Decisions under the Stability and Growth Pact
What has the European Commission decided today as regards the fiscal area?
The European Commission recommends to the Council to:
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-decide that the United Kingdom has not taken effective action in response to the Council recommendation of December 2009 and to recommend that the United Kingdom should correct its present excessive deficit by 2016-17 at the latest.
The Commission has also prepared a report on Finland under Article 126(3) of the Treaty analysing breach of the deficit and debt criteria of the Treaty.
1. Ending the Excessive Deficit Procedure for Malta and Poland
1.1 When was the Excessive Deficit Procedure launched?
Malta
The Council decided in June 2013, following a recommendation from the Commission, that Malta had an excessive deficit. This decision was based on the deficit as well as on the debt criteria: besides having a deficit above the 3% of GDP reference value, Malta also did not decrease its debt at a satisfactory path.
Poland
In July 2009, following a recommendation from the Commission, the Council decided that Poland had an excessive deficit. At the same time, the Council recommended to Poland to bring the excessive deficit situation to an end by 2012. In June 2013, the Council concluded that Poland had taken effective action to reduce the deficit, but adverse economic events with major implications on public finances had occurred after the adoption of the original recommendation. Therefore, the Council issued a new recommendation to Poland to bring the excessive deficit situation to an end by 2014. However, in December 2013, the Council decided under Article 126(8) of the Treaty that Poland had not taken effective action in response to the new Council Recommendation. It recommended Poland put an end to the excessive deficit situation by 2015.
In Poland, the headline figure for the deficit was 3.2% of GDP in 2014, thus above the reference value of 3% of GDP. Costs are still occurring in 2014 from a systemic pension reform in 1999 even after a law reversed the reform in December 2013. Once these net costs of the pension reform from 1999 are taken into account, the deficit is below 3% of GDP in 2014 (2.7% in 2015). Thus the Commission considers that Poland respects the deficit criterion of the Stability and Growth Pact.
1.2 Why is the Commission recommending ending the Excessive Deficit Procedure for these two countries?
Malta
Malta reduced its general government deficit to 2.1% of GDP in 2014, down from 2.6% in 2013. Malta's Stability Programme for 2015-18 foresees that the deficit to decline to 1.6% of GDP in 2015 and to 1.1% of GDP in 2016. The Commission, in its 2015 spring forecast, expects a deficit of 1.8% of GDP in 2015 and 1.5% of GDP in 2016. Thus, the deficit is set to remain below the Treaty reference value of 3% of GDP over the forecast horizon.
At the same time, since the EDP was based on the breach of both the deficit and the debt criteria, Malta also needs to ensure compliance with the debt rule. In 2014, Malta meets the debt rule with a margin of 1.9% of GDP. Therefore, based on the Commission's 2015 spring forecast, Malta has achieved a timely and durable correction of the excessive deficit by 2014. After reaching 69.2% of GDP in 2013, Malta's debt ratio decreased to 68.0% of GDP in 2014. The debt is forecast to continue decreasing to 67.2% in 2015 and 65.4% of GDP in 2016.
Poland
In 2014, Poland's general government deficit amounted to 3.2% of GDP. Since this number has been consistently close to the reference value and Poland's debt-to-GDP ratio is below the 60% of GDP reference value, Poland is eligible to the provisions regarding systemic pension reforms (Article 2(7) of Regulation 1467/97). This means that the Commission takes into account the net costs of the pension reform of 1999 when assessing the correction of the excessive deficit. Total direct net costs from the pension reform are estimated at 0.4% of GDP for the period January - July 2014. They are thus sufficient to explain the excess of the deficit over the 3% of GDP reference value in 2014.
The Polish government's convergence programme targets a deficit of 2.7% of GDP in 2015 and of 2.3% of GDP in 2016. The Commission's 2015 spring forecast projects a deficit of 2.8% of GDP in 2015, and, based on a no-policy change assumption, of 2.6% of GDP in 2016. Thus, the deficit is set to remain below the Treaty reference value of 3% of GDP over the forecast horizon of 2015 and 2016.
Therefore, based on the Commission's 2015 spring forecast, Poland has achieved a timely and durable correction of the excessive deficit by 2014. The EDP can be closed.
1.3 When will the countries move to the preventive arm of the Stability and Growth Pact?
As soon as the Council has decided in 2015 - the year following the correction of the excessive deficit - Malta and Poland move from the corrective to the preventive arm of the Stability and Growth Pact.
2. Decision that the United Kingdom has not taken effective action
2.1 When was the Excessive Deficit Procedure for the United Kingdom launched?
The Council decided in July 2008 that an excessive deficit existed in the UK and issued recommendations to the country to correct the excessive deficit by the financial year
2009-10 at the latest. The United Kingdom did not accomplish this, and the deficit peaked at 10.9% in 2009-10.
The Council recognised that the higher deficit resulted from the implementation of measures - amounting to around 1.5% of GDP - seen as an appropriate response to the European Economic Recovery Plan, and the impact of the economic cycle. Based on this, in December 2009 the Council issued a revised recommendation to the UK under Article 126(7), recommending that the country should correct the excessive deficit situation by 2014-15.
2.2 Why is the Commission recommending to the Council to decide that the UK has not taken effective action?
The UK's general government deficit stood at 5.2% of GDP in the financial year 2014-15, so - despite the fiscal consolidation programme set out and being implemented - the UK has not corrected the deficit by the deadline the Council has set. Moreover, the average annual fiscal effort is calculated to fall short of the 1¾% of GDP required by the Council.
This is why the Commission recommends to the Council to decide under Article 126 (8) that the UK has not taken effective action.
2.3 What is the next step?
The Commission proposes to the Council to recommend under Article 126 (7) that the UK puts an end to the present excessive deficit situation by 2016-17 at the latest.
The UK should reach a headline deficit of 4.1% of GDP in 2015-16 and 2.7% in 2016-17. Based on the Commission's 2015 spring forecast, this should be consistent with delivering improvements in the structural balance of 0.5% of GDP in 2015-16 and 1.1% in 2016-17.
2.4 Can the United Kingdom be fined for failing to correct the excessive deficit?
No, fines are only applicable for euro area Member States. The UK is also not subject to a possible suspension of the commitments or payments of European structural and investment funds.
3. Report under Article 126(3) of the Treaty analysing the reasons for Finland being non-compliant with the deficit and debt criterion
3.1 What is a report under Article 126 (3)?
The first step of a possible Excessive Deficit Procedure usually follows the identification by the Commission of non-compliance with the deficit and/or debt criteria. 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 greater than 60% of GDP and not declining at a satisfactory pace. The Stability and Growth Pact defines a satisfactory pace as a reduction of the gap between a country's debt ratio and the 60% of GDP reference value of the Treaty by 1/20th annually on average over three years. If a Member State does not meet one or both of the criteria, the Commission prepares a report under Article 126(3) of the Treaty, which considers all the relevant factors. On that basis the Commission concludes whether or not the deficit and/or the debt criteria are complied with.
3.2 Has the Commission not adopted such a report for Finland only recently?
Indeed, today's report updates the Commission's previous report of 27 February 2015.
In the February report, the Commission found that Finland was in compliance with the debt criterion on account of the contribution to fostering international solidarity, (bilateral and multilateral support between Member States in the context of safeguarding financial stability). At the time, the Commission did not consider in detail whether Finland respected the deficit criterion, as its previous forecasts indicated that the deficit would remain below the 3%-of-GDP-reference value. The current report takes account of the Commission's 2015 spring forecast, in which Finland's deficit is expected to rise to above the reference value for each year from 2014 to 2016, and an evaluation of subsequent developments. This analysis will help determine whether further steps under the EDP are warranted.
3.3 What are the findings of the report?
Deficit criterion:
The general government deficit in Finland reached 3.2% of GDP in 2014 and the 2015 Stability Programme plans for it to stay above the 3%-of-GDP-reference value over the forecast horizon, if the no-policy-change assumption is applied. The excess over the reference value is therefore not temporary. The deficit cannot be considered exceptional within the meaning of the Stability and Growth Pact for the period 2014-2016. When considering the relevant factors for 2014, an important deterioration in structural balance can be seen in that year However, on balance, the relevant factors seem to indicate that there are mitigating factors for the breach of the reference value in 2014. The high general government deficit reflects the impact of the changeover to the European accounting standard ESA 2010. Although the increase of deficit in 2014 cannot be linked to the increase in public investments in this year, Finland's public investment expenditure exceeds the deficit. However, in 2015 and 2016, the debt breaches the 60% of GDP reference value of the Treaty and the deficit remains above 3% of GDP. The medium-term budgetary position manifested in the structural balance strongly indicates that Finland is moving away from its medium-term budgetary objective (MTO) as the cyclical conditions improve over 2015-2016. Therefore, the Commission considers that Finland does not comply with the deficit criterion in the Treaty.
Debt criterion:
While general government gross debt was below 60% in 2014, Finland's 2015 Stability Programme plans it to reach 62.5% of GDP in 2015, i.e. above the 60%-of-GDP-reference value. Similarly, the Commission's spring forecast projects gross debt above the reference value at 62.6% of GDP in 2015 and 64.8% in 2016. While the planned breach of the debt criterion is fully explained by Finland's financial support to safeguarding financial stability in the euro area in 2015, this will no longer be the case in 2016. The debt level has been influenced by large purchases of financial assets by the social security funds, resulting in the accumulation of assets in parallel to the increase of debt. Finally, the debt ratio reflects the effects of Finland's current cyclical position. However, this factor also cannot, by itself, explain the excess over the 60%-of-GDP reference value in 2016. Overall, the Commission considers that Finland does not comply with the debt criterion.
3.4 What are the next steps?
After further consultation by the relevant bodies, including the Economic and Financial Committee, the Commission may recommend to the Council to open an excessive deficit procedure for Finland.
For more information contact
Annika BREIDTHARDT (+ 32 2 295 61 53)
Annikky LAMP (+32 2 295 61 51)
MEMO/15/4971
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