Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes

AuthorSecretariat General
ProfessionCouncil of the European Union
Pages160-193

Page 160

Introduction

This opinion updates and replaces the opinion of the Economic and Financial Committee on the content and format of the stability and convergence programmes, endorsed by the Econ Council on 10 July 2001.

The Stability and Growth Pact fully entered into force on 1 January 1999 and consists of a rules-based framework with both preventive and corrective elements. It initially consisted of Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, Council Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive decit procedure and the Resolution of 17 June 1997 on the Stability and Growth Pact. On 20 March 2005 the Council adopted a report entitled 'Improving the implementation of the Stability and Growth Pact'. The report was endorsed by the European Council in its conclusions of 22 March 2005, which stated that the report updates and complements the Stability and Growth Pact, of which it is now an integral part. On 27 June 2005 the Pact was complemented by two additional Regulations amending Regulations (EC) No 1466/97 and (EC) No 1467/97.

The Stability and Growth Pact is an essential part of the macroeconomic framework of economic and monetary union, which contributes to achieving macroeconomic stability in the EU and safeguarding the sustainability of public nances. A rules-based system is the best guarantee for commitments to be enforced and for all Member States to be treated equally. The two nominal anchors of the Stability and Growth Pact - the 3 % of GDP reference value for the decit ratio and the 60 % of GDP reference value for the debt ratio - and the medium-term budgetary objectives are the centrepiece of multilateral surveillance.

Member States, the Commission and the Council are committed to deliver on their respective responsibilities, applying the Treaty and the Stability and Growth Pact in an eective and timely manner. In addition, since eectiveness of peer support and peer pressure is an integral part of the Stability and Growth Pact, the Council and the Commission are expected to motivate and make public their positions and decisions at all appropriate stages of the procedure of the Stability and Growth Pact. Member States are expected to regularly inform the national Parliaments of developments in the procedures.

In order to enhance ownership of the EUbudgetary framework, national budgetary rules should be complementary to the Stability and Growth Pact. Without prejudice to the balance between national and Community competences, their implementation could be discussed at European level in the context of the stability and convergence programmes. In the same vein, governance arrangements at national level should complement the EU framework. National institutions could play a more prominent role in budgetary surveillance to enhancePage 161 enforcement through national public opinion and complement the economic and policy analysis at EU level. In particular, Member States could establish an economic council of wise people who would advise on the main macroeco-nomic projections.

These guidelines for the implementation of the Stability and Growth Pact consist of two sections. The rst section elaborates on the implementation of the Stability and Growth Pact. The second section consists of guidelines on the content and format of the stability and convergence programmes.Page 162

Section I: Specifications on the Implementation of the Stability and Growth Pact
A The Preventive Arm of the Stability and Growth Pact
1. The medium-term budgetary objective (MTO)
Definition of the MTO

The MTO is dened in cyclically adjusted terms, net of one-o and other temporary measures. The reference method for the estimation of potential output is the one adopted by the Council on 12 July 2002 47- One-o and temporary measures are measures having a transitory budgetary eect that does not lead to a sustained change in the intertemporal budgetary position 48.

The MTO pursues a triple aim:

- providing a safety margin with respect to the 3 % of GDP decit limit. This safety margin is assessed for each Member State taking into account past output volatility and the budgetary sensitivity to output fluctuations;

- ensuring rapid progress towards sustainability. This is assessed against the need to ensure the convergence of debt ratios towards prudent levels taking into account the economic and budgetary impact of ageing populations;

- taking (i) and (ii) into account, allowing room for budgetary manoeuvre, in particular taking into account the needs for public investment.

The MTOs are dierentiated for individual Member States to take into account the diversity of economic and budgetary positions and developments as well as of scal risk to the sustainability of public nances, also in face of prospective demographic changes. The country-specic MTOs may diverge from the requirement of a close to balance or in surplus position.

Until criteria and modalities for taking into account implicit liabilities are appropriately established and agreed by the Council, the country-specic MTOs are set taking into account the current government debt ratio and potential growth, while preserving sucient margin below the reference valuePage 163 of -3 % of GDP 49. In this transition period, the country-specic MTOs for euro area and ERM2 Member States would be in a range between -1 % of GDP for low debt / high potential growth countries and balance or surplus for high debt / low potential growth countries.

Potential growth should be assessed in a long-term perspective on the basis of the projections produced by the Working Group on Ageing attached to the Economic Policy Committee.

Member States may present more ambitious MTOs than implied by these criteria if they feel their circumstances call for it.

For Member States outside of the euro area and not participating in ERM2, country-specic MTOs would be dened with a view to ensuring the respect of the triple aim mentioned above.

Procedure for defining and revising the MTOs

In order to ensure a consistent application of the principles mentioned above for dening the country-specic MTOs, regular methodological discussions take place in the Economic and Financial Committee.

Taking into account the results of these discussions, Member States present their MTO in their stability or convergence programme. The MTOs are examined by the Commission and the Council in the context of the assessment of the stability and convergence programmes. In accordance with Article 99(3) of the Treaty and Article 5(2) of Regulation (EC) No 1466/97, where the Council considers that the MTO presented in a stability or convergence programme should be strengthened, it shall, in its opinion, invite the Member State concerned to adjust its programme.

The MTOs could be revised when a major reform is implemented and in any case every four years, in order to reflect developments in government debt, potential growth and scal sustainability.

2. The adjustment path toward the medium-term budgetary objective and deviations from it
Fiscal behaviour over the cycle and adjustment path toward the MTO

Member States should achieve a more symmetrical approach to scal policy over the cycle through enhanced budgetary discipline in periods of economic recovery, with the objective to avoid pro-cyclical policies and to gradually reach their medium term objective, thus creating the necessary room to accommod-Page 164 ate economic downturns and reduce government debt at a satisfactory pace, thereby contributing to the long-term sustainability of public nances. The presumption is to use unexpected extra revenues for decit and debt reduction.

- Member States that have already reached their MTO could let automatic stabilisers play freely over the cycle. They should in particular avoid pro- cyclical scal policies in 'good times'.

- Member States that have not yet reached their MTO should take steps to achieve it over the cycle. Their adjustment eort should be higher in good times; it could be more limited in bad times. In order to reach their MTO, Member States of the euro zone or of ERM2 should pursue an annual adjustment in cyclically adjusted terms, net of one-os and other tempor ary measures, of 0.5 % of GDP as a benchmark.

Member States that do not follow the required adjustment path will explain the reasons for the deviation in the annual update of their stability/convergence programme.

Based on the principles mentioned above and on the explanations provided by Member States, the Commission and the Council, in their assessments of the stability or convergence programmes, examine whether the adjustment path towards the medium-term budgetary objective is appropriate. In particular, they examine whether a sucient adjustment eort is made in economic good times, and take into account that the eort may be more limited in economic bad times.

Where the Council considers that the adjustment path towards the MTO should be strengthened, it shall, in accordance with Article 99(3) of the Treaty and Article 5(2) of Regulation (EC) No 1466/97, invite the Member State concerned to adjust its programme.

Definition of economic 'good times'

Economic 'good times' should be identied as periods where output exceeds its potential level, taking into account tax elasticities.

Given the uncertainty surrounding output gap levels' estimates, the change in the output gap could also be considered, especially when the output gap is estimated to be close to zero. For instance, periods where the output gap is slightly negative but moving rapidly towards positive values could be considered as 'good times'. Symmetrically, periods where the output gap is slightly positive but moving rapidly towards negative values could not be considered as 'good times'.

The identication of periods of economic 'good times' should be made after an overall economic assessment.Page 165

The reference for the estimation of potential output is the methodology adopted by the Council on 12 July 2002 50. The reference to 'tax elasticities' should be understood as the overall elasticity of taxes to GDP, resulting from the influence of economic factors (scal leads and lags, supply and demand composition of growth), abstracting from the implementation of discretionary measures.

Structural reforms

In order to enhance the growth oriented nature of the Pact, structural reforms will be taken into account when dening the adjustment path to the medium-term objective for countries that have not yet reached this objective and in allowing a temporary deviation from this objective for countries that have already reached it.

Only major reforms that have a veriable positive impact on the long-term sus-tainability of public nances will be taken into account. This includes reforms with direct long-term cost-saving eects and reforms raising potential growth. For instance, major health, pension and labour-market reforms will be considered.

Special attention will be paid to pension reforms introducing a multi-pillar system that includes a fully funded pillar, which have a direct negative impact on the general government decit (as dened in Article 1 of Regulation (EC) No 3605/93). This impact stems from the fact that revenue, which used to be recorded as government revenue, is diverted to a pension fund, which is fully funded and classied in a sector other than general government, and that some pensions and other social benets, which used to be government expenditure, will be, after the reform, paid by the pension scheme 51. In this specic case, the allowed deviation from the MTO should reflect the net cost of the reform to the publicly managed pillar, provided the deviation remains temporary and an appropriate safety margin to the reference value is preserved. The net cost of the reform is measured as its direct impact on the general government decit.

Only adopted reforms should be considered, provided that sucient, detailed information is provided in the stability and convergence programmes (see Section II). The budgetary eects of the reforms over time are assessed by the Commission and the Council in a prudent way, making due allowance for the margin of uncertainties associated with such an exercise.

Major structural reforms as identied above will be taken into account when dening the adjustment path to the medium-term objective for countries that have not yet reached this objective and in allowing a temporary deviation fromPage 166 this objective for countries that have already reached it, with the clear understanding that:

(i) a safety margin to ensure the respect ofthe 3 % of GDP reference value for the decit is guaranteed. This safety margin will be assessed for each Member State taking into account past output volatility and the budgetary sensitivity to output fluctuations;

(ii) the budgetary position is expected to return to the MTO within the period covered by the stability or convergence programme. For this purpose, the period under consideration will be limited to - at most - the four years following the year of the presentation of the programme.

Where a temporary deviation from the medium-term objective or the adjustment path towards it is allowed, this should be specied in the Council opinion on the stability/convergence programme.

3. Commission policy advice and warning

The Commission will issue policy advice to encourage Member States to stick to their adjustment path. Such policy advice, given in accordance with Article 211, second indent, of the Treaty, will be replaced by warnings in accordance with Article 111-179(4) of the Constitution as soon as it becomes applicable. The Commission policy advice and warnings are made public. The Commission continues to have the possibility to propose recommendations for the Council to issue an early warning, in accordance with Article 99(4) of the Treaty and Article 6(2), 6(3), 10(2) and 10(3) of Regulation (EC) No 1466/97.

B The Excessive Deficit Procedure
1. Commission report under Article 104(3)

The Commission will always prepare a report under Article 104(3) of the Treaty when a reported or planned decit exceeds 3 % of GDP. The Commission may, in accordance with Article 104(3), also prepare a report notwithstanding the fullment of the requirements under the criteria laid down in Article iO4(2)(a) of the Treaty if it is of the opinion that there is a risk of an excessive decit in a Member State.

The Commission shall examine in its report if one or more of the exceptions foreseen in Article iO4(2)(a) apply. In particular, the Commission shall consider whether the decit ratio has declined substantially and continuously and reached a level that comes close to the reference value.

The Commission shall also consider whether the excess over the reference value is only exceptional and temporary and whether the ratio remains closePage 167 to the reference value. In order to be considered as exceptional, the excess has to result from an unusual event outside the control of the Member State concerned and with a major impact on the nancial position of the general government, or it has to result from a 'severe economic downturn'. The Commission and the Council may consider an excess over the reference value resulting from a 'severe economic downturn' as exceptional in the sense of the second indent of Article 104(2) (a) of the Treaty if the excess over the reference value results from a negative annual GDP volume growth rate or from an accumulated loss of output during a protracted period of very low annual GDP volume growth relative to its potential. The indicator for assessing accumulated loss of output is the output gap, as calculated according to the method agreed by the Council on 12 July 2002 52. The excess over the reference value shall be considered as temporary if the forecasts provided by the Commission indicate that the decit will fall below the reference value following the end of the unusual event or the severe economic downturn.

The Commission report under Article 104(3) shall also take into account whether the government decit exceeds government investment expenditure and take into account all other relevant factors.

The Commission report should appropriately reflect developments in the medium-term economic position (in particular potential growth, prevailing cyclical conditions, the implementation of policies in the context of the Lisbon agenda and policies to foster R & D and innovation) and in the medium-term budgetary position (in particular, scal consolidation eorts in 'good times', debt sustainability, public investment and the overall quality of public nances). Furthermore, due consideration will be given to any other factors which, in the opinion of the Member State concerned, are relevant in order to comprehensively assess in qualitative terms the excess over the reference value. To this end, the Member State concerned may put forward to the Council and to the Commission the specic factors that it considers relevant, in due time for the preparation of the report under Article 104(3) and as a rule within one month of the reporting dates established in Article 4(2) and (3) of Regulation (EC) No 3605/93. The Member State shall provide the information necessary for the Commission and the Council to make a comprehensive assessment of the budgetary impact of these factors. In that context, special consideration will be given to budgetary eorts towards increasing or maintaining at a high level nancial contributions to fostering international solidarity and to achieving European policy goals, notably the unication of Europe if it has a detrimental eect on the growth and scal burden of a Member State. A balanced overall assessment has to encompass all these factors.

The Commission report will give due consideration to the implementation of pension reforms introducing a multi-pillar system that includes a fully fundedPage 168 pillar, if these reforms have a direct negative impact on the general government decit (as dened in Article 1 of Regulation (EC) No 3605/93. This impact stems from the fact that revenue, which used to be recorded as government revenue, is diverted to a pension fund, which is fully funded and classied in a sector other than general government, and that some pensions and other social benets, which used to be government expenditure will be, after the reform, paid by the pension scheme. In particular, the Commission report will examine the net cost of the reform to the publicly managed pillar. The net cost of the reform is measured as its direct impact on the general government decit.

2. Increasing the focus on debt and sustainability

In line with the provisions of the Treaty, the Commission has to examine compliance with budgetary discipline on the basis of both the decit and the debt criteria. The Council has agreed that there should be increased focus on debt and sustainability, and rearmed the need to reduce government debt to below 60 % of GDP at a satisfactory pace, taking into account macroeconomic conditions. The higher the debt to GDP ratios of Member States, the greater must be their eorts to reduce them rapidly.

The debt surveillance framework and the excessive decit procedure should be strengthened by applying the concept of 'suciently diminishing and approaching the reference value at a satisfactory pace' for the debt ratio in qualitative terms, by taking into account macroeconomic conditions and debt dynamics, including the pursuit of appropriate levels of primary surpluses as well as other measures to reduce gross debt and debt management strategies and the relationship between the evolution of the decit and the evolution of the general government gross debt.

The Commission will always prepare a report on the basis of Article 104(3) of the Treaty, in which it shall examine if one or more of the exceptions foreseen respectively in Article 104(2)(a) and (b) apply.

For countries in which the debt ratio is above the reference value, the Council will formulate recommendations on the debt dynamics in its opinions on the stability and convergence programmes.

3. The decision on the existence of an excessive deficit

If the double condition of the overarching principle - that, before the relevant factors mentioned in Article 2 (3) of Regulation (EC) No 1467/97 are taken into account, the general government decit remains close to the reference value and its excess over the reference value is temporary - is fully met, the relevant factors assessed in the Commission report under Article 104(3) will also be taken into account in the steps leading to the decision on the existence of an excessive decit, foreseen in paragraphs (4), (5) and (6) of Article 104 of thePage 169

Treaty. The balanced overall assessment to be made by the Council in accordance with Article 104(6) shall encompass all these factors.

In the case of Member States where the decit exceeds the reference value, while remaining close to it, and where this excess reflects the direct impact on the general government decit (as dened in Article 1 of Regulation (EC) No 3605/93) stemming from the implementation of a pension reform introducing a multi-pillar system that includes a fully funded pillar, the Commission and the Council shall also consider the cost of the reform to the publicly managed pillar when assessing developments in EDP decit gures. This impact stems from the fact that revenue, which used to be recorded as government revenue, is diverted to a pension fund, which is fully funded and classied in a sector other than general government, and that some pensions and other social benets, which used to be government expenditure, will be, after the reform, paid by the pension scheme. Consideration to the net cost of the reform will be given for the initial ve years after a Member State has introduced a fully funded system, or ve years after 2004 for Member States that have already introduced such a system. Furthermore, it will also be regressive, i.e. during a period of ve years, consideration will be given to 100, 80, 60, 40 and 20 % of the net cost of the reform to the publicly managed pillar. The net cost of the reform is measured as its direct impact on the general government decit.

The Council shall decide on the existence of an excessive decit in accordance with Article 104(6) of the Treaty, on the basis of a Commission recommendation, as a rule within four months of the reporting dates established in Article 4(2) and (3) of Regulation (EC) No 3605/93. The Council may decide later in the cases in which the budgetary statistical data have not been validated by the Commission (Eurostat) shortly after the reporting dates established in Regulation (EC) No 3605/93.

4. The correction of an excessive deficit
Minimum fiscal eort for countries in excessive deficit and initial deadline for its correction

The Council recommendations under Article 104(7) and notices under Article 104(9), based on recommendations of the Commission, will request that the Member State concerned achieves a minimum annual improvement in its cyclically adjusted balance net of one-o and temporary measures of at least 0.5 % of GDP as a benchmark, in order to correct the excessive decit within the deadline set in the recommendation.

As a rule, the initial deadline for correcting an excessive decit should be the year after its identication and thus, normally, the second year after its occurrence. This deadline should be set taking into account the minimum adjustment, in cyclically adjusted terms net of one-o and other temporary measures, requested by the Council. If this eort seems sucient to correct the excessivePage 170 decit in the year following its identication, the initial deadline needs not to be set beyond that year.

In case of special circumstances, the initial deadline for correcting an excessive decit would be set, as a rule, one year later, i.e. the second year after its identication and thus normally the third year after its occurrence. The determination of the existence of such circumstances will take into account a balanced overall assessment of the factors mentioned in the report under Article 104(3).

Longer deadlines could be set for new and future Member States, i.e. in the case of Member States being placed in excessive decit immediately following their accession. Longer deadlines could also be set for Member States implementing pension reforms introducing a multi-pillar system that includes a fully funded pillar.

Clarifying the conditions for abeyance

Following the expiry of the six-month period following the adoption of a recommendation under Article 104(7) or the four-month period following the adoption of a notice under Article 104(9), the Commission shall assess whether the Member State concerned has acted in compliance with the recommendation or notice. This assessment should consider whether the Member State concerned has publicly announced or taken measures that seem sucient to ensure adequate progress towards the correction of the excessive decit within the time limits set by the Council.

Where it appears that the Member State concerned has not acted in compliance with the recommendation or notice, the following step of the procedure provided by Article 104 of the Treaty, as claried by Regulation (EC) No 1467/97, shall be activated.

If the Commission considers that the Member State has acted in compliance with the recommendation or notice, it shall inform the Council accordingly, and the procedure shall be held in abeyance. If, thereafter, it appears that action by the Member State concerned is not being implemented or is proving to be inadequate and if the possibility of repeating the same step does not apply, the following step of the procedure provided by Article 104 of the Treaty, as claried by Regulation (EC) No 1467/97, shall be immediately activated. When considering whether the following step of the procedure should be activated, the Commission and the Council should take into account whether the measures required in the recommendation or notice are fully implemented and whether other budgetary variables under the control of the government are developing in line with what was assumed in the recommendation or notice.

In the specic case of recommendations or notices which have set a deadline for the correction of the excessive decit more than one year after its identication, the assessment made by the Commission after the expiry of the six-monthPage 171 period following the adoption of a recommendation under Article 104(7) or the four-month period following a notice under Article 104(9) should mainly focus on the measures taken in order to ensure an adequate scal adjustment in the year following the identication of the excessive decit. The Commission should, during the period of abeyance, assess whether the measures already announced or taken are being adequately implemented and whether additional measures are announced and implemented in order to ensure adequate progress toward the correction of the excessive decit within the time limits set by the Council.

Clarifying the concept of eective action and repetition of steps in the excessive deficit procedure

If eective action has been taken in compliance with a recommendation under Article 104(7) (or notice under Article 104(9)) of the Treaty and unexpected adverse economic events with major unfavourable consequences for government nances occur after the adoption of that recommendation or notice, the Council may decide, on a recommendation from the Commission and before taking into account the relevant factors mentioned in Article 2(3) of Regulation (EC) No 1467/97, to adopt a revised recommendation under Article 104(7) (or notice under Article 104(9)) of the Treaty. The revised recommendation (or notice), then taking into account the relevant factors mentioned in Article 2(3) of Regulation (EC) No 1467/97, may notably extend the deadline for the correction of the excessive decit by one year.

A Member State should be considered to have taken 'eective action' if it has acted in compliance with the recommendation or notice, regarding both the implementation of the measures required therein and budgetary execution. The assessment should in particular take into account whether the Member State concerned has achieved the annual improvement of its cyclically adjusted balance, net of one-o and other temporary measures, initially recommended by the Council. Where the observed adjustment proves to be lower than recommended, a careful analysis of the reasons for the shortfall would be made.

The occurrence of unexpected adverse economic events with major unfavourable budgetary eects shall be assessed against the economic forecast underlying the Council recommendation or notice.

5. Abrogation of Council decisions in the context of the EDP for Member States having implemented multi-pillar pension reforms Abrogation of Council decisions under paragraphs (6) to (9) and (11) of Article 104 of the Treaty is possible only if the general government decit has declined substantially and continuously and has reached a level that comes close to the reference value Page 172

The Commission and the Council, when considering under Article 104(12) whether some or all of the Council decisions under Article 104(6) to (9) and (11) should be abrogated, consider carefully an excess close to the decit reference value which reflects the implementation of a pension reform introducing a multi-pillar system that includes a fully funded pillar.

Consideration to the net cost of the reform will be given for the initial ve years after a Member State has introduced a fully funded system, or ve years after 2004 for Member States that have already introduced such a system 53. Furthermore, it will also be regressive, i.e. during a period of ve years, consideration will be given to 100, 80, 60,40 and 20 % of the net cost of the reform to the publicly managed pillar. The net cost of the reform is measured as its direct impact on the general government decit (as dened in Article 1 of Regulation (EC) No 3605/93). This impact stems from the fact that revenue, which used to be recorded as government revenue, is diverted to a pension fund, which is fully funded and classied in a sector other than general government, and that some pensions and other social benets, which used to be government expenditure, will be, after the reform, paid by the pension scheme.

This implies in particular that for those Member States that already have implemented such reforms, it will be considered for 100 % in 2005, 80 % in 2006- 60 % in 2007, 40 % in 2008 and 20 % in 2009. For reforms implemented after 2005, the net impact of such reforms will be considered accordingly. For example, in the case of a Member State that would implement such a reform in 2007, the net budgetary impact of the reform will be considered for 100 % in 2007- 80 % in 2008, 60 % in 2009, 40 % in 2010 and 20 % in 2011. The Member State shall provide the information necessary for the Commission to assess the net budgetary impact of the reform.Page 173

Section II: Guidelines on the Format and Content of Stability and Convergence Programmes

The Stability and Growth Pact requires Member States to submit stability or convergence programmes and updates thereof, which are at the basis of the Council's surveillance of budgetary positions and its surveillance and coordination of economic policies. The Council may, on a recommendation from the Commission, and after consulting the Economic and Financial Committee, deliver an opinion on each of the updated programmes and, if it considers that its objectives and contents should be strengthened, invite the Member State concerned to adjust its programme.

Member States are expected to take the corrective action they deem necessary to meet the objectives of their stability or convergence programmes, whenever they have information indicating actual or expected signicant divergence from those objectives.

In view of the fundamental role of the stability and convergence programmes in the process of multilateral surveillance, it is important that their information content is suitable and allows for comparison across Member States. Whilst acknowledging that the programmes are the responsibility of national authorities and that the possibilities and practices dier across countries, Council Regulation (EC) No 1466/97 as amended by Council Regulation (EC) No 1055/2005 sets out the essential elements of these programmes.

The experience gathered during the rst years of implementation of the Pact with the stability and convergence programmes shows that guidelines on the content and format of the programmes not only assist the Member States in drawing up their programmes, but also facilitate their examination by the Commission, the Economic and Financial Committee and the Council.

The guidelines set out below should be considered as a code of good practice and checklist to be used by Member States in preparing stability or convergence programmes. Member States are expected to follow the guidelines as far as possible, and to justify any departure from them.

1. Status of the programme and of the measures

Each programme mentions its status in the context of national procedures, notably with respect to the national Parliament. The programme also indicates whether the Council opinion on the previous programme has been presented to the national Parliament.

The state of implementation of the measures (enacted versus planned) presented in the programme should be specied.Page 174

2. Content of stability and convergence programmes

In order to facilitate comparison across countries, Member States are expected, as far as possible, to follow the model structure for the programmes in Annex 1. The standardisation of the format and content of the programmes along the lines set below will substantially improve the conditions for equality of treatment.

The quantitative information should be presented following a standardised set of tables (Annex 2). Member States should endeavour to supply all the information in these tables. The tables could be complemented by further information wherever deemed useful by Member States.

In addition to the guidelines set out below, the programmes should provide information on the consistency with the broad economic policy guidelines of the budgetary objectives and the measures to achieve them, as well as on the measures to enhance the quality of public nances and to achieve long-term sustainability.

Objectives

Member States will present in their stability and convergence programmes budgetary targets for the general government balance in relation to the MTO, and the projected path for the debt ratio. Convergence programmes shall also present the medium-term monetary policy objectives and their relationship to price and exchange rate stability.

Member States, when preparing the rst update of their stability or convergence programme after a new government has taken oce, are invited to show continuity with respect to the budgetary targets endorsed by the Council on the basis of the previous update of the stability/convergence programme and - with an outlook for the whole legislature - to provide information on the means and instruments envisaged to reach these targets by setting out its budgetary strategy.

To permit a fuller understanding of the path of the government balance and of the budgetary strategy in general, information should be provided on expenditure and revenue ratios and on their components separately identied, as well as on one-o and other temporary measures 54. To permit a fuller understanding of the path of the debt ratio, information should be provided, to the extent possible, on components of the stock-flow adjustment, such as privatisation receipts and other nancial operations.Page 175

The budget balances should be broken down by sub-sector of general government (central government, state government for Member States with federal or quasi-federal institutional arrangements, local government and, social security).

Assumptions and data

Stability and convergence programmes should be based on realistic and cautious macroeconomic forecasts. The Commission forecasts can provide an important contribution for the coordination of economic and scal policies. Member States are free to base their stability/convergence programmes on their own projections. However, signicant divergences between the national and the Commission services' forecasts should be explained in some detail. This explanation will serve as a reference when forecast errors are assessed ex post.

The programmes should present the main assumptions about expected economic developments and important economic variables that are relevant to the realisation of their budgetary plans, such as government investment expenditure, real GDP growth, employment and inflation. The assumptions on real GDP growth should be underpinned by an indication of the expected demand contributions to growth. The possible upside and downside risks to the outlook should be brought out.

Furthermore, the programmes should provide sucient information about GDP developments to allow an analysis of the cyclical position of the economy and the sources of potential growth. The outlook for sectoral balances and, especially for countries with a high external decit, the external balance should be analysed.

As regards external macroeconomic developments, euro-area Member States and Member States participating in ERM2 in particular should use the 'common external assumptions' on the main extra-EU variables if provided by the Commission in due time or, for comparability reasons, present sensitivity analysis based on the common assumptions for these variables when the differences are signicant. The assumptions are to be provided in due time by the Commission services (after consultation with national experts), on the basis of the nal table in Annex 2, for discussion by the EFC.

Assumptions about interest rates and exchange rates, if not presented in the programme, should be provided to the Commission services to allow for the technical assessment of the programmes.

In order to facilitate the assessment, the concepts used shall be in line with the standards established at European level, notably in the context of the European system of accounts (ESA). The programmes should ensure the formal and substantial consistency of the required information on budgetary aggregates andPage 176 economic assumptions with ESA concepts. This information may be complemented by a presentation of specic accounting concepts that are of particular importance to the country concerned.

Measures, structural reforms and long-term sustainability

The programmes should describe the budgetary and other economic policy measures being taken or proposed to achieve the objectives of the programme, and, in the case of the main budgetary measures, an assessment of their quantitative eects on the general government balance. Measures having signicant 'one-o? eects should be explicitly identied. The further forward the year of the programme, the less detailed the information could be. However, budgetary targets should be backed by an indication of the broad measures necessary to achieve them.

Structural reforms should be specically analysed when they are envisaged to contribute to the achievement of the objectives of the programme. In particular, given the relevance of 'major structural reforms' in dening the adjustment path to the medium-term objective for Member States that have not yet reached it and allowing a temporary deviation from the MTO for Member States that have already reached it (see Section I), the programmes should include comprehensive information on the budgetary and economic eects of such reforms. Programmes should notably include a detailed quantitative cost-benet analysis of the short-term costs - if any - and of the long-term benets of the reforms from the budgetary point of view. They should also analyse the projected impact of the reforms on economic growth over time while explaining the used methodology.

The programmes should also describe measures aimed at improving the quality of public nances on both the revenue and expenditure side (e.g. tax reform, value-for-money initiatives, measures to improve tax collection eciency and expenditure control).

The programmes could further include information on the implementation of existing national budgetary rules (expenditure rules etc.) as well as on other institutional features of the public nances, in particular budgetary procedures and public nance statistical governance.

Finally, the programmes should outline the countries' strategies to ensure the sustainability of public nances, especially in light of the economic and budgetary impact of ageing populations.

The Working Group on Ageing (AWG) attached to the Economic Policy Committee (EPC) is responsible for producing common budgetary projections on: public spending on pensions, healthcare, long-term care, education, unemployment transfers and where possible and relevant, age-related revenues, such as pension contributions. These common projections will provide the basis forPage 177 the assessment by the Commission and the Council of sustainability of the Member States' public nances within the context of the SGP. They should be included in the programmes.

The programmes should include all the necessary additional information, both of qualitative and quantitative nature, so as to enable the Commission and the Council to assess the sustainability of Member States of public nances based on current policies. To this end, information included in programmes should focus on new relevant information that is not fully reflected in the latest common EPC projections. For example, Member States might want to include information on the latest demographic trends and major policy changes in pension and healthcare systems. Programmes should clearly distinguish between measures that have been enacted and measures that are envisaged.

Given the uncertainty surrounding long-term projections, the assessment by the Commission and the Council should include stress tests that provide an indication of the risks to public nance sustainability in the event of adverse demographic, economic or budgetary developments.

In addition to the requirements mentioned above, Member States may present dierent projections, based on national calculations. In such a case, Member States should explain in detail the underlying assumptions of these projections, the methodology used, the policies implemented or planned to meet the assumptions, and the divergences between the national projections and the common projections produced by the Working Group on Ageing attached to the Economic Policy Committee.

These national projections and their assumptions, including their plausibility, will enter the basis for the assessment by the Commission and the Council of sustainability of the Member States' public nances within the context of the SGP.

Sensitivity analysis

Given the inevitability of forecast errors, stability and convergence programmes include comprehensive sensitivity analyses and/or develop alternative scenarios, in order to enable the Commission and the Council to consider the complete range of possible scal outcomes.

In particular, the programmes shall provide an analysis of how changes in the main economic assumptions would aect the budgetary and debt position and indicate the underlying assumptions about how revenues and expenditures are projected to react to variations in economic variables. This should include the impact of dierent interest rate assumptions and, for non-participating Member States, of dierent exchange rate assumptions, on the budgetary and debt position. Countries that do not use the common external assumptions shouldPage 178 endeavour to provide a sensitivity analysis also on main extra-EU variables when the dierences are signicant.

In the case of'major structural reforms' (see Section I), the programmes shall also provide an analysis of how changes in the assumptions would aect the eects on the budget and potential growth.

Time horizon

The information about paths for the general government surplus/ decit ratio, the expenditure and revenue ratios and their components as well as for debt ratio and the main economic assumptions should be on an annual basis and should cover, as well as the current and preceding year, at least the three following years (Article 3(3) and Article 7(3)), leaving it open to Member States to cover a longer period if they so wish.

The horizon for the long-term projections on the budgetary implications of ageing should cover the same period as the EPC projections.

Updating of programmes

In order to promote the eciency of the budgetary and economic surveillance and achieve a better interaction between dierent procedures, submissions of SCP updates should take place shortly after national governments have presented their budget proposals to parliaments, but not earlier than mid-October and not later than 1 December 55 56 57- This should increase the comparability of the programmes, the consistency of the assessments and the equality of treatment. The EFC and the Econ should examine the SCP updates in a maximum of three sessions. The whole process should be completed before the end of March each year.

Annual updates of stability and convergence programmes should show how developments have compared with the budgetary targets in the previous programme or update. When applicable, they should explain in detail the reasons for the deviations from these targets. When substantial deviations occur, the update should mention whether measures are taken to rectify the situation, and provide information on these measures.Page 179

Annex 1: Model Structure for the Stability and Convergence Programmes

1- Overall policy framework and objectives

2- Economic outlook (on the basis of Tables ia-id, 5 and 8)

- World economy/technical assumptions

- Cyclical developments and current prospects

- Medium-term scenario

- Sectoral balances

- Growth implications of 'major structural reforms'

3. General government balance and debt (on the basis of Tables 2, 3, 4 and )

- Policy strategy

- Medium-term objectives

- Actual balances and implications of budget for next year

- Structural balance (cyclical component of the decit, one-off and temporary measures), scal stance

- Debt levels and developments, analysis of below-the-line operations and stock-flow adjustments

- Budgetary implications of 'major structural reforms'

4. Sensitivity analysis and comparison with previous update (on the basis of Table 6)

- Alternative scenarios and risks

- Sensitivity of budgetary projections to different scenarios and assumptions

- Comparison with previous updatePage 180

5. Quality of public finances (on the basis of Tables 2 and 3)

- Policy strategy

- Developments on the expenditure side

- Developments on the revenue side

6. Sustainability of public finances (on the basis of Table 7)

- Policy strategy

- Long-term budgetary prospects, including the implications of ageing populations

7. Institutional features of public finances

- Implementation of national budgetary rules

- Budgetary procedures, including public nance statistical governance

- Other institutional developments in relation to public nancesPage 181

Annex 2: Tables To Be Contained in the Stability and Convergence Programmes and Their Updates

Provision of data on variables in bold characters is a requirement. Provision of data on other variables is optional but highly desirable

Table a. Macroeconomic prospects

Page 182
ESA code Year
X-1
Year
X-1
Year
X
Year
X+1
Year
X+2
Year
X+3
Level rate of change rate of change rate of change rate of change rate of change
1. Real GDP Bi*g - - - - - -
2. Nominal GDP Bi*g - - - - - -
Components of real GDP
3. Private consumption expenditure P3 - - - - - -
4-Government consumption expenditure P3 - - - - - -
5. Gross xed capital formation P.51 - - - - - -
6. Changes in inventories and net acquisition of valuables (%ofGDP) P.52 + P.53 - - - - - -
7. Exports of goods and services P.6 - - - - - -
8. Imports of goods and services P.7 - - - - - -
Contributions to real GDP growth
9. Final domestic demand - - - - - - -
10. Changes in inventories and net acquisition of valuables P.52 + P.53 - - - - - -
11. External balance of goods and services B.11 - - - - - -
Table b. Price developments Page 183Table c. Labour-market developments
ESA code Year
X-1
Year
X-1
Year
X
Year
X+1
Year
X+2
Year
X+3
Level rate of change rate of change rate of change rate of change rate of change
1. GDP deflator - - - - - - -
2. Private consumption deflator - - - - - - -
3. HICP 1 - - - - - - -
4. Public consumption deflator - - - - - - -
5. Investment deflator - - - - - - -
6. Export price deflator (goods and services) - - - - - - -
7. Import price deflator (goods and services) - - - - - - -
Page 184Table d. Sectoral balances
ESA code Year
X-1
Year
X-1
Year
X
Year
X+1
Year
X+2
Year
X+3
Level rate of change rate of change rate of change rate of change rate of change
1. Employment, persons 2 - - - - - - -
2. Employment, hours worked 3 - - - - - - -
3-Unemployment rate ( %) 4 - - - - - - -
4. Labour productivity, persons 5 - - - - - - -
5.Labour productivity, hours worked 6 - - - - - - -
6. Compensation of employees D.1 - - - - - -
% of GDP ESA code Year X-1 Year X YearX+1 YearX+2 YearX+3
1. Net lending/ borrowing vis--vis the rest of the world B.9 - - - optional optional
of which: - Balance on goods and services - - - - - -
- Balance of primary incomes and transfers - - - - - -
- Capital account - - - - - -
2. Net lending/ borrowing of the private sector B.9/ EDP B.9 - - - - -
3. Net lending/ borrowing of general government B.9 - - - - -
4. Statistical discrepancy - - optional optional optional optional
Page 185 Table 2 . General government budgetary prospects Page 186
ESA code Year
X-1
Year
X-1
Year
X
Year
X+1
Year
X+2
Year
X+3
Level %of GDP %of GDP %of GDP %of GDP %of GDP
Net lending (EDP B.9) by sub-sector
1. General government S.13 - - - - - -
2. Central government S.1311 - - - - - -
3. State government S.1312 - - - - - -
4. Local government S.1313 - - - - - -
5. Social security funds S.1314 - - - - - -
General government (S13)
6. Total revenue TR - - - - - -
7. Total expenditure TE7 - - - - - -
8. Net lending/ borrowing EDP B.9 - - - - - -
9. Interest expenditure (including FISIM) EDP D.41 incl. FISIM - - - - - -
p.m.: 9a. FISIM - - - - - - -
10. Primary balance 8 - - - - - -
Selected components of revenue
11. Total taxes(11=11a+11b+11c) - - - - - - -
a. Taxes on production and imports D.2 - - - - optional optional
b. Current taxes on income, wealth, etc. D.2 - - - - optional optional
c. Capital taxes D.91 - - - - optional optional
12. Social contributions D.61 - - - - optional optional
13. Property income D.4 - - - - optional optional
14. Other (14=15-(11+12+13)) - - - - - optional optional
15=6. Total revenue TR - - - - - -
p.m.: Tax burden (D.2+D.5+D.61+ D.91-D.995)9 - - - - - - -
Page 187
Selected components of expenditure
16. Collective consumption P.32 - - - - - -
17. Total social transfers D.62 + D.63 - - - - - -
17a. Social transfers in kind P.31 =D.63 - - - - - -
17b. Social transfers other than in kind D.62 - - - - - -
18.=9. Interest expenditure (including FISIM) EDP D.41 incl. FISIM - - - - - -
19. Subsidies D.3 - - - - - -
20. Gross fixed capital formation P.51 - - - - - -
21. Other (21=22-(16+17+18+19+20)) - - - - - - -
22=7. Total expenditure TE 10 - - - - - -
p.m.: compensation of employees D.1 - - - - - -
Page 188 Table 3. General government expenditure by function
% of GDP COFOG code Year X-2 Year X+3
1. General public services 1 - -
2. Defence 2 - -
3. Public order and safety 3 - -
4. Economic aairs 4 - -
5. Environmental protection 5 - -
6. Housing and community amenities 6 - -
7. Health 7 - -
8. Recreation, culture and religion 8 - -
9. Education 9 - -
10. Social protection 10 - -
11. Total expenditure ( = item 7=26 in Table 2) TE 11 - -
Page 189 Table 4. General government debt developments
% of GDP - Year X-1 Year X YearX+1 YearX+2 YearX+3
1. Gross debt 12 - - - - - -
2. Change in gross debt ratio - - - - - -
Contributions to changes in gross debt
3. Primary balance 13 - - - - - -
4. Interest expenditure (including FISIM) 14 - - - - - -
5. Stock-flow adjustment - - - - - -
of which: - Dierences between cash and accruals 15 - - - - - -
- Net accumulation of nancial assets 16 of which: - privatisation proceeds - - - - - -
- Valuation eects and other 17 - - - - - -
p.m. implicit interest rate on debt 18 - - - - - -
Page 190
Other relevant variables
6. Liquid nancial assets 19 - - - - - -
7. Net nancial debt (7=1-6) - - - - - -
Table 5. Cyclical developments
% of GDP ESA code Year X-1 Year X YearX+1 YearX+2 YearX+3
1. Real GDP growth(%) - - - - - -
2. Net lending of general government EDP B.9 - - - - -
3. Interest expenditure (including FISIM recorded as consumption) EDPD41 + FISIM - - - - -
4. Potential GDP growth (%) * - - - - - -
contributions: - labour - capital - total factor productivity - - - - - -
5. Output gap - - - - - -
6. Cyclical budgetary component - - - - - -
7. Cyclically-adjusted balance (2-6) - - - - - -
8. Cyclically-adjusted primary balance (7-3) - - - - - -
Page 191 Table 6. Divergence from previous update
- ESA code Year X-1 Year X YearX+1 YearX+2 YearX+3
Real GDP growth(%) - - - - - -
Previous update - - - - - -
Current update - - - - - -
Difference - - - - - -
General government net lending (% of GDP) EDP B.9 - - - - -
Previous update - - - - - -
Current update - - - - - -
Difference - - - - - -
General government gross debt (% of GDP) - - - - - -
Previous update - - - - - -
Current update - - - - - -
Difference - - - - - -
Page 192 Table 7. Long-term sustainability of public finances
% of GDP 2000 2005 2010 2020 2030 2050
Total expenditure - - - - - -
Of which: age-related expenditure - - - - - -
Pension expenditure - - - - - -
Social security pension - - - - - -
Old-age and early pensions - - - - - -
Other pensions (disability, survivors) - - - - - -
Occupational pensions (if in general government) - - - - - -
Health care - - - - - -
Long-term care (this was earlier included in health care) - - - - - -
Education expenditure - - - - - -
Other age-related expenditure - - - - - -
Interest expenditure - - - - - -
Total revenue - - - - - -
Of which: property income - - - - - -
Of which: from pensions contributions (or social contributions if appropriate) - - - - - -
Pension reserve fund assets - - - - - -
Of which: consolidated public pension fund assets (assets other than government liabilities) - - - - - -
Assumptions
Labour productivity growth - - - - - -
Real GDP growth - - - - - -
Participation rate males (aged 20-64) - - - - - -
Participation rates females (aged 20-64) - - - - - -
Total participation rates (aged 20-64) - - - - - -
Unemployment rate - - - - - -
Population aged 65+ over total population - - - - - -
Page 193 Table 8. Basic assumptions This table should preferably be included in the programme itself; if not, these assumptions should be transmitted to the Council and the Commission together with the programme.
- Year X-1 Year X YearX+1 YearX+2 YearX+3
Short-term interest rate 20 (annual average) - - - - -
Long-term interest rate (annual average) - - - - -
USD/EUR exchange rate (annual average) (euro area and ERM countries) - - - - -
Nominal effective exchange rate - - - - -
(for countries not in euro area or ERM) exchange rate vis--vis the euro (annual average) - - - - -
World excluding EU, GDP growth - - - - -
EU GDP growth - - - - -
Growth of relevant foreign markets - - - - -
World import volumes, excluding EU - - - - -
Oil prices, (Brent, USD/ barrel) - - - - -
--------------------- Due to data problems, a dierent method may be used for the estimation of potential output in the case of recently acceded Member States (RAMS). The method used should be agreed by the Economic Policy Committee on the basis of a proposal of the Output Gap Working Group. Examples of one-o and temporary measures are the sales of non-nancial assets; receipts of auctions of publicly owned licences; short-term emergency costs emerging from natural disasters; tax amnesties; revenues resulting from the transfers of pension obligations. The Council Report on 'Improving the implementation of the Stability and Growth Pact' of 20 March 2005 and endorsed on 22 March 2005 by the Heads of State or Government stated that 'by the end of 2006, the Commission should report on progress achieved towards the methodology for completing the analysis by incorporating implicit liabilities'. See footnote 47. For more information on the classication of pension schemes, see Eurostat decision on the 'Classication of funded pension schemes in case of government responsibility or guarantee' of 2 March 2004. See footnote 47. Up to the March 2007 notication, these provisions do not apply to Member States that benet from the special treatment granted by Eurostat for the implementation of the 2 March 2004 decision on the classication of second-pillar funded pension schemes. See Eurostat News Releases No 30/2004 of 2 March 2004 and No 117/2004 of 23 September 2004. Countries that benet, over a transition period up to the March 2007 notication, from the special treatment granted by Eurostat for the implementation of the 2 March 2004 decision on the classication of second-pillar funded pension schemes, should present in their programmes detailed information on the impact on the general government balance as well as on the revenue and expenditure side separately and, if possible, on the debt ratio. In the case of the UK, which has a dierent scal year, submission should be as close as possible to the presentation of the autumn pre-Budget report. Austria and Portugal cannot comply at this stage with this schedule, but they will submit their stability programmes no later than 15 December. Ireland will be regarded as meeting this commitment by submitting its stability programme update on its annual Budget day, which traditionally takes place on the rst Wednesday of December. Optional for stability programmes. Occupied population, domestic concept national accounts denition. National accounts denition. Harmonised denition, Eurostat, levels. Real GDP per person employed. Real GDP per hour worked. Adjusted for the net flow of swap-related flows, so that TR-TE=EDP B.9. The primary balance is calculated as (EDP B.9, item 8) plus (EDP D.41 + FISIM recorded as intermediate consumption, item 9). Including those collected by the EU and including an adjustment for uncollected taxes and social contributions (D.995), if appropriate. Adjusted for the net flow of swap-related flows, so that TR-TE=EDP B.9. Adjusted for the net flow of swap-related flows, so that TR-TE=EDP B.9. As dened in Regulation (EC) No 3605/93 (not an ESA concept). Cf. item 10 in Table 2. Cf. item 9 in Table 2. The dierences concerning interest expenditure, other expenditure and revenue could be distinguished when relevant. Liquid assets, assets on third countries, government controlled enterprises and the dierence between quoted and non-quoted assets could be distinguished when relevant. Changes due to exchange rate movements, and operation in secondary market could be dis tinguished when relevant. Proxied by interest expenditure (including FISIM recorded as consumption) divided by the debt level of the previous year. * Until an agreement on the production function method is reached, Member States can use their own gures (SP). AFi, AF2, AF3 (consolidated at market value), AF (if quoted in stock exchange, including mutual fund shares). If necessary, purely technical assumptions.

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