The widespread progress in reducing budget deficits has allowed government debt ratios to come down in almost
all Member States in 1997. The driving force behind the debt reduction for most Member States came from the combined contribution of GDP growth and deficit reductions and only in a few Member States as allowed government debt ratios to come down in almost all Member States in 1997. The driving force behind the debt reduction for most Member States came from the combined contribution of GDP growth and deficit reductions and only in a few Member States — mainly Austria and Portugal — can the debt reduction in 1997 be attributed to a large extent to ‘stock-flow adjust- ment’ measures.
The so-called ‘stock-flow adjustment’ regroups factors, other than the government deficit, which contribute to the variation in the stock of government gross debt: included are changes in the net holdings of financial assets, changes in the value of debt denominated in for- eign currency and other statistical adjustments. Whereas in earlier years these factors contributed to increasing the government debt ratio in most Member States, gov- ernments in recent years have taken measures to limit their level of government debt via a more careful man-
I I . C o n v e r g e n c e r e p o r t 1 9 9 8
Table 4.6
Convergence programme projections for government surplus/deficit
(general government net lending (+)/net borrowing (–), as percentage of GDP)
Date 1997 1998 1999 2000 2001 submitted B 1.1997 – 2.9 – 2.3 – 1.7 – 1.4 DK (1) 6.1997 0.7 0.7 0.9 1.1 D (2) 1.1997 – 2.9 – 2½ – 2 – 1½ EL 7.1997 – 4.2 – 2.4 – 2.1 E 4.1997 – 3.0 – 2.5 – 2.0 – 1.6 F 1.1997 – 3.0 – 2.8 – 2.3 – 1.8 – 1.4 IRL 12.1997 0.4 0.3 0.7 I 6.1997 – 3.0 – 2.8 – 2.4 – 1.8 NL 12.1996 – 2.2 – 2¼ A 10.1997 – 2.7 – 2.5 – 2.2 – 1.9 P 3.1997 – 2.9 – 2.5 – 2.0 – 1.5 FIN 9.1997 – 1.3 – 0.1 0.3 1.0 1.9 S 9.1997 – 1.9 0.6 0.5 1.5 UK (3) 9.1997 – 1.6 – 0.3 – 0.1/0.4 0.5/1.5 0.9/2.4
(1) Government surplus of 2.8 % of GDP projected for 2005.
(2) Revised estimates submitted by the German authorities in February 1997.
(3) Financial years.
agement of their financial assets. Indeed, over recent years governments cut their extension of loans and accelerated the reimbursement of outstanding loans. They also reduced their liquid working balances on bank accounts and increased operations which allow for the consolidation of claims and liabilities within the government sector. In addition, important privatisation operations were launched in most Member States. Following the ESA-1979 accounting rules and Eurostat’s decisions, the proceeds of these privatisation operations could not be booked as revenue influencing the government deficit but could only be used to redeem the outstanding government debt. These sales of government-owned public enterprises often also con- tributed to increasing the efficiency of the economic system and induced a durable reduction of government transfers to these enterprises.
Whereas over the period 1990-93, the ‘stock-flow adjustment’ factors added more than 3 percentage points on average each year to the government debt ratio, their annual average effect over the period 1994-97 has become negligible or even negative in most Member States, except for Germany (where the large unification-related debt assumptions were regrouped in this category), Greece and Luxembourg (see Table 4.7).
The primary surplus which Member States have to maintain in order to put their debt ratio on a downward path increases with the level of their outstanding debt and with the speed at which the debt ratio must come down. Primary surpluses were sufficiently large in 1997 for the debt ratio to come down in most Member States, the stock-flow adjustment not being taken into account (see Table 4.8). Especially Belgium, Denmark, Greece and Italy achieved large primary surpluses while in Denmark, Greece and Ireland the primary surplus was much larger than that needed to stabilise the debt ratio. In Germany and France the primary surplus was not sufficiently large in 1997 to put the debt ratio on a declining path; the debt ratio remained below the 60 % of GDP threshold in France.
Based on the Commission services forecasts for the debt ratio until 1999 and on mechanical projections thereafter — fixing interest rates on the government debt at a common level of 6 %, inflation rates at 2 %, the stock-flow adjustment at zero and keeping real GDP trend growth rates and primary balances constant at their levels forecast for 1999 — the debt trajectory for
each Member State can be calculated and the year when the debt ratio is projected to fall below the 60 % GDP reference value can be determined.
It would take seven years or less to bring the debt ratio below the 60 % GDP threshold for those Member States which currently have a debt ratio in the 60 to 80 % GDP range, (see Table 4.8). For the highly-indebted Member States with a debt ratio over 100 % of GDP, reducing the debt ratio to acceptable levels will obvi- ously take much longer. The speed at which the debt ratio will decline in these countries depends on future growth performance and debt service costs — in several Member States the latter are coming down rapidly — as well as on expenditures and revenues being kept under control. However, the level of surplus on the primary balance already achieved in Belgium, Greece ans Italy should ensure a steadily continuing reduction in the debt ratio. Under these conditions, the debt ratio in these countries could fall below the 60 % GDP thresh- old within less than 20 years (see Table 4.8). If Ireland’s debt ratio falls below the reference value in 1998, as is forecast by the Commission services, it would have taken Ireland only 11 years to bring down
G o v e r n m e n t b u d g e t a r y p o s i t i o n
Table 4.7
Factors, other than the deficit, adding to the debt stock
(stock-flow adjustment, as percentage of GDP)
1990-93 1994-97
annual average annual average
B 1.6 – 1.7 DK 5.2 – 1.5 D 2.4 2.2 EL 10.2 3.0 E 2.8 0.8 F 0.6 0.4 IRL 2.0 – 0.5 I 2.0 0.9 L 2.4 2.7 NL 0.2 – 1.5 A 1.4 – 0.5 P 2.1 – 0.3 FIN 8.3 – 0.9 S 5.1 – 1.7 UK 0.2 – 0.7 EU (1) 3.1 0.0 (1) Unweighted average.
its debt ratio from a peak of around 115 % of GDP in 1987 to less than 60 % in 1998. The main factors which contributed to this rapid reduction in Ireland’s debt ratio were the major budgetary retrenchment which it imple- mented at the end of last decade and which has not been reversed since then as well as its high real GDP growth rates over the last few years.