In view of the above assessment, Greece is invited to:
(i) carry-out the envisaged adjustment towards the MTO, reduce the debt-to-GDP ratio accordingly, and use any budgetary over-performance to speed up the consolidation process to reach the MTO within the programme period;
(ii) pursue the ongoing reforms of tax administration and continue improving the budgetary process by further increasing its transparency, spelling out the medium-term budgetary framework and effectively implementing mechanisms to monitor, control and improve the efficiency of primary expenditure;
(iii) in view of the level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances by achieving the MTO, continuing the ongoing reforms in the healthcare system and reforming the pension system; updated long-term projections for age-related expenditure should be produced as soon as possible. The Council also notes that such policy actions would be consistent with the April 2007 Eurogroup orientations for fiscal Greece is also invited to improve compliance with the submission deadline for stability and convergence programmes specified in the code of conduct
SUMMARY ASSESSMENT:
ES
The overall conclusion is that the medium-term budgetary position is sound with high general government surpluses above the MTO and a relatively low debt ratio. However, given favourable economic growth assumptions and the end of the asset boom, the projected government revenue might turn out to be on the high side. In this context, a careful assessment of the impact on the general government balance of permanent tax cuts and/or expenditure increases will be crucial to maintain a strong budgetary position and to ensure the long-term sustainability of public finances, which is at medium risk. Fostering productivity-enhancing expenditure items, such as R&D, infrastructure and education, is important to underpin a smooth adjustment of the economy in the light of large external imbalances, the contraction of the housing sector and the existing inflation differential with the euro area.
POLICY INVITATIONS
In view of the above assessment, while maintaining a strong budgetary position, Spain is invited to further improve the long-term sustainability of public finances with additional measures to contain the future impact of ageing on spending programmes. Spain is also invited to improve compliance with the submission deadline for stability and convergence programmes specified in the code of conduct
SUMMARY ASSESSMENT:
The overall conclusion is that the pace of budgetary consolidation and debt reduction has slowed down in 2007 and is planned to be significantly less ambitious in the coming years than planned in the previous update of the stability programme, especially as concerns 2008. The envisaged consolidation is back-loaded and the achievement of the MTO through an expenditure-based adjustment is postponed from 2010 to 2012 under the more plausible of the two macroeconomic scenarios presented by the French authorities. Moreover, even this adjustment path is subject to important risks. While tax cuts adopted in summer 2007 are already impacting on public finances, the authorities have also adopted measures to curb public expenditure in 2008, notably in social security, broadened the coverage of expenditure rules for the state, and have embarked on structural reforms. Structural reforms will be crucial to increase potential growth, improve competitiveness and sustain the budgetary consolidation process.
FR
However, measures underlying the ambitious planned reduction in the expenditure ratio over the programme period still have to be further specified and implemented. The programme objectives are also subject to risks stemming from macroeconomic assumptions, which are favourable and the assumptions on the impact of structural reforms on growth. In view of the debt and deficit levels and the projected increase in age-related expenditure, France appears to be at medium risk with regard to the sustainability of public finances.
POLICY INVITATIONS:
In view of the above assessment, France is invited to:
(i) strengthen the pace of budgetary consolidation and debt reduction, including through a rigorous implementation of the 2008 budget, so as to ensure that the safety margin against breaching the 3% deficit threshold is attained more rapidly and – cyclical conditions permitting- aim to reach the MTO by 2010 in order to decisively contribute to the improvement of the long-term sustainability of public finances.
(ii) effectively enforce existing expenditure rules and take further steps in order to guarantee the respect of the ambitious multi-annual expenditure reduction targets of the general government by all sub-sectors thus leading to a reduction in the expenditure to GDP ratio
(iii) continue and accelerate structural reforms, so as to increase potential growth and curb public expenditure.
The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations for fiscal policies.
SUMMARY ASSESSMENT:
The overall conclusion is that the programme is consistent with a correction of the excessive deficit in 2007, which should be achieved by a good margin. The 2007 budgetary outturn is likely to outperform expectations due to the favourable cyclical and budgetary developments. This result could have been even better in the absence of the additional expenditure approved during the year. In 2008, the structural balance risks deteriorating substantially, unless the better than projected 2007 starting position is carried through. The planned adjustment towards the MTO is back-loaded to the outer years of the programme. The programme provides no information on the composition of the fiscal consolidation strategy after 2008, which hinders its proper assessment. In particular, appropriate measures aimed at curbing expenditure developments remain to be spelled out. In the light of these risks, the MTO may not be achieved by 2011 as planned in the programme and the debt ratio may not be sufficiently diminishing towards the 60% of GDP reference value over the programme period.
IT With regard to the sustainability of public finances, Italy is at medium risk but this assessment assumes the fullimplementation of the pension reforms. POLICY INVITATIONS:
In view of the above assessment, and also in the light of the recommendation under Article 104(7) of 28 July 2005, Italy is invited to:
(i) building on the positive results of 2007, strengthen the budgetary target for 2008, so as to secure an ambitious adjustment; and implement the planned fiscal consolidation thereafter with specified measures to ensure adequate progress towards the MTO, so as to achieve it within the programme period and thus accelerate the pace of debt reduction; (ii) in view of the very high level of government debt, fully implement the pension reforms, notably the planned periodical actuarial adjustment, so as to avoid significant increases in age-related spending; and
(iii) spelling out the budgetary strategy within a medium time perspective in line with the SGP and its Code of Conduct, continue the effort to improve the quality of public finance by focussing on their composition, increasing the transparency of the budgetary process, and effectively implementing mechanisms to monitor and control expenditure.
The Council also notes that such actions would be consistent with the April 2007 Eurogroup orientations for fiscal policies.
SUMMARY ASSESSMENT:
The overall conclusion is that the budgetary strategy in the programme should be sufficient to maintain a sound budgetary position and macroeconomic stability throughout the period. The programme puts forward a more ambitious MTO of a balanced position in structural terms (compared to a deficit of 0.5% of GDP previously), which has already been over- achieved in 2007. This is the result of an unexpected increase in total revenues by over 3 percentage points of GDP, largely explained by composition effects associated to the strong profitability of the financial sector and the buoyant investment in real estate, which are projected by the programme to return to historical trends in the coming years. The budgetary targets, which are significantly better than in the previous programme, could be overachieved in 2008 and 2009 given the better 2007 base. Thereafter, they could be worse given the favourable growth assumptions.
CY
Although the planned reduction of the budgetary surplus compared to 2007 reflects to a large extent an expected normalisation of tax revenues, there is a risk that the stance in 2008 may turn out to be procyclical. The level of debt is projected to decline significantly, especially in 2008.
Given the projected increase in age-related spending, the reform of the pension system and a timely implementation of adopted reforms in health care, would have a positive effect on the long-term sustainability of public finances, which appears to be at high risk.
POLICY INVITATIONS
In view of the above assessment, Cyprus is invited to:
(i) avoid pro-cyclical fiscal policies by further improving the control of current expenditures, while using revenue windfalls to further reduce debt;
(ii) contain public expenditure, notably by reforming the pension system and timely implementing the adopted reforms in health care in order to improve the long-term sustainability of the public finances.
FR
SUMMARY ASSESSMENT:
The overall conclusion is that the programme aims to reduce economic imbalances and excessive demand pressure by setting slightly increasing but overall modest surplus target for 2008-2010, in excess of the MTO. However, the risks to the achievement of the budgetary targets are high primarily due to large macroeconomic uncertainty and a track record of slippages from expenditure plans. Moreover, a considerably tighter stance of fiscal policy is urgently needed to meet the programme's aims in a context of an economy subject to risks to stability - stemming from inflationary pressures, deteriorating cost competitiveness and sharply increasing net foreign liabilities. While medium-term expenditure ceilings have been introduced, they remain to be tested. As regards the long-term sustainability of public finances Latvia is assessed to be at low risk.