Almunia evalueert convergentieprogramma's van Malta, Cyprus, Litouwen en het Verenigd Koninkrijk (en)

Having examined their updated convergence programmes[1], the European Commission finds that Cyprus, Malta and the United Kingdom, which are subject to the excessive deficit procedure, present strategies that should enable them to correct their excessive deficits, though the UK may have to introduce additional measures in 2006.

Cyprus and Malta have set themselves a budgetary adjustment path for the present decade that is in line with the Stability and Growth Pact but are invited to improve the long-term sustainability of their public finances.

Lithuania plans an adjustment effort towards its medium-term objective which reflects the cost of the ongoing pension reform but which could be strengthened in view of the good growth prospects.

" All countries - except the United Kingdom - have set medium-term objectives for their public finances that are in line with the revised Stability and Growth Pact. It is also encouraging that Cyprus, Lithuania and Malta would be (close to) reaching these targets by the end of their respective programme periods. Budgetary strategies in line with the Pact not only produce sound fiscal policies over the economic cycle but are also a necessary precondition for stronger growth in Europe," said Economic and Monetary Affairs Commissioner Joaquín Almunia i.

Each year Member States notify to the Commission their medium-term macroeconomic and budgetary projections that must provide a safety margin against breaching the Treaty deficit ceiling of 3%. According to the revised Stability and Growth Pact, euro area and ERM II Member States are recommended to set their respective medium-term budgetary objective (MTO) within a range between -1% of GDP for low debt / high potential growth countries and balance or surplus for high debt / low potential growth countries. If they have not yet reached their target, they should pursue an annual adjustment in cyclically-adjusted terms, net of one-offs and other temporary measures, of 0.5% of GDP as a benchmark.

The assessment of the pluriannual budgetary programmes is separate from the assessment of whether a country that has not yet adopted the euro is ready to do so or not. This latter evaluation will be carried out in October in the so-called Convergence Report unless there are individual requests before.

CYPRUS

Cyprus submitted a new update of its convergence programme, covering the period 2005-2009, on 14 December 2005. Based on a plausible macroeconomic scenario (which is slightly favourable towards the end of the programme period), the programme plans to gradually reduce the deficit, from an expected 2.5% of GDP in in 2005 to 0.6% by 2009, through structural expenditure cuts and a combination of structural and one-off revenue measures.

The medium-term objective (MTO) for the budgetary position set in the programme is a deficit of around ½% of GDP in structural terms(i.e. in cyclically-adjusted terms and net of one-off and temporary measures), which is in line with the Pact.

Based on the estimated outturn for 2005 and given that the risks attached to the budgetary targets are broadly balanced, Cyprus seems have corrected its excessive deficit in 2005, as recommended by the Council in July 2004. The budgetary strategy also ensures that the MTO is almost reached by 2009 through an average structural adjustment that is in line with the Pact's benchmark of 0.5% of GDP per year. From 2008, a safety margin against breaching the 3% of GDP deficit threshold with normal macroeconomic fluctuations would also be provided.

The debt ratio, currently estimated at 70½% of GDP, is planned to decline significantly over the programme period, to some 53½% in 2009, which is to be welcome given the high risk that the projected budgetary costs of ageing population put on the sustainability of public finances.

Overall, the structural adjustment planned over the programme period after bringing the deficit below 3% of GDP in 2005 is the right one. However, it would be appropriate for Cyprus to ensure further structural adjustment towards the MTO after the correction of the excessive deficit and to control public pension expenditure by implementing further reforms in the areas of pensions and health in order to improve long-term sustainability.

LITHUANIA

Lithuania submitted a new update of its convergence programme, covering the period 2005-2008, on 1 December 2005. The programme aims to reduce the public deficit in structural terms (i.e. in cyclically-adjusted terms and net of one-off measures) to, or even below, 1% of GDP by the end of the programme period. This is based on economic growth assumptions of 7.0% in 2005, 6.0% this year and 6.8% in 2008, a scenario which is plausible overall.

The deficit target is consistent with the programme's medium-term objective (MTO) for the budgetary position and is in line with the Pact.

The outlined budgetary stance may not be sufficient to reach the MTO by 2008, as planned in the programme. But the picture is somewhat distorted by the costs of the ongoing pension reform which increase from 0.5% of GDP in 2005 to 0.8% in 2008.

Lithuania should afford soon, possibly already this year, and maintain a safety margin against breaching the 3% ceiling with normal macroeconomic fluctuations, if the deficit outcome is closer to 1% of GDP as opposed to the estimated 1.5% in the programme.

At less than 20% of GDP, the country's public debt is small and stable compared to the 60% ceiling set in the EU treaty and, partly thanks to the pension reform, which shifts the burden from the state to a privately-funded second pillar, the sustainability of the public finances is at a low risk.

Lithuania has, therefore, good budgetary prospects as it plans an adjustment effort towards its medium-term objective which reflects the cost of the ongoing pension reform. But in view of its strong growth -- one of the EU's highest -- it would be appropriate to strengthen the structural adjustment effort towards the MTO in order to ensure a sustainable convergence with the rest of the EU, starting with a more demanding target for the general government deficit in 2006.

MALTA

Malta submitted a new update of its convergence programme, covering the period 2005-2008, on 6 January 2006. The programme aims at bringing the deficit below 3% in 2006, as recommended by the Council in July 2004, and at further reducing the deficit thereafter, against a macroeconomic scenario which, albeit generally plausible, appears favourable in 2006. The deficit outcome has been estimated at 3.9% in 2005 and is seen decreasing to 2.7% in 2006 and 1.2% in 2008.

The medium-term objective (MTO) for the budgetary position is a balanced budget in structural terms (i.e. in cyclically-adjusted terms and net of one-off measures), which is in line with the Pact.

Although the budgetary outcomes could turn out less positive that targeted in the programme, Malta's seems on track to correct the excessive deficit by 2006, provided that the budget is fully implemented and the macroeconomic risks are duly addressed. Thereafter, the adjustment towards the MTO is in line with the Pact's benchmark and the objective should be within reach in 2008. This will provide a safety margin against breaching the 3% ceiling with normal macroeconomic fluctuations.

The debt ratio, estimated at close to 77% of GDP in 2005, is planned to start declining in 2006, to attain 67¼% of GDP by 2008. Malta is at a medium risk with regard to the impact of the ageing of population on the long-term sustainability of its public finances.

Overall, the programme is consistent with the correction of the excessive deficit by 2006. But it would be appropriate for Malta to implement rigorously the 2006 budget in order to ensure its correction this year; to ensure that the debt ratio declines towards the 60% of GDP reference value at a satisfactory pace from 2006 onwards; and to improve long-term sustainability by making further progress in the design and implementation of the pension reforms.

UNITED KINGDOM

The UK submitted a new update of its convergence programme, covering the period from the financial year 2005/06 to 2010/11[2], on 14 December 2005. Based on a broadly plausible macroeconomic scenario, the update projects the deficit to decline from 3.1% of GDP in 2005/06 to 1.5% of GDP by 2010/11.

The programme does not specify a medium-term objective (MTO) for the general government structural balance, but refers to the fiscal objectives under the domestic rules. The MTO cannot be inferred from the convergence programme.

The analysis of the Commission's services points to risks in the budgetary projections, especially in the short term, mainly because revenue projections rely on continuing buoyancy in the financial sector, and it will be a challenge to achieve the full extent of the projected fall in the expenditure ratio after 2007/08.

For 2006/07, the programme projects the deficit to fall below the 3% of GDP reference value, while the Commission services estimated, at the time of the Council recommendation on the correction of the excessive deficit of 24 January 2006 that it is likely to remain slightly above. Only at the very end of the programme period (in 2010/11) would Britain afford a safety margin against the 3% deficit ceiling.

The gross debt ratio, currently estimated at around 41% of GDP, is planned to rise over the programme period, peaking at just below 45% in 2007/08. Concerning the long-term sustainability of public finances, the UK appears to be at medium risk in view of the projected budgetary cost of an ageing population which could be compounded by an insufficient provision of private pensions with potential implications for the public finances.

Overall, the projected adjustment path is vulnerable to risks and could be strengthened beyond the correction of the excessive deficit. It would be appropriate for the United Kingdom to ensure that the deficit is brought below 3% of GDP by 2006/07 at the latest in a credible and sustainable manner, and pursue budgetary consolidation thereafter; and set and attain a medium-term objective that ensures a prudent development of the debt ratio over the long run, while ensuring a sufficient safety margin against breaching the 3% of GDP reference value.

The country-specific Commission assessments are available at:

http://europa.eu.int/comm/economy_finance/about/activities/sgp/year/year20052006_en.htm

CYPRUS

Comparison of key macroeconomic and budgetary projections

LITHUANIA

Comparison of key macroeconomic and budgetary projections

MALTA

Comparison of key macroeconomic and budgetary projections

UNITED KINGDOM

Comparison of key macroeconomic and budgetary projections

Notes:

• 1) 

  GDP and inflation forecast underlying the authorities' projections for the public finances; derived from a scenario whereby trend growth is one-quarter percentage point higher.
• 2) 

  Commission services' forecast is on a calendar year basis. According to first estimates, growth was 1.8% in 2005. The Commission services' interim forecast of 21 February 2006 projects growth of X.X% in 2006.
• 3) 

  Output gap calculations according to the commonly agreed methodology on the basis of data provided in the convergence programme. The output gap calculations are based on the data underlying the central trend growth scenario. Under the UK methodology, the two yield the same output gap profile.
• 4) 

  Commission services calculation of output gap is on a calendar year basis.
• 5) 

  Figures in the convergence programme adjusted for treatment of UMTS receipts. The UK authorities include, in their projections for the general government balance, annual receipts of around £1.0 billion from the sale of UMTS licences in 2000. Adjusting for this, to bring the projections onto to an EDP basis, has the effect of subtracting around 0.1 pp from the balance (i.e. increasing the deficit) in each year. All data shown in this table are given after this adjustment, made by the Commission services, to the data in the programme.
• 6) 

  Commission services' forecast is before discretionary measures announced in the December 2005 Pre-Budget Report and included in the convergence programme. Adding the net impact of the measures as estimated by the UK authorities, the Commission services' forecast would be a deficit at 3.4% of GDP in 2005/06, 3.1% in 2006/07 and 2.8% in 2007/08.
• 7) 

  Data from the convergence programme adapted in line with a definition of the primary balance using gross rather than net interest payments.
• 8) 

  Cyclically-adjusted balance (calculated according to the commonly agreed methodology) excluding one-offs and other temporary measures.The figures for cyclically adjusted and structural balances published in the programme, calculated according to the UK own methodology, and based on nominal balances not corrected for the treatment of UMTS receipts, are: -2.9% of GDP in 2004/05, -2.2% in 2005/06, -1.7% in 2006/07, -1.7% in 2007/08, -1.7% in 2008/09, -1.6% in 2009/10, -1.5% in 2010/11. .
• 9) 

  There are no one-offs and temporary measures in the convergence programme projections and in the Commission services forecast.

Source: Convergence programme (CP), Commission services' calculations, Commission services' (COM) autumn 2005 forecast

[1] According to Council Regulation (EC) No 1466/97 on the strengthening of budgetary surveillance and coordination of economic policies (as amended by Regulation No 1055/2005), Member States that have adopted the euro must submit annual updates of their stability programmes. Member States that have not yet adopted the euro submit convergence programmes.

[2] The UK financial year runs from April to March.