Autumn fiscal surveillance package

15 November 2013
by eub2 -- last modified 15 November 2013

The European Commission today presented a major package of budgetary surveillance announcements, covering 13 eurozone Member States and 3 non-euro Member States, with a special focus also on the euro area as an economic entity in its own right. For the first time, the Commission has issued opinions on euro area Member States' Draft Budgetary Plans, which from this year must be submitted to the Commission by 15 October, at the same time as draft budgets are sent to national parliaments. Assessments have also been published regarding compliance with Council recommendations under the Excessive Deficit Procedure (EDP), potential breaches of the debt and deficit criteria under the Stability and Growth Pact (SGP), and on certain Member States' plans for structural reforms with a budgetary impact outlined in their Economic Partnership Programmes (EPP).

What has the Commission presented today?

Today, the Commission issued its first ever opinions on each of the 13 Draft Budgetary Plans submitted by euro area Member States by 15 October. Four Member States (Cyprus, Greece, Ireland and Portugal) were exempted from this exercise as they are subject to a macroeconomic adjustment programme, which already provides this budgetary information. This first in euro area fiscal surveillance is rooted in the 'Two-Pack' legislation, which entered into force on 30 May 2013 and which further strengthens budgetary policy coordination for the euro area. Based on all the Draft Budgetary Plans, the Commission is also presenting a comprehensive overview of the budgetary outlook and stance of the euro area as a whole in the form of a Communication to euro area Member States.

The opinions on the Draft Budgetary Plans of Belgium, Spain, France, Malta, the Netherlands and Slovenia, also include an assessment of effective action taken by these Member States to address their Excessive Deficit Procedure (EDP), based on the reports the countries had submitted. In parallel, the Commission today also adopted a Communication on action taken by the countries to correct their excessive deficits.

The Commission has also adopted a proposal on the Economic Partnership Programmes of Spain, France, Malta, the Netherlands and Slovenia. The Economic Partnership Programme is a new reporting requirement also introduced by the Two-Pack. It spells out the structural reforms the country plans to carry out to ensure the excessive deficit is corrected in an effective and lasting way, focusing particularly on the fiscal structural reforms that have an impact on their budget.

Accompanying this package, the Commission is publishing a staff working document on each of the 13 euro area countries concerned. This presents a more in-depth analysis of the Draft Budgetary Plan and – if applicable – also covers the report on effective action taken to correct excessive deficits and the Economic Partnership Programme.

The Commission is also publishing assessments on whether a breach of the deficit or debt criterion merits the launch of an EDP. The Commission has adopted three reports in this respect: one for Croatia, one for Lithuania and one for Finland (all in accordance with Article 126(3) of the Treaty on the Functioning of the EU). The Commission has also taken new steps under the EDP for Poland as the country has not taken effective action in response to the Recommendation of the Council of Ministers in June.

1. Draft Budgetary Plans

Who had to submit a Draft Budgetary Plan? Why are there 13 and not 17 covering all euro area Member States?

Euro area Member States must submit their Draft Budgetary Plans for the forthcoming year to the Commission and to the Eurogroup by 15 October. But in order to avoid a multiplication of reporting requirements, the Two-Pack explicitly makes exceptions for Member States with a macroeconomic adjustment programme (Ireland, Greece, Cyprus and Portugal). However, they still have to comply with the common timeline by presenting their draft budget by 15 October and adopting their budget by 31 December.

What is a Draft Budgetary Plan? What is the content?

Euro area Member States make public their draft budget for the forthcoming year no later than 15 October. By that same date, they must submit their draft budgetary plan to the Commission and to the Eurogroup.

The Draft Budgetary Plan is not the same as a draft national budget. A draft national budget is a national legislative act that - annually and according to national procedures - proposes the nature, amount and allocation of the resources of the state. According to the Two-Pack, the draft budget is underpinned by an independent macroeconomic forecast. The Draft Budgetary Plan is a synthetic document presenting, on the basis of the draft budget, the main aspects of the budgetary situation of the general government and its sub-sectors for the year ahead. It outlines the budgetary targets, detailed measures to reach those targets, and the macroeconomic assumptions underlying the budget. The Draft Budgetary Plan has to be consistent with the Stability and Growth Pact. It also has to be consistent with recommendations delivered in the context of an EDP, or fiscal recommendations issued in the context of the European Semester.

What is meant by "independent macroeconomic forecast"?

According to the Two-Pack, draft budgets and national medium-term fiscal plans are based on independent macroeconomic forecasts, which are produced or endorsed by independent bodies. Accordingly, Draft Budgetary Plans include the main assumptions of these independent macroeconomic forecasts that underpin budget planning.

"Independent bodies" means bodies that are independent or autonomous vis-à-vis the budgetary authorities of Member States. They should be underpinned by national laws that ensure a high degree of autonomy and accountability.

What is the focus of the opinions on the Draft Budgetary Plans?

The Commission's opinion on the Draft Budgetary Plans offers a global assessment of the budgetary situation. It focuses on compliance with the Stability and Growth Pact. This means that for euro area Member States in the preventive arm of the Stability and Growth Pact, i.e. not in EDP, the Commission's opinion looks at whether the Member State concerned is making sufficient progress towards the medium-term objective (or, if it is already at its medium-term objective, whether it deviates from it). If applicable, the opinion also assesses whether the Member State complies with the debt criterion. For Member States in EDP, the Commission's opinion assesses compliance with the Council's recommendation issued as part of the EDP.

Specifically, in the case of Belgium, Spain, France, Malta, the Netherlands and Slovenia, the opinion also includes an assessment of action taken by these Member States under the EDP (see section 2 below).

Is the Commission asking any country to present a revised Draft Budgetary Plan?

No. According to the Two-Pack rules, the Commission can request a revised plan if it has identified particularly serious non-compliance with the budgetary policy obligations set out in the Stability and Growth Pact. But this has not been the case in this round.

Do Member States have a legal obligation to follow the Commission's opinion?

The Two-Pack does not give the Commission the right to change draft national budgets. Nor does it oblige Member States to strictly follow the Commission's opinion – even though it is clearly in the interest of Member States to comply with the rules they agreed on within the Stability and Growth Pact.

The added value of this exercise is the increased transparency that it introduces to the budgetary procedure. It gives all actors concerned in the national budgetary process the information they need before making their final decision on the budget.

Economic and budgetary policies pursued in individual euro area Member States also affect the euro area as a whole. It is therefore important that fiscal plans of Member States are assessed by the Commission and discussed at an early stage at euro area level, before national budgets are adopted.

This new practice also facilitates a dialogue between the Commission and Member States, as national parliaments can ask the Commission to come and present its opinion.

Overall, the autumn exercise is an important follow-up to the budgetary recommendations issued as part of the European Semester, which largely concentrates on the first half of the year. It sets a milestone against which it can be assessed whether the measures set out in the stability programmes (submitted to the Commission by euro area Member States in spring) have actually been translated into concrete budgetary plans.

Did any country ask for application of the investment clause?

Yes, Italy and Slovakia applied to use the investment clause in 2014, as have Bulgaria and Romania.

In the case of Italy and Slovakia, the Commission's opinion on the Draft Budgetary Plans concludes that neither country can take advantage of the investment clause in 2014 since, based on the Commission 2013 autumn forecast, they would not fulfil the eligibility criteria. Italy would not bring its debt-to-GDP ratio on a sufficiently declining path and Slovakia would not correct its excessive deficit in a lasting way in 2013.

The Commission's assessment of the eligibility of Bulgaria and Romania to the investment clause will be communicated to the Council in due course.

What are the main elements of the investment clause?

Following requests from the European Council, the Commission has explored how public investments that support sustainable growth can be accommodated within EU fiscal rules, i.e. under the preventive arm of the Stability and Growth Pact. This means that only Member States that are not in EDP and respect the deficit and debt thresholds throughout implementation of the clause are eligible for the investment clause.

The Commission could allow temporary deviations from the structural deficit path towards the medium-term objective specified in the country specific recommendations, or deviations from the medium-term objective for Member States that have reached it, if:

(i) the economic growth of the Member State remains negative or well below its potential;

(ii) the deviation does not lead to a breach of the 3% of GDP deficit ceiling, and the public debt rule is respected; and

(iii) the deviation is linked to the national expenditure on projects co-funded by the EU under the Structural and Cohesion policy, Trans-European Networks and Connecting Europe Facility with positive, direct and verifiable long-term budgetary effect.

What happens next?

The opinions on the Draft Budgetary Plans will be presented to the Eurogroup, which meets on 22 November to discuss them. The Commission can also present its opinion to the parliament of the Member State concerned and/or to the European Parliament if invited to do so.

In line with the new common budgetary timeline introduced by the Two-Pack, budgets have to be adopted by national parliaments by 31 December each year.

2. Report on effective action

Why does the opinion on the Draft Budgetary Plan of some countries include an assessment of effective action?

Both a Council Recommendation based on Article 126(7) and a Council Decision based on Article 126(9) include a deadline for a Member State to adopt the necessary measures. Within this deadline, the Member State must report to the Council and the Commission on action taken. The report is made public by the Member State and includes targets for government expenditure and revenue and the discretionary measures on both the expenditure and the revenue side that should ensure that the targets are met.

The Commission examines the report to see whether the Member State concerned has complied with the Council recommendation or decision. The Commission does this by assessing whether the Member State is expected to meet the nominal targets as well as the required structural adjustment. This assessment is based on the Commission's most recent economic forecast and takes into account whether the Member State has publicly announced or taken measures that are sufficient to ensure sufficient progress towards correcting the excessive deficit within the time limits set by the Council. If the Member State does not comply with the nominal targets, the Commission makes an assessment focussing on the structural adjustment. If the Member State has improved its structural balance in line with the recommendation but could not meet the nominal targets because of an adverse economic downturn with major consequences for government finances, it will be assessed as having taken effective action.

So the possible scenarios are: If the Commission considers that the Member State has acted in compliance with the recommendation and that the EDP fiscal requirements are likely to be fulfilled, it informs the Council of its assessment and the procedure is held in abeyance (or, if it considers that adverse economic events with major unfavourable consequences for public finances have occurred, it may recommend to the Council to issue revised recommendations, possibly extending the deadline for correcting the excessive deficit).

Otherwise, if no effective action has been taken, the Commission will recommend to the Council to step up the procedure to Article 126(8) (no effective action), followed by new a Council decision to give notice (Art. 126(9), for euro area Member States) or a new Council recommendation (Art. 126(7), for non-euro area Member States). If no effective action has been taken, there is the possibility to impose financial sanctions on euro area Member States.

Who had to submit a report on measures to reduce deficits?

Belgium, Spain, France, Malta, the Netherlands, Slovenia and Poland presented a report on action taken to correct their excessive deficits. (The deadline was 1 October for all countries except Belgium, which had to submit it by 21 September.) For euro area Member States, the assessment of effective action is included in the opinion on the Draft Budgetary Plans.

3. Economic Partnership Programmes

What is an Economic Partnership Programme?

Economic Partnership Programmes are a tool for enhanced surveillance of euro area Member States in EDP. They were introduced by the Two-Pack in May 2013. Countries entering the EDP or receiving a new EDP deadline since then were required to submit an Economic Partnership Programme. This contains plans for details fiscal-structural reforms (for example, on pension systems, taxation or public healthcare) that will correct their deficits in a lasting way.

Who had to submit an Economic Partnership Programme this autumn?

Spain, France, Malta, the Netherlands and Slovenia this autumn since the original deadline to correct their excessive deficit was extended last summer. Programme countries do not need to submit an Economic Partnership Programme, as they are already under enhanced surveillance through their economic adjustment programmes.

No Economic Partnership Programme was requested from Belgium because the country's deadline to correct its excessive deficit is already this year, 2013.

What is the next step?

The Economic and Financial Affairs Council (ECOFIN) will discuss the Commission proposals for Council opinions on the Economic Partnership Programmes on 10 December.

4. Steps under the Excessive Deficit Procedure

What is a Report in accordance with Article 126(3)?

The start of an EDP usually follows the identification by the Commission of a breach of either the deficit or debt criterion. A Member State is non-compliant with the deficit requirement if its general government deficit is above 3% of GDP. As regards debt, the criterion for non-compliance is a general government debt which is greater than 60% of GDP and not declining at a satisfactory pace. This means that the gap between a country's debt ratio and the 60% reference needs to be reduced by 1/20th annually on average over three years.

The breach of the deficit and/or debt criterion triggers an Article 126(3) report, which assesses whether the breach of the criteria should result in launching an EDP.

Which countries are concerned?

Croatia, Lithuania and Finland. In the case of Croatia, two different criteria are breached: the actual data shows the deficit in 2012 exceeding 3% of GDP, while the government plans, as well as the Commission forecast, include gross debt in 2014 exceeding 60% of GDP. As regards Lithuania, the validated data confirmed that the deficit was 3.2% in 2012 (the year on the basis of which the EDP was abrogated in June). For Finland, the fact that the debt ratio is planned to exceed the 60% next year (and confirmed in the Commission forecasts), triggers this report. The preparation of a report does not automatically mean that an EDP will be launched.

What recommendations has the Commission issued to Poland?

The Commission has adopted two recommendations for the Council concerning the Polish EDP. One is a recommendation for a Council Decision under article 126(8) establishing that Poland has not taken effective action and therefore not complied with the Recommendation addressed to the country in June.

Moreover, the Commission has also adopted a new recommendation for a new Council Recommendation (under Article 126(7)) concerning the correction of the excessive deficit.

What are the next steps?

Reports on the existence of a breach of the deficit or debt criterion

The Reports are submitted to the Economic and Financial Committee in the Council which has two weeks to draft an opinion.

If the report concludes that the country should be placed in EDP, the Commission addresses an opinion to that effect to the country concerned and informs the Council. It also prepares a recommendation that an excessive deficit exists and a recommendation on the measures that the Member State should take to correct its excessive deficit.

Recommendations to Poland

The Recommendations to Poland will be discussed in the Economic and Financial Affairs Council (ECOFIN), which will meet on 10 December.

5. Country specific overview

Austria

Austria submitted a Draft Budgetary Plan based on a no-policy-change scenario, due to general elections having taken place in September. The Commission is of the opinion that the Draft Budgetary Plan is broadly compliant with the rules of the Stability and Growth Pact. In particular, the Commission forecast points to a durable correction of the excessive deficit in 2013 and some deviation in 2014 from the adjustment path towards the medium-term objective of a structural general government deficit of 0.45% of GDP. Furthermore, the Commission is of the opinion that Austria has made some progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester. As soon as a new government takes office, national authorities are encouraged to submit to the Commission and the Eurogroup an updated Draft Budgetary Plan taking into account the present Opinion.

Belgium

The Commission is of the opinion that the Draft Budgetary Plan of Belgium is broadly compliant with the rules of the Stability and Growth Pact. The Commission forecast indicates a durable correction of the excessive deficit by the deadline of 2013. However, the forecast for 2014 also points to a risk of some deviation from the adjustment path towards the medium-term objective of a structural surplus of 0.75% of GDP, notably as concerns the fiscal effort required by the Stability and Growth Pact. Furthermore, the Commission is of the opinion that Belgium has made limited progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

Croatia

According to notified data, Croatia's deficit reached 5% of GDP in 2012, and total government debt amounted to 55.5% of GDP. The Commission 2013 Autumn Forecast projects that the deficit will increase to 5.4% of GDP in 2013 and 6.5% of GDP in 2014. Government debt is projected to rise further in 2013 and exceed the reference value of the Treaty in 2014. Consequently, the Commission has carried out a report under Article 126(3) of the Treaty and has examined relevant factors. The findings of the report support the conclusion that neither the deficit nor the debt criteria of the Treaty are fulfilled.

Estonia

Based on its 2013 autumn forecast, the Commission is of the opinion that the Draft Budgetary Plan of Estonia is compliant with the rules of the Stability and Growth Pact. In particular, the medium-term objective of a structural surplus is expected to be maintained in 2014. Estonia has made some progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester. While the structural budget balance rule is expected to be adopted before the end of 2013, the binding nature of expenditure rules and ceilings has not yet been strengthened.

Finland

Based on its forecast, the Commission is of the opinion that Finland's Draft Budgetary Plan is at risk of non-compliance with the rules of the Stability and Growth Pact. In particular, the Commission identifies a significant deviation from the adjustment path towards the medium-term objective of a structural general government deficit of 0.5% of GDP.

According to the Commission forecast, Finland's debt will breach the 60%-of-GDP Treaty threshold in 2014 and is expected to rise further. The Commission has investigated this breach in a report under Article 126(3) and has come to the conclusion that, due to low growth and other factors, the forecast debt position does not merit the launch of an EDP. Finally, Finland has made some progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

France

The Commission forecast suggests that the measures taken by France in 2013 and those contained in the Draft Budgetary Plan submitted on 1 October are sufficient to ensure adequate progress in 2013-14 towards the correction of the excessive deficit by 2015, the time limit set by the Council. Therefore, the Commission is of the opinion that the Draft Budgetary Plan is compliant with the rules of the Stability and Growth Pact, albeit with no margin. Furthermore, the Commission is of the opinion that the Economic Partnership Programme submitted on 1 October constitutes limited progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

Germany

The Commission is of the opinion that the Draft Budgetary Plan of Germany is compliant with the rules of the Stability and Growth Pact. However, Germany has made no progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester. As soon as a new federal government takes office, national authorities are encouraged to submit an updated Draft Budgetary Plan.

Italy

Based on the 2013 autumn forecast, the Commission is of the opinion that there is a risk that the Draft Budgetary Plan for 2014 will not allow Italy to respect the debt reduction benchmark in 2014. The Commission is also of the opinion that the Draft Budgetary Plan demonstrates limited progress with regard to the structural part of the fiscal recommendations issued by the Council in the context of the European Semester. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2014 budget will be fully compliant with the Stability and Growth Pact and to accelerate progress towards implementation of the fiscal recommendations under the European Semester. The Commission has concluded that Italy cannot take advantage of the investment clause in 2014 since, based on the Commission 2013 autumn forecast, it would not make the minimum structural adjustment required to bring its debt-to-GDP ratio on a sufficiently declining path.

Lithuania

The general government deficit in Lithuania reached 3.2% of GDP in 2012, above but close to the 3% of GDP reference value. Since the excess over the reference value can be considered temporary and Lithuania's debt-to-GDP ratio is below the 60% of GDP reference value in a sustained manner, the direct net cost of the pension reform should be taken into account when assessing the correction of the excessive deficit. As these costs have been 0.2% of GDP in 2012, they explain the excess over the 3 % of GDP Treaty reference value in 2012. In a report carried out under Article 126(3) of the Treaty, the Commission has thus found that Lithuania complies with the deficit and debt criteria of the Treaty.

Luxembourg

According to the Commission assessment, the general government balance in structural terms is projected to deteriorate from a surplus of 0.8% of GDP in 2012 to a deficit of 0.4% of GDP in 2014, thus deviating significantly from Luxembourg's medium-term objective (MTO) of a surplus of 0.5% of GDP. Therefore, there is a risk of non-compliance with the requirements of the preventive arm of the Stability and Growth Pact. Luxembourg has made some progress as regards the structural part of the fiscal recommendations issued by the Council in the context of the European Semester. As soon as a new government takes office, national authorities are invited to submit to the Commission and Eurogroup an updated Draft Budgetary Plan.

Malta

Based on the 2013 autumn forecast, the Draft Budgetary Plan for 2014 submitted by Malta is at risk of non-compliance with the rules of the Stability and Growth Pact. In particular, the Commission forecast indicates a risk of non-compliance with respect to the EDP recommendation for 2014. Furthermore, the Commission is of the opinion that the Economic Partnership Programme constitutes limited progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

The Netherlands

The Commission is of the opinion that the Draft Budgetary Plan of the Netherlands for 2014 is compliant with the rules of the Stability and Growth Pact, albeit with no margin. The Commission forecast shows that, in particular, the measures for 2014 are consistent with what the Council requires, even though, based on the latest economic forecast, the excessive deficit situation is not expected to end by that year. Furthermore, the Commission is of the opinion that the Economic Partnership Programme submitted by the Netherlands constitutes some progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

Poland

Poland has not taken effective action in 2013 in response to the Council recommendation. Poland is set to miss the general government deficit target for 2013 recommended by the Council and has also not adopted the required amount of consolidation measures. While in 2014 the headline target is likely to be met, this is due to a large extent to a one-off transfer of pension funds' assets, which does not guarantee a sustainable correction in the following years.

In light of this assessment, the Commission has adopted a recommendation for a Council decision on effective action taken (Article 126.8 of the TFEU) and is recommending to the Council to step-up the procedure with a new recommendation for Poland to correct the excessive deficit by 2015 at the latest (Article 126.7 of the TFEU).

Slovakia

Slovakia is expected to respect the 3%-of-GDP reference value of the Treaty in 2013 (the deadline for correcting the excessive deficit) and deliver the required fiscal effort. The Commission is of the opinion that the Draft Budgetary Plan of Slovakia is broadly compliant with the rules of the Stability and Growth Pact, in particular while Slovakia is expected to respect the 3% reference value, but there are concerns about whether the excessive deficit is corrected in a durable manner. Moreover, although Slovakia limits the growth of expenditure in line with requirements, some deviation from the adjustment path towards the medium-term objective of a structural general government deficit of 0.5% of GDP is expected. Furthermore, the Commission is of the opinion that Slovakia has made limited progress in addressing the structural part of the fiscal recommendations issued in the context of the European Semester. Finally, Slovakia cannot be considered at this stage eligible to benefit from the investment clause, as it is still subject to the EDP.

Slovenia

Based on the 2013 autumn forecast, the Commission is of the opinion that Slovenia's Draft Budgetary Plan is compliant with the rules of the Stability and Growth Pact, albeit with no margin. Slovenia is forecast to deliver the recommended fiscal effort in 2014. Furthermore, the Commission is of the opinion that the Economic Partnership Programme constitutes limited progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

Spain

Based on the latest Commission forecast, Spain appears to have taken effective action in 2013 in response to the EDP recommendation. For 2014, the Draft Budgetary Plan is at risk of non-compliance with the Stability and Growth Pact, as the headline deficit target may be missed and the recommended improvement in the structural balance is currently not expected to be delivered. The Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2014 budget will be fully compliant. The Economic Partnership Programme confirms the reform agenda and timetable (for fiscal and other structural reforms) included in the 2013 National Reform Programme and the Stability Programme. Some progress has been made in addressing the structural part of the fiscal recommendations issued by the Council in the context of the European Semester.

6. Euro area overview

The Draft Budgetary Plans facilitate an assessment of the budgetary situation of the euro area as a whole, as set out in today's Communication. The assessment concludes that the major consolidation effort undertaken in recent years is bearing fruit. Public debt is expected to stabilise. The headline budget balance is expected to be brought below the reference value of 3% of GDP. Countries facing the largest fiscal challenges plan to implement the strongest consolidation efforts, with some differentiation according to fiscal space. As only two Member States (Estonia and Germany) have attained their medium-term objective, further consolidation in other euro area countries may be necessary. The aggregate fiscal effort, as expressed by the change in the cyclically adjusted budget balance net of one-off and temporary measures, should amount to ¼ % of GDP next year.

Further structural reform is necessary to bolster the foundations for sustained growth and sound public finances. Overall, the Economic Partnership Programmes show progress in improving national fiscal frameworks; mixed results with respect to tax reform; and substantial reforms to pension and health systems, albeit not for all countries.

The Draft Budgetary Plans still do not pay sufficient attention to the composition of fiscal consolidation. The general trend of decreasing public capital expenditure observed in recent years, while stabilising, is not being reversed. Some focus on expenditure restraint is key in a well-designed consolidation strategy, especially where government sectors are relatively large.

Draft Budgetary Plans

Overview of the EDPs

ECFIN page on Stability and Growth Pact

Specifications on the implementation of the Two Pack and Guidelines on the format and content of draft budgetary plans, economic partnership programmes and debt issuance reports