Council opinion

of 27 February 2007

on the stability programme of Slovenia, 2006-2009

(2007/C 71/03)

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 coordination 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:

(1) On 27 February 2007 the Council examined the first stability programme of Slovenia, which covers the period 2006 to 2009.

(2) The macroeconomic scenario underlying the programme envisages that real GDP will grow steadily at above 4 % over the programme period. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. The programme's projections for inflation also appear realistic.

(3) For 2006, the general government deficit is estimated at 1,6 % of GDP in the Commission services' autumn 2006 forecast, against a target of 1,7 % of GDP set in the December 2005 update of the convergence programme. The 2006 estimated outturn, based on more recent figures, of 1,2 % GDP is lower compared to 2005.

(4) The programme's budgetary strategy is geared to achieving the medium-term objective (MTO) for the budgetary position as meant in the Stability and Growth Pact by 2009 through a back-loaded consolidation. Reflecting the ongoing tax reform and a number of cost-saving expenditure measures, revenues and expenditure as a percentage of GDP fall significantly throughout the programme period. Until 2008, when the respective ratios decrease in broadly equal measure, the general government deficit is planned to linger at around 1,5 % of GDP. In 2009, the deficit declines to 1,0 % as expenditure reduction outweighs the revenue loss. The primary balance initially deteriorates from 0,1 % of GDP in 2006 to -0,3 % of GDP in 2008 before improving to 0,3 % of GDP in 2009. Compared with the last update of the convergence programme, the stability programme postpones the target of achieving a nominal deficit of 1 % of GDP by one year against a more favourable macroeconomic scenario.

(5) Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve by around 14 % of GDP. As in the December 2005 update of the convergence programme, the medium-term objective (MTO) for the budgetary position presented in the stability programme is a structural deficit of 1 % of GDP to be achieved by 2009, one year later than in the previous programme. The delay is attributed in the programme to a major railway project with an estimated cost of 0,4 % of GDP in 2007, 0,5 % of GDP in 2008 and 0,2 % of GDP in 2009; as well as some expenditure of a temporary nature. Since the MTO is more demanding than the minimum benchmark (estimated at a deficit of around 112 % of GDP), reaching it should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO lies within the range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential growth in the long term.

(6) The risks to the budgetary projections in the programme appear broadly balanced but the budgetary outcome could be worse than projected in 2009. On the one hand, the assumptions on growth and tax revenues seem plausible. Furthermore, Slovenia has established a track record of better-than-projected budgetary outcomes in recent years, also supported by an effective budgetary mechanism of containing general government expenditures in response to an unexpected revenue shortfall. On the other hand, notwithstanding the efforts to restructure the general government expenditure, the share of mandatory expenditure remains very high but on a declining path. The measures that underpin the considerable cut in primary expenditure as a percentage of GDP announced for 2009 remain to be specified in more detail.

(7) In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure that the MTO is achieved by 2009, as envisaged in the programme. However, it provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations throughout the programme period. The pace of the adjustment towards the MTO implied by the programme is insufficient and should be strengthened to be in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times. In particular, good times are expected to occur throughout the programme period but the structural balance is not planned to improve noticeably before the last year of the programme.

(8) Government gross debt is estimated to have reached 28,5 % of GDP in 2006, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 0,8 percentage point over the programme period.

(9) The long-term budgetary impact of ageing in Slovenia is among the largest in the EU, influenced notably by a considerable increase in pension expenditure as a share of GDP. While some action is being taken, stronger fiscal consolidation and implementation of further reform measures aimed at containing the substantial increase in age-related expenditures would contribute to reducing risks to the sustainability of public finances. Although the initial budgetary position contributes to stabilising the debt ratio over the medium term, the low structural improvement over the programme period will not be sufficient to contain the expected budgetary impact of ageing in the long term. Overall, Slovenia appears to be at high risk with regard to the sustainability of public finances.

(10) The stability programme contains a qualitative assessment of the overall impact of Slovenia's October 2006 national reform programme within the medium-term fiscal strategy. In addition, it provides some information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme but its budgetary projections do not explicitly take into account the public finance implications of all actions outlined in the national reform programme. The measures in the area of public finances envisaged in the stability programme seem consistent with those foreseen in the national reform programme. In particular, the stability programme provides details of the tax reform announced in the national reform programme and complements the actions envisaged in the national reform programme with expenditure measures.

(11) The budgetary strategy in the programme is partly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. In particular, the adjustment path towards the MTO is insufficient.

(12) As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data. [2]

The Council considers that, while the programme recognises that containing inflationary pressures and continued fiscal consolidation are necessary to preserve the resilience of the economy, it envisages insufficient progress towards the MTO in spite of the upbeat growth prospects. In view of the above assessment, Slovenia is invited to:

(i) taking advantage of the good economic conditions, including the better than expected budgetary outcome in 2006, speed up the achievement of the MTO;

(ii) in view of the projected increase in age related expenditure, improve the long-term sustainability of public finances, in particular by strengthening the ongoing pension reform with additional measures, geared especially to increasing labour participation of older workers and encouraging the move towards a greater reliance on private pension saving schemes.

Comparison of key macro economic and budgetary projections

Notes:

Source:

Convergence/stability programme (CP/SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

| 2005 | 2006 | 2007 | 2008 | 2009 |

Real GDP (% change) | SP Dec 2006 | 4,0 | 4,7 | 4,3 | 4,2 | 4,1 |

COM Nov 2006 | 4,0 | 4,8 | 4,2 | 4,5 | n.a. |

CP Dec 2005 | 3,9 | 4,0 | 4,0 | 3,8 | n.a. |

HICP inflation (%) | SP Dec 2006 | 2,5 | 2,7 | 2,7 | 2,5 | 2,2 |

COM Nov 2006 | 2,5 | 2,5 | 2,5 | 2,6 | n.a. |

CP Dec 2005 | 2,2 | 1,5 | 2,2 | 2,5 | n.a. |

Output gap (% of potential GDP) | SP Dec 2006 [3] | ‘�1,2 | ‘�0,5 | ‘�0,3 | ‘�0,1 | 0,3 |

COM Nov 2006 [7] | ‘�1,1 | ‘�0,3 | 0,0 | 0,4 | n.a. |

CP Dec 2005 [3] | ‘�1,2 | ‘�0,7 | ‘�0,3 | 0,0 | n.a. |

General government balance (% of GDP) | SP Dec 2006 | ‘�1,4 | ‘�1,6 | ‘�1,5 | ‘�1,6 | ‘�1,0 |

COM Nov 2006 | ‘�1,4 | ‘�1,6 | ‘�1,6 | ‘�1,5 | n.a. |

CP Dec 2005 | ‘�1,7 | ‘�1,7 | ‘�1,4 | ‘�1,0 | n.a. |

Primary balance (% of GDP) | SP Dec 2006 | 0,4 | 0,1 | ‘�0,1 | ‘�0,3 | 0,3 |

COM Nov 2006 | 0,3 | ‘�0,1 | ‘�0,2 | ‘�0,3 | n.a. |

CP Dec 2005 | ‘�0,2 | ‘�0,3 | ‘�0,1 | 0,2 | n.a. |

Cyclically-adjusted balance (% of GDP) | SP Dec 2006 [3] | ‘�0,9 | ‘�1,4 | ‘�1,4 | ‘�1,6 | ‘�1,1 |

COM Nov 2006 | ‘�0,9 | ‘�1,5 | ‘�1,6 | ‘�1,7 | n.a. |

CP Dec 2005 [3] | ‘�1,2 | ‘�1,4 | ‘�1,3 | ‘�1,0 | n.a. |

Structural balance [4] (% of GDP) | SP Dec 2006 [5] | ‘�0,9 | ‘�1,4 | ‘�1,4 | ‘�1,6 | ‘�1,1 |

COM Nov 2006 [6] | ‘�0,9 | ‘�1,5 | ‘�1,6 | ‘�1,7 | n.a. |

CP Dec 2005 | ‘�0,4 | ‘�1,4 | ‘�1,4 | ‘�1,0 | n.a. |

Government gross debt (% of GDP) | SP Dec 2006 | 28,0 | 28,5 | 28,2 | 28,3 | 27,7 |

COM Nov 2006 | 28,0 | 28,4 | 28,0 | 27,6 | n.a. |

CP Dec 2005 | 29,0 | 29,6 | 29,8 | 29,4 | n.a. |

[1] OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

[2] In particular, net external balances for 2006-2007 as well as certain optional data concerning sectoral balances, labour market developments, general government expenditure by function and debt evolution are not provided.

[3] Commission services calculations on the basis of the information in the programme.

[4] Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

[5] There are no one-off or other temporary measures in the programme.

[6] There are no one-off or other temporary measures in the Commission services' autumn 2006 forecast.

[7] Based on estimated potential growth of 3,8 % in 2005 and 4 % in 2006-2008.

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