Select Committee on European Scrutiny Twenty-Third Report


STABILITY AND CONVERGENCE PROGRAMMES


(a)
(23166)
SN 1107/02


Austria — Council Opinion on the updated Stability Programme, 2002-2005.

(b)
(23167)
SN 1108/02


Belgium — Council Opinion on the updated Stability Programme, 2002-2005.

(c)
(23168)
SN 1109/02


Finland — Council Opinion on the updated Stability Programme, 2001-2004.

(d)
(23169)
SN 1111/02


Netherlands — Council Opinion on the updated Stability Programme.

(e)
(23170)
SN 1112/02


Luxembourg — Council Opinion on the updated Stability Programme.

(f)
(23171)
SN 1113/02


Sweden — Council Opinion on the updated Convergence Programme.

(g)
(23246)
SN 1319/1/02


France — Council Opinion on the updated Stability Programme, 2003-2005.

(h)
(23247)
SN 1320/1/02


Germany — Council Opinion on the updated Stability Programme, 2001-2005.

(i)
(23248)
SN 1321/02


Greece — Council Opinion on the updated Stability Programme, 2001-2004.

(j)
(23249)
SN 1322/02


Ireland — Council Opinion on the updated Stability Programme, 2002-2004.

(k)
(23250)
SN 1323/02


Italy — Council Opinion on the updated Stability Programme, 2001-2005.

(l)
(23251)
SN 1324/1/02


Portugal — Council Opinion on the updated Stability Programme, 2001-2005.

(m)
(23252)
SN 1325/1/02


Spain — Council Opinion on the updated Stability Programme, 2001-2005.

(n)
(23278)
Official Journal C51/7


UK — Council Opinion on the updated Convergence Programme, 2000/1 - 2006/7.

(o)
(23303)
SN 1361/02


Denmark — Council Opinion on the updated Convergence Programme, 2001-2005.

(p)
(23306)
SN 1382/1/02


Council Statement on the Budgetary Situation of Germany.

(q)
(23307)
SN 1383/1/02


Council Statement on the Budgetary Situation of Portugal.


Legal base:Articles 99(3), 99(5), and 104 EC; qualified majority voting
Department:HM Treasury
Basis of consideration: (a) - (f): EM of 11 February 2001
(g) - (n), (p) and (q): EM of 12 March 2002
(o): EM of 26 March 2002
Previous Committee Report: None
Discussed in Council: 22 January 2002
Committee's assessment:Politically important
Committee's decision:(All) For debate in European Standing Committee B



Background

  3.1  The Council of Economic and Finance Ministers (ECOFIN) issues an Opinion on the stability and convergence programme (SCP) of each Member State.[12] These Opinions, which are not binding on Member States, are based on a recommendation from the Commission. The economic content of the programmes is assessed with reference to the Commission's autumn economic forecasts. If a Member State's programme is found wanting, it may be invited by ECOFIN to make adjustments to its economic policies, as Ireland was in 2001.

The documents

  3.2  The documents provide the Council's Opinion on the SCP of each of the Member States and the Council's Statements on the budgetary situation in Germany and Portugal. A summary of the Council's Opinion for each Member State is provided by the Minister in several helpful Explanatory Memoranda, as follows:

    "Austria — Council Opinion on the updated Stability Programme, 2001-2005

    "For Austria, the Council's Opinion notes that the 2000 deficit of 1.1% of GDP is expected to move to balance in 2001­3, and a small surplus thereafter. Government gross debt is expected to decrease from 61 .8% of GDP in 2001 to 52.1% in 2005. The Opinion welcomes important structural savings measures in pensions and public administration which contributed to balanced government accounts in 2001 and will continue to produce downward pressure on spending over the programme period. The annual average growth projection of 2.25% is considered to be feasible. The budgetary position is expected to be close to balance or in surplus for the programme period in line with the requirements of the Stability and Growth Pact (SGP). The Opinion encourages "a stronger than planned reduction in the revenue ratio", through a decline in the tax burden. It also encourages continued structural reforms, particularly in the pension and health care systems.

    "Belgium — Council Opinion on the updated Stability Programme, 2002-2005

    "For Belgium, the Council's Opinion notes strong growth of 4% in 2000, a general government surplus and a reduction in government debt by 5.7 percentage points to 109.3% of GDP. The temporary departure from the budgetary adjustment path projected in the 2000 stability programme is noted but is not considered significant, although the Opinion urges a return to the previously projected budgetary adjustment path in 2003. Given the high level of debt, the Opinion recommends that all additional revenues be allocated to debt reduction and that a high level of primary surplus is maintained throughout the programme period. The Opinion notes that the general government accounts are projected to be in conformity with the SGP throughout the period. It recommends firm adherence to the 1.5% limit for real expenditure increases in the federal government and social security.

    "Finland — Council Opinion on the updated Stability Programme, 2001-2004

    "For Finland, the Council's Opinion notes with satisfaction that general government surpluses are projected to remain at a fairly high level throughout the programme period. The government debt to GDP ratio is expected to continue to decline. The assumption of a revival in growth from 2002 on is considered plausible, but it hinges on an upturn in employment growth, which requires wage moderation in order to materialise. The Opinion recommends that spending ceilings 'are firmly adhered to' in coming years. High government surpluses are required because of Finland's particular exposure to expenditure pressures related to population ageing. The Opinion notes that the projected surplus in government accounts is fully in line with the SGP and welcomes the commitment to continued structural reform.

    "Luxembourg — Council Opinion on the updated Stability Programme, 2000-2004

    "For Luxembourg, the Council's Opinion notes strong GDP growth, a government surplus of 6.2% of GDP in 2000 and projected budget surpluses over the period of the programme. The public finance projections are considered to be in compliance with the requirements of the SGP. The Council notes that current government expenditure continued to grow rapidly in 2001; it is considered that the rigidity of current expenditure might become a risk factor should growth slow significantly. The preparedness of Luxembourg to meet the budgetary consequences of an ageing population is noted, as is the low level of the government debt ratio resulting from healthy public finances.

    "The Netherlands — Council Opinion on the updated Stability Programme, 2000-2004

    "For the Netherlands, the Council's Opinion notes a sharp deceleration in GDP growth from 3.5% in 2000 to about 1% in 2001 and a deterioration in the government balance from 1.5% to 0.7% of GDP. However, the ratio of government debt to GDP continued to decrease due to developments in nominal GDP. Despite the slowdown, the Council notes that a general government surplus is projected for 2002: it expects that surpluses will continue to be projected for the remaining years of the programme, in line with the SGP. The Opinion welcomes structural reforms underway in the health and education sectors as well as in social infrastructure. It also welcomes the strategy in place to meet the consequences of population ageing and it encourages the government to maintain the effort towards reducing the debt ratio in order to achieve this strategy.

    "Sweden — Council Opinion on the updated Convergence Programme, 2001-2004

    "For Sweden, the Council's Opinion notes with satisfaction that the Convergence programme envisages continued government budget surpluses throughout the period to 2004. The debt ratio fell below the reference value of 60% of GDP in 2000 and is expected to continue to fall substantially over the remainder of the programme period. The programme's forecasts of GDP growth at 1.7% in 2001 and 2.4% in 2002 are judged optimistic given the worsening of the global outlook, but the projections for 2003 and 2004 are said to appear sensible. Sweden 'continues to fully respect' the SGP ... The need for exchange rate stability is reiterated and the Council 'expects Sweden to decide to join the ERM2 in due course.' The Opinion welcomes structural reforms, including the lowering of the tax burden."


    "France — Council Opinion on the updated Stability Programme, 2003- 2005

    "For France, the Council's Opinion notes that under the cautious scenario the government deficit should decline to 1.3% of GDP in 2003 and 0.5% of GDP in 2004; balance is expected to be attained in 2005. The Opinion considers that the macroeconomic projections encompass downside risks in the short term, and that the 2002 deficit is thus likely to be less favourable than initially expected. The Opinion notes that balance is reached in 2005, one year later than was recommended last year; it therefore urges France to use every opportunity to reach balance in 2004. The budgetary objectives are considered to respect the SGP's requirements in 2004 and 2005. The Opinion notes that 2002 spending is planned to rise more quickly than was recommended in the 2001 Broad Economic Policy Guidelines (BEPGs) and encourages France to fully respect the spending norm for the period 2003­5. Finally, the Opinion notes that the strategy to deal with population ageing lacks ambition, and considers further progress in pensions reform necessary.

    "Germany — Council Opinion on the updated Stability Programme, 2001-2005

    "For Germany, the Opinion notes that the estimated deficit outcome for 2001 (2.6% of GDP) is clearly above the 2000 projection, although this can be explained by the economic downturn. It notes that the government now considers the lower­growth scenario in the programme to be realistic, and concurs that it is plausible. It considers that the deficit could be above 2.6% in 2002, and thus welcomes the government's determination to ensure that the deficit will not exceed 3% of GDP. The Opinion thinks that a budgetary position of close to balance by 2004 may ultimately require discretionary measures in addition to those included in the stability programme. It welcomes the intention to make every effort to ensure strict budgetary implementation at all levels of government, through agreements with the regional authorities. The Opinion 'notes with satisfaction' that the authorities will continue to attempt to bring the debt level down below 60% of GDP, but states that a balanced budget position must be reached as soon as possible if debt reduction is to contribute significantly to meeting the costs of population ageing. Sustaining and maintaining a position of budget balance is seen as Germany's key challenge, though reforms of pensions and labour markets are also important.

    "The Council statement on Germany's budgetary situation says that the Commission acted in accordance with the provisions of the Stability and Growth Pact in recommending the warning. It welcomes the commitments of the German government; the government: confirms its endeavour to ensure that the 3% of GDP reference value will not be breached; will implement budgetary plans carefully, using any room for manoeuvre to reduce the deficit; confirms that a close to balance position will be reached by 2004; notes that the debt ratio is projected to decline over the period of the programme. It considers that in light of these commitments, an effective response has been made to the Commission recommendation, so no early warning is necessary.


    "Greece — Council Opinion on the updated Stability Programme, 2001-2004

    "The Council Opinion notes that the budgetary projections remain in surplus throughout the period of the programme in both actual and cyclically­adjusted terms and that they respected the close to balance or surplus requirement of the Stability and Growth Pact. The projected real GDP growth of around 4% for the period 2002­2004 is considered to be attainable. The expected reduction of the government debt ratio from 99.6% of GDP in 2001 to 90.0% of GDP by 2004 is noted, although it is also noted that current debt reduction plans are less than warranted by expected GDP growth. The Opinion encourages the Greek Government to proceed to the necessary structural reforms rapidly and notes the risk of future imbalances due to the ageing population.

    "Ireland — Council Opinion on the updated Stability Programme, 2002-2004

    "The Opinion notes the deceleration in GDP growth from 11.5% in 2000 to just under 7% in 2001. It notes the general government surplus in 2001 and the move into small deficits in 2003 and 2004, as well as the low debt level. The Council urges the Irish authorities to ensure that compliance with the Pact is continued throughout the programme period. The Opinion welcomes the further progress in tax reform and infrastructural investment and notes that Ireland is in a good position to meet the budgetary costs of ageing populations.

    "Italy — Council Opinion on the updated Stability Programme, 2001-2005

    "The Council Opinion notes the balanced budget objective in 2003 and the postponement by one year in the reduction of the debt ratio below 100%. It notes that the external assumptions do not sufficiently reflect the deterioration in the global outlook, and that the risks are mainly on the downside. The Opinion refers to the role of one­off measures in achieving the budgetary targets, and remarks that these should be complemented by measures aimed at restraining primary expenditures. The Opinion recommends that Italy adopt a more effective monitoring and control of current outlays and that fiscal consolidation is kept on course if the trend growth assumptions are not met. The Opinion encourages Italy to accelerate the implementation of pensions reform and notes the key role of labour market reforms.

    "Portugal — Council Opinion on the updated Stability Programme, 2001-2005

    "The Council Opinion notes the move from a deficit of 2.2% of GDP in 2001 to a small surplus by 2005, and a decrease in debt from 55.9% of GDP in 2001 to 51.9% in 2005. The Opinion notes that the deficit outcome is higher than previously projected, which can only partly be explained by lower growth.

    "It notes that measures taken in a corrective budget were insufficient to offset the shortfall in tax revenues in order to meet the deficit target set in the previous programme update. The macro­economic scenario is said to be realistic and the cautious line taken regarding the medium­term outlook is said to appear appropriate. The Opinion notes that once economic recovery is established, the government should strengthen its efforts to move towards the zero deficit target by 2004. The Opinion notes that any revenue shortfall other than that explained by slower economic growth should be compensated for by additional measures. It also notes that the sustainability of government finances should be strengthened in the light of the budgetary costs of ageing populations. The main challenges noted are to complete the process of pension reform and to continue with reforms to the health sector.

    "The Council statement on Portugal's budgetary situation says that the Commission acted in accordance with the provisions of the Stability and Growth Pact in recommending an early warning. It welcomes the governments commitments; the government: confirms its endeavour to ensure that the 3% of GDP reference value for the general government deficit will not be breached; will implement budgetary plans carefully, compensating any revenue shortfall by additional measures; confirms that a balanced budget position will be reached by 2004; notes that the debt ratio is projected to decline over the programme period. The statement considers that in light of these commitments, an effective response has been made to the Commission recommendation, so no early warning is necessary.

    "Spain — Council Opinion on the updated Stability Programme, 2001-2005

    "The Council Opinion notes that the target of a general government balance in 2001 is expected to have been reached and the debt ratio objective over-achieved. The outlook in the medium­term is described as plausible, although somewhat optimistic in the short­term. The medium­term budgetary projections are described as prudent, and the targets respect the 'close to balance or surplus' objective of the Stability and Growth Pact. The Opinion notes the risks posed by the pressures of population ageing, and welcomes the role to be played by other structural policies, particularly in the market for goods and services.

    "UK — Council Opinion on the updated Convergence Programme,
    2000/1 - 2006/7

    "The Council Opinion welcomes the UK's strategy of securing macroeconomic stability through sound monetary and fiscal policies and continued structural reform. It considers the programme's macro-economic forecasts to be realistic. The Opinion also notes that the UK is projected to move into deficit in the medium term, but sees this as a result of the use of a cautious trend growth assumption and of addressing the low level of government investment, as suggested in the 2001 broad economic policy guidelines. It notes that gross debt relative to GDP is expected to fall to the low level of 36.3% by 2006/7, and considers that the UK is in a good position to meet the consequences of ageing populations. The Opinion notes with approval that the progress on economic reforms should help to raise productivity performance and secure further improvements in the labour market.



    "Denmark — Council Opinion on the updated Convergence Programme, 2001-2005

    "The Opinion considers the programme's economic scenario plausible, and notes with satisfaction Denmark's continued fulfilment of the convergence criteria. It welcomes the programme's objective of keeping surpluses between 1½% and 2½% of GDP, and considers that Denmark continues to fulfil the Stability and Growth Pact's requirement of a budgetary position 'close to balance or in surplus'. The Opinion welcomes the governments commitment to a tax freeze, but notes that it should not prevent a reduction of marginal labour taxes. It notes that expenditure control has had a mixed record recently, and invites the Danish government to strengthen the institutional framework to avoid further slippage in the future. The Opinion welcomes the programmes's focus on longer-term sustainability, and considers the Danish economy to be in a good position to deal with the problems caused by population ageing. Finally, it encourages the authorities to proceed with further labour market reforms to increase labour force participation rates."

The Government's view

  3.3  The Minister says:

    "These Council Opinions set out the Council's views on policy priorities for the coming years in other Member States. They have no policy implications for the UK. In addition, they are non­binding on Member States; article 249 of the Treaty states that 'recommendations and opinions shall have no binding force'."

  3.4  As regards the Council's Opinion on the UK, the Minister says that the Opinion is consistent with the Government's fiscal rules, and adds:

    "The Government supports a prudent interpretation of the Stability and Growth Pact which takes into account the economic cycle, sustainability and the important role of public investment (as specified in Article 104 of the Treaty). The UK continues to discuss this with its EU partners."

Conclusion

  3.5  We note with interest that, despite recommendations from the Commission for early warnings to be issued to Germany and Portugal concerning their budgetary situation, the Council decided against issuing such warnings in either case.

  3.6  We recognise that the process of subjecting the stability and convergence programme of each Member State to a critical peer-review serves a useful scrutinising purpose. However, the credibility of the system of Council warnings is likely to be brought into question if the Council does not issue justifiable warnings or if, without good cause, countries simply ignore such warnings. We note that, in this instance, both of the Governments concerned gave a number of commitments.

  3.7  We recommend that the documents be debated in European Standing Committee B, since this will provide a timely opportunity for the House to consider the stability and convergence programmes and the procedures for ECOFIN to issue early warnings to Member States.


12  The twelve Member States that have adopted the euro have stability programmes, whereas the other three Member States (UK, Denmark and Sweden) produce convergence programmes. Back


 
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Prepared 22 April 2002