Council opinion

of 10 February 2004

on the updated stability programme of Italy, 2003-2007

(2004/C 43/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 10 February 2004 the Council examined Italy's updated stability programme, which covers the period 2003-2007. The programme was submitted on 1 December and largely complies with the data requirements of the revised "code of conduct on the content and format of stability and convergence programmes". Information on the additional measures foreseen to achieve the budgetary targets beyond 2004 would have been useful in order to assess with precision the path and composition of the adjustment, particularly given the commitment to progressively reduce reliance on one-off measures.

The budgetary strategy relies on a progressive increase in the primary balance, with a major part of the adjustment towards the close to balance or in surplus position taking place in the outer years of the programme. Given the government's stated aim to reduce the tax and social security contributions burden, the brunt of the adjustment is to be borne by primary expenditure. The planned high primary surpluses, together with sizeable privatisations, entail a steady decline in the debt ratio throughout the programme period.

The macroeconomic framework in the update projects real GDP growth to accelerate from an estimated 0,5 % in 2003 to 1,9 % in 2004. In the period 2005-2007, growth is estimated to average 2,4 %. Employment growth (full-time equivalent in national accounts definition) is expected to strengthen from an estimated 0,9 % in 2004 to 1,1 % on average in 2005-2007. HICP inflation, at 2,8 % in 2003, is planned to ease to 1,8 % in 2004 and to further decline to 1,4 % by 2007. Currently available information indicates that projected growth underpinning the programme appears to be on the high side of the current forecasting range. In particular, the evolution of potential growth in the medium term reflects rather favourable assumptions regarding the contribution by capital.

In 2003 the deficit is expected at 2,5 % of GDP, below the 3 % limit in spite of the adverse cyclical developments. For 2004, the government targets a general government deficit of 2,2 % of GDP; in cyclically-adjusted terms, based on Commission calculations according to the commonly agreed methodology, there is an estimated improvement by 0,2 percentage point, to 1,6 % of GDP. For 2005, 2006 and 2007, the projections are for headline deficits of 1,5 % and 0,7 % of GDP and a balance in the final year, respectively. In cyclically-adjusted terms, the corresponding improvements amount to around half a percentage point of GDP on average.

Given the risks, the budgetary stance in the programme does not seem to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations. The risks stem from an underestimation of the primary expenditure baseline projections and the downside risks to the macroeconomic scenario mentioned above. Indeed, if economic conditions turned out to be weaker than currently foreseen, the deficit threshold may already be breached in 2004. Also the envisaged measures in the outer years of the programme need still to be defined, including the replacement of one-off measures adopted in 2004. For the same reasons, the budgetary stance in the update may be insufficient to ensure that the Stability and Growth Pact's medium-term objective of a budgetary position close to balance or in surplus is achieved within the programme period.

The debt ratio, which in 2003 fell more than assumed in the programme, is projected to decline over the programme period, from 106 % of GDP in 2003 to 98,6 % in 2007. This evolution is less ambitious than was foreseen in the previous update. The evolution of the debt ratio may be less favourable than projected, given the risks to the deficit outcomes mentioned above, and the level of expected proceeds from the privatisation programme. Concern is expressed about the pace of debt reduction, so every opportunity should be taken by the Italian authorities to accelerate its pace.

On the basis of current policies, risks of budgetary imbalances emerging in the future due to an ageing population cannot be ruled out. Securing an adequate primary surplus is essential if the debt reduction is to make a noticeable contribution towards meeting the costs of ageing. This should be complemented by measures to raise employment rates, especially among older workers and women, and control the evolution of age-related spending. The plans to reform the pension system unveiled in late 2003, if implemented, would make a substantial contribution to achieve these objectives. A further postponement in the implementation of the draft legislation on pension reform is not consistent with the pursuit of a sustainability-oriented fiscal strategy.

The economic policies as reflected in the updated programme are partly consistent with the recommendations of the Broad Economic Policy Guidelines, specifically those with budgetary implications, including the request to improve the cyclically-adjusted budget position by at least 0,5 % of GDP each year as calculated according to the commonly agreed methodology. Risks persist on the planned replacement of one-off measures, the implementation of structural expenditure cuts and the pace of reduction in the debt ratio. Finally, the timely implementation of the government draft legislation on pension reform is essential in order to dampen the projected increase in the ratio of pension expenditure to GDP over the next twenty years.

(1) OJ L 209, 2.8.1997.