3.3.1. Backloaded and insufficient
consolidation in 2008-10
In 2008, on the basis of the plans in the programme updates, the euro-area average structural balance is expected to deteriorate marginally to a deficit of 0.8% of GDP while the EU average deficit is expected to remain unchanged at 1.1% of GDP. Compared to the time the 2007/08 updates were drawn up economic prospects have further weakened. The situation is highly uncertain at this stage. Some countries are better positioned to cope with the deterioration in the international environment and financial turmoil than others. For many, however, there is a risk of worse budgetary outcomes resulting from the economic developments.
Graph I.3.3 presents the budgetary developments in different groups of Member States. The Member States are grouped according to their budgetary situation in the year preceding the plan, according to the 2007/08 programme updates. It shows that:
(i) Some deterioration in the structural balance is envisaged in 2008 in 'countries that are at the MTO'. This reflects developments in Cyprus, Ireland, Finland and to a lesser extent Spain and Estonia. In Spain and Finland the change is mainly related to tax cuts, while in Cyprus the deterioration is due to the assumed normalisation of exceptionally high tax revenue from a booming financial and real estate sector. In 2009, consolidation of a ¼% of GDP is planned. (ii) Member States that have a deficit below 3% of GDP but have not reached their MTO plan on average a small structural improvement in 2008. This reflects mainly fiscal loosening in Germany on account of a corporate tax reform and an almost unchanged structural position in France. In 2009 the countries in this group of Member States are planning to improve their structural balance by on average ½% of GDP, with marked differences between Member States.
Graph I.3.3:Planned change in the structural balance - Unweighted average per group
1 3 6 13 11 9 12 13 13 -0.5 0.0 0.5 1.0 2007 2008 2009 Cha nge in s tr uc tur al ba la nc e ( % G D P)
Nominal deficit t-1 > 3% GDP Structural balance in t-1<MTO Structural balance in t-1>=MTO
Source: 2007 stability and convergence programme updates. Number of Member States in the group
(iii) Countries with nominal deficits above the 3% reference value all meet the required effort of 0.5% of GDP in their plans. However, when comparing projections to the Commission services' forecast, additional measures may be required in Hungary to meet the budgetary objectives. When looking at Member States which were subject to the EDP (Graph I.3.4) in 2007, a lack of ambition is apparent in 2008 in Italy, Poland and Slovakia, which estimate their 2007 nominal deficits to have dropped clearly below 3% of GDP but do not take advantage of this to accelerate progress towards the MTO and increase the safety margin vis-à-vis the reference value.
Graph I.3.4:Planned change in the structural balance of Member States in EDP at the start of 2008 (% of GDP)
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 HU PT CZ IT PL SK P la nne d c ha nge in th e s truc tura l ba la nc e (%G D P ) 2007 2008 2009 4.1
Source:2007 stability and convergence programme updates.
3.3.2. Composition of planned adjustment - Expenditures and revenues
As in previous updates, planned consolidation efforts over the programme period are typically expenditure based (Graph I.3.5). Planned
expenditure reductions are particularly large in the Czech Republic, Hungary, Malta, Poland and Slovakia, while increases in the expenditure-to- GDP ratio are foreseen in Estonia, Lithuania and Denmark. At the same time, the average revenue share is projected to fall. Whereas the tax burden is projected to be reduced in most countries, Greece, Lithuania, Romania, Bulgaria and the Netherlands expect a substantial increase in revenue ratio. In the past, while actual expenditures have been higher than planned, and partly substantially so, revenues have generally turned out closer to projections, also in the wake of revenue windfalls. Failure to improve implementation of the planned expenditure cuts would result in a worsening of the average budgetary balance, as compared to the planned budgetary consolidation.
The share of interest expenditures to GDP is expected to decline further, especially in Cyprus due to the significant debt reduction. As to public investment, a sharp reduction is planned in Romania and Bulgaria, while it is projected to increase by about one percent of GDP in Germany.
3.4. DEBT DEVELOPMENTS
According to the figures presented in the updated stability and convergence programmes, in 2007, debt-to-GDP ratio stood at 66.7 % in the euro area and at 59.4 % in the EU as a whole, down from respectively 68.6% and 61.3% the year before. Eight Member States (MT, FR, PT, DE, HU, BE, EL, IT) have a debt ratio above the 60% reference value The official public finance projections in the updated programmes imply significant acceleration of the pace of debt reduction in both the EU as a whole and in the euro area over the period covered by the programmes, mainly due to higher primary surpluses and favourable economic growth prospects. Should the downside risks to the current economic outlook materialise, debt dynamics would clearly be affected. Note that in Section I.1 which discusses the Commission services' spring 2008 forecast, the debt reduction is foreseen to slowdown on the basis of the no- policy-change scenario.
Based on the programme updates, in 2010, the debt-to-GDP ratio would be 61.3 % of GDP in the euro area, while the EU aggregate is planned to be reduced further below the reference value of 60% of GDP, at 55.1% of GDP. Further reductions in the debt ratio are projected in the programmes, such that Germany, Portugal and Malta would fall below the reference value and Graph I.3.5:Composition of the planned change in the budgetary position 2007-2010 (% of GDP)
1.1 0.8 2.7 2.6 0.9 0.6 0.6 -2.6 -0.6 -1.7 1.3 -1.6 0.8 0.2 1.1 0.5 1.1 -1.7 -0.9 0.9 1.7 3.5 2.6 0.6 1.7 2.2 0.5 -4 -3 -2 -1 0 1 2 3 4 5 6 AT BE DE DK EL ES FI FR IE IT LU NL PT SE UK CZ EE CY LV LT HU MT PL SI SK BG RO ch an ge in % o f G D P
Interest payments Revenues
Gross fixed capital formation Primary current expenditure
Total change 2007-2010
Note: A positive value indicates a positive contribution to the change in budgetary position. A positive total variation of the budgetary position implies an improvement of the balance (value is presented on top (+) or below (-) of the columns).
the very-high debt countries would accomplish significant reductions.