpectedly growing at a lower rate than would have been implied by the GDP
growth based on standard elasticities (+0.4pp), the average annual adjusted
structural effort (1.6% of GDP) exceeds the recommended average annual fiscal
effort (1¼% of GDP) over 2010 - 2012. The bottom-up
approach estimates the cumulative size of consolidation measures at some 4.3%
of GDP over 2010-2012. Thus, Poland has taken effective action. 
(15)     The European Commission Fiscal
Sustainability Report 2012 shows that Poland does not face a risk of fiscal
stress in the short run. The country is at medium sustainability risk in a
medium term and at a low risk in a long-term perspective, providing the plans
for fiscal consolidation are fully implemented. The 2012 Ageing Report indicates
a limited projected increase in total age-related public expenditure over the
years 2010-60. Nevertheless, Poland still needs to implement long-term
sustainability-enhancing policies, but this effort is below the average
improvement required for the EU as a whole.
(16)     Public debt declined to
55.6% of GDP in 2012 from 56.2% of GDP in 2011, on the back of sizeable
stock-flow adjustment. The Commission services’ 2013 spring forecast projects
its increase to 57 ½% of GDP in 2013 and, based on a no-policy-change
assumption, to almost 59% of GDP in 2014. 
(17)     In order to reduce the
deficit below the 3% of GDP threshold by 2013, thus extending the deadline by
one year, the required structural effort would amount to at least 1.4% of GDP.
Such a yearly effort would be higher than requested in the Council
Recommendation of 7 July 2009 (1¼ % of GDP), despite the fact that fiscal risk
has fallen since 2009 as the headline deficit is at a much lower level and debt
remains below the 60% threshold. As a consequence, a more gradual pace of
consolidation is affordable as it would also reduce output costs, which would
be sizeable if a correction had to be done in 2013. In particular, because the
time available after the recommendation to enact the required measures would be
limited. Therefore, they have to be scaled up to be able to achieve an impact of
about 1% of GDP over the entire year.
(18)     In view of the above and consistent
with the rules of the Stability and Growth Pact, an extension of the deadline
to correct the excessive deficit by two years is warranted.
(19)     Correcting the excessive
deficit by 2014 would be commensurate with intermediate headline deficit
targets of 3.6% of GDP for 2013 and 3.0% of GDP for 2014. The underlying
improvement in the structural budget balance implied by these targets are 0.8%
of GDP in 2013 and 1.3% of GDP in 2014. This implies a need of additional
measures of 0.4% of GDP in 2013 and 0.4% of GDP in 2014, on top of those
already included in the spring forecast and in the update of the Convergence
Programme with an estimated budgetary impact of 0.25% in 2013 and 0.4% of GDP
in 2014.
(20)     Poland 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)                   
Poland should bring an
end to the excessive deficit situation by 2014 at the latest.
(2)                   
Poland should reach a headline deficit target of 3.6% of
GDP in 2013 and 3.0% of GDP in 2014, which is consistent with an annual improvement
of the structural balance of at least 0.8% and 1.3% of GDP respectively, based
on the updated Commission services' 2013 spring forecast.
(3)                   
Poland should rigorously
implement the measures already adopted , while
complementing them with additional measures sufficient to achieve a correction
of the excessive deficit in 2014 at the latest.
(4)                   
The Council establishes the deadline of [01
October 2013] for Poland 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, Polish authorities should (i)
improve the quality of public finances, in particular through minimising cuts
in growth-enhancing infrastructure investments, a careful review of social
expenditures and their efficiency; (ii) improve tax compliance and increase the
efficiency of tax administration and (iii) make the institutional framework of
public finances more binding and transparent, including through prompt adoption
of a permanent expenditure rule on the general government budget. Finally, to
ensure the success of the fiscal consolidation strategy, it will be important
to back the fiscal consolidation by comprehensive structural reforms, in line
with the Council recommendations addressed to Poland in the context of the
European Semester. Beyond the report foreseen in recommendation (4), the Polish authorities
should report on progress made in the implementation of these recommendations
in a separate chapter in the convergence programmes, until full correction of
the excessive deficit has taken place.
This recommendation is addressed to the Republic of   Poland.
Done at Brussels, 
                                                                       For
the Council
                                                                       The
President
[1]               All documents related to the
excessive deficit procedure of Poland can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/poland_en.htm
[2]               OJ L 209, 2.8.1997, p. 6.
[3]               Communication from the
Commission to the Council on assessment of budgetary implementation in the
context of the ongoing Excessive Deficit Procedures after the Commission
services' 2011 autumn forecast – COM(2012) 4 final, 11.1.2012.