EU - Denmark, Estonia, Malta, Poland and Slovakia
Commission assesses the updated convergence programmes of Denmark, Estonia, Malta, Poland and Slovakia
Having examined their respective updated multi-annual convergence programmes, the European Commission has concluded that Denmark and Estonia fully meet the requirements of the Stability and Growth Pact on budgetary discipline while Malta is on track for correcting its excessive deficit by 2006 as recommended by the Council. But it calls on Poland to strengthen fiscal adjustment and to carry out the comprehensive reform plan adopted in 2004 in order to be able to bring its deficit below 3% of GDP in 2007. Slovakia is called to use any expenditure savings and unexpected revenues to accelerate the reduction of its deficit. The Commission’s recommendations on the five convergence programmes as well as on six stability programmes also assessed today (see IP/05/129) will be on the agenda of the European Union finance ministers meeting on 17 February.
“Achieving and maintaining national budgets close to balance or in surplus in the medium-term is one of the key aspects of the Stability and Growth Pact which must be revived. This is good for the economy and for growth, as it creates margins for stabilisation in economic downturns, increases the efficiency of the public sector and its contribution to the economy while ensuring the sustainability of public finances,” said Economic and Monetary Affairs Commissioner Joaquín Almunia.
Denmark’s public finances continue to present a very healthy picture with planned budget surpluses and a debt ratio clearly below the 60% reference value. This strategy puts Denmark in a favourable position to deal with the ageing population challenge.
The updated convergence programme of Denmark for the period 2004-2010 is little changed from 2003 with projected annual budgetary surplus of 1.5-2.5% of GDP in the medium-term and a limit on real public consumption growth of 0.5% from 2005. The macroeconomic scenario underlying the programme seems overall to reflect relatively cautious growth assumptions and the risks to the budgetary projections appear fairly balanced.
The budgetary stance in the programme seems sufficient to maintain a medium-term position close to balance or in surplus as required by the Stability and Growth Pact, therefore providing a sufficient safety margin against breaching the 3% deficit threshold.
The gross debt ratio of 44.7% of GDP in 2003 is projected to fall to below 29% in 2010.
All in all, Denmark is in a favourable position with regard to the long-term sustainability of its public finances. However, achieving continued tight expenditure control and a considerable rise in employment on which the strategy also relies may prove challenging.
Estonia’s economic performance continues to be impressive in many respects. The updated convergence programme for the period 2004-2008 aims at achieving a budget on balance from 2005 onwards after an expected 1% surplus in 2004.
The programme assumes an acceleration of output growth from 5.6% in 2004 to 5.9% in 2005 and close to 6% until 2008, a projection which appears plausible and even prudent.
Overall, the risks to the budgetary projections in the programme appear broadly balanced. On the one hand, the cautious macroeconomic scenario suggests that revenues could be higher and expenditure somewhat lower than budgeted. Indeed, Estonia has established a track record of prudent government forecasting and repeated overshooting of fiscal targets over the past few years. On the other hand, unexpected revenue shortfalls from the ongoing tax cuts, or an adverse impact on growth from exogenous shocks cannot be excluded altogether.
At 4.8% of GDP, Estonia’s debt is the lowest in the EU and is set to decline further. This means that the country is well placed to meet the budgetary costs of an ageing population and to maintain a medium-term objective of a budget close-to-balance over the entire programme period.
Malta is one of the 10 countries currently included in the excessive deficit procedure. The government, however, is on track to bringing its deficit below the 3% reference value in 2006, as confirmed by Finance Ministers last month, and in the updated convergence programme for 2004-2007.
The general government deficit is expected to fall from 5.2% in 2004 to 2.3% in 2006 and 1.4% in 2007. The macro-economic scenario underlying the programme envisages real GDP growth to pick up from 0.6% in 2004 to 1.8% on average over the rest of the programme period. On the basis of currently available information, this scenario seems plausible and the projections for inflation realistic.
All in all, the risks to the budgetary projections appear broadly balanced. The deficit target of 5.2% in 2004 is likely to have been reached. As to the future, the prudent underlying macro-economic scenario and the nature of the announced measures aimed at reducing the deficit, as well as budgetary projections set up in the programme, make the consolidation path broadly plausible. Therefore, the budgetary stance in the programme seems sufficient to reduce the deficit to below 3% in 2006 and seems to provide a sufficient safety margin against breaching this threshold with normal macroeconomic fluctuations.
However, the long-term sustainability of the country’s finances is dependent on achieving the budgetary targets, on addressing the costs of an ageing population and on reducing the national debt.
The programme puts the debt ratio at 73.2% of GDP in 2004, up from 70.4% in 2003, before falling again to 70.4% in 2007 thanks to stronger economic growth, progressive improvements in the primary budgetary balance and the sale of assets.
Poland presented an update of the convergence programme for 2004-2007 that is less ambitious than the previous one. The updated programme aims at a gradual reduction of the deficit from 5.4% in 2004 to 2.2% of GDP in 2007 (calculated with the inclusion of the second pillar pension fund estimated at 1.5% of GDP).
The programme is based on a macro-economic scenario of real GDP growth of 4.9% on average in 2005 and 2006, down from 5.7% in 2004 and rebounding to 5.6% in 2007. While the growth projections for 2005 and 2006 are plausible, the forecast for 2007 seems to on the high side.
The fiscal consolidation foreseen in the programme would result from the implementation of the measures contained in the comprehensive public finance reform (so-called Hausner plan), which, if fully implemented, would have an estimated budgetary impact of 4.7% of GDP over the period 2005-2007.
While the country is on track for correcting the budget deficit in the short term, the budgetary strategy presents clear risks which means that the objective of being below 3% in the last year can only be achieved if the government fully implements the Hausner plan (of which parts must still be approved by parliament), proceeds further in the path of fiscal consolidation and lowers the deficit target for 2007.
The debt ratio is projected to increase by a cumulative 3.4 percentage points over the period 2005-2007, with the increase coming to a halt only in the last year of the programme. A strict monitoring of outstanding liabilities and a resolute implementation of the planned budgetary consolidation should contribute to a sustainable fiscal position in the long term.
Slovakia continues to aim at bringing its deficit to 3% by 2007. This is in line with the correction path recommended by Finance Ministers in July 2004, but could be more ambitious, particularly this year in case of better-than-expected revenues, in view of a more favourable macroeconomic scenario.
The November 2004 updated convergence programme for the period 2004-2007 puts the general government deficit at around 3.8% until 2006 with the planned overall adjustment by 0.8 percentage points postponed to 2007.
Real GDP is now predicted to expand at an average rate of 5% over the period which appears plausible. By contrast, the predicted rapid fall of inflation to some 2.5% in 2007 is only plausible if second-round effects from the high headline inflation in 2004 are strictly contained.
All in all, the risks to the budgetary projections appear broadly balanced for the programme horizon as revenue developments may turn out more favourable and the uncertainties with respect to the pension reform are taken into account. The use of EU-funds (and of co-payments) is likely to be lower than budgeted in 2004 to 2006 but could exceed the budgeted amount in 2007.
The public debt is predicted to increase from 43% of GDP in 2004 to 45.5% of GDP in 2007. Although the structural reform measures enacted and planned, in particular the pension and health reforms, contribute to the achievement of a sustainable position over the long run, some risks to long-term sustainability remain.
The Commission individual assessments are available on: