The experience of the past suggests that the current figures for structural balances may overestimate the strength of the underlying budgetary position, notably on account of temporary favourable revenue surprises and a possible underestimation of the output gap. Developments in asset prices and corporate profitability carry a particular risk for the revenue side of the budget.
As to the output gap, Graph I.3.6. illustrates the risk that the output gap estimates may be revised upwards, deteriorating the structural balances. The graph plots output gap estimates using the autumn 2007 and the spring 2008 forecast against the rate of capacity utilisation in the manufacturing industry and the autumn 2007 estimates integrating the rate of capacity utilisation for the euro-area countries. Looking back in time the rate of capacity utilisation has been a rather good predictor of cyclical conditions. The current evolution of this indicator and forecasts integrating the capacity utilisation in the production function currently used by the Commission services suggest that the output gap estimates may be revised upward.
-3 -2 -1 0 1 2 3 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 % G D P -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140
Output gap (lhs; spring 2008 forecast) Output gap (lhs; autumn 2007 forecast) Capacity utilisation index (rhs) Graph I.3.6:Capacity utilisation and output gap in
the euro area
Note: Over the observation period (1991-2007), the index for capacity utilisation averages zero
Source: Commission services.
While the Commission autumn 2008 forecast estimated the output gap for the euro area in 2007 still being negative (based on the agreed common methodology), capacity utilisation in
the manufacturing industry was far above its long-term average. The spring 2008 forecast modifies the autumn 2007 forecast and shows a positive output gap (+0.2). The estimates from the extended production function integrating the rate of capacity utilisation suggest however that the output gap could be much larger (+0.7). Current output gap estimates without integrating the rate of capacity utilisation may therefore underestimate the true figures. The methodological developments with regard to the calculation of the output gap are discussed in detail in Section II.2.
This situation is similar to the situation in 2000, at the height of the previous upturn. At the time, output gap estimates where still negative as potential growth estimates were revised upwards in line with actual growth rates. In spring 2000, the euro area output gap for the year 2000 was estimated at -1.2% of GDP. Ex-post, as the slowdown materialised and potential growth rate estimates were gradually slashed, the output gap has been revised to +2% of GDP, implying that the structural balances at the time were overestimated by about 1½ % of GDP. While the real-time output gap estimates prepared in 2000 are not strictly comparable to the current ones given differences in the methodology used (HP filter in 2000 vs. production function currently), past experience may repeat itself.
From the viewpoint of fiscal policy the underestimation of the output gap can give rise to a distorted diagnosis and, in the present context, to an overestimation of the cyclically adjusted budget balance (and the structural balance). It cannot be excluded that the output gaps will be revised upward (and the structural balance be revised downward) again as growth decelerates, with implications for previous and future years. Especially in Member States that experience a pronounced growth deceleration (e.g. Ireland and Spain) potential output has already been the subject to sizeable revisions (½% of GDP or more) between the autumn 2007 forecast and the spring 2008 forecast.
There is a risk that weak tax revenues as well as revisions of the output gap will deteriorate the structural balance in 2008 and 2009 and lead to failure to comply with the 0.5% of GDP benchmark improvement of the structural balance even in Member States where the plans seem adequate and implementation would be rigorous.
This risk comes on top of the usual risk of expenditure overruns. Should expenditure overruns occur (as they consistently have in the past), the budgetary stance would likely turn expansionary and there would be a move away from the MTOs or the path towards them in the period 2008-2010.
In addition, nominal balances are likely to deteriorate further as the growth prospects have worsened since the submission of the programme updates. This argues for a strict adherence to nominal expenditure plans in 2008 and a full carry-over of better-than-expected outcomes of 2007. It also calls for additional prudence in setting the fiscal stance on an ex-ante basis in 2009 and 2010. Only in this way the consolidation gains of recent years would not be lost. In addition, such prudent fiscal policies would also support monetary policy in the current juncture, as inflation continues to exceed its target values.
In this context, shifting surveillance and monitoring of the implementation of budgetary plans more to the adherence to aggregate expenditure plans would be useful. It would allow focusing on factors more directly under the
control of the government and a fair judgement of budgetary consolidation efforts. Disappointing revenues due to lower tax-to-GDP elasticities, which are likely to occur in 2008, should not lead to a negative assessment (ex post) as long as the 3% reference value is not breached and if disappointing revenues are not caused by unduly optimistic forecasts. As an aside, increased focus on monitoring of implementation of expenditure plans could in the future also contribute to increasing fiscal efforts in good times.
Of course when monitoring expenditure plans, the degree of ambition, as well as the assumptions on the revenue side, needs to be taken into account. Countries which consistently and deliberately produce cautious forecasts with a bias towards underestimating growth and revenues can be granted some more leeway on the expenditure side. Member States which have a track record of expenditure slippage, and which do not have a bias towards underestimating revenues, could be more ambitious in setting their targets for 2009 and 2010 or present convincing measures to ensure improved expenditure control in order to avoid a move away from sustainable budgetary positions.
Graph I.3.7:Debt-to-GDP ratio 2007 and 2010 (% of GDP)
0 20 40 60 80 100 120 EU- 27 EA- 15 EE LU LV RO LT BG IE IE DK CZ SK FI ES SE UK NL PL AT CY MT FR PT DE HU BE EL IT
Debt / GDP 2007 (spring 2008 forecast) Debt / GDP 2010 projection in the 2007 SCP updates
Table I.3.2:
Budgetary developments in the Member States according to the 2007 stability and convergence programme updates
2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 BE 2.8 2.7 1.9 2.0 0.3 -0.2 0.0 0.3 -0.4 -0.3 0.0 0.5 88.2 84.9 81.5 78.1 DE 2.9 2.4 2.0 1.5 -1.6 0.0 -½ 0.0 -1.6 0.0 -½ 0.0 67.5 65.0 63.0 -61½ IE 5.7 4.8 3.0 3.5 2.9 0.5 -0.9 -1.1 2.9 0.5 -0.9 -1.1 25.1 25.1 25.9 27.6 EL 4.2 4.1 4.0 4.0 -2.5 -2.7 -1.6 -0.8 -2.5 -2.7 -1.6 -0.8 95.3 93.4 91.0 87.3 ES 3.9 3.8 3.1 3.0 1.8 1.8 1.2 1.2 1.8 1.8 1.2 1.2 39.7 36.2 34.0 32.0
FR (1) 2.0 2.0 2.3 2.5 n.a. -2.4 -2.3 -1.7 n.a. -2.4 -2.3 -1.7 n.a. 64.2 64.0 63.2
IT 1.9 1.9 1.5 1.6 -4.4 -2.4 -2.2 -1.5 -4.4 -2.4 -2.2 -1.5 106.8 105.0 103.5 101.5 CY 3.8 4.2 4.1 4.0 -1.2 1.5 0.5 0.5 -1.2 1.5 0.5 0.5 65.2 60.0 48.5 45.3 LU 6.1 6.0 4.5 5.0 0.7 1.0 0.8 1.0 0.7 1.0 0.8 1.0 6.6 6.9 7.1 7.2 MT 3.2 3.5 3.1 3.2 -2.5 -1.6 -1.2 -0.1 -2.5 -1.6 -1.2 -0.1 64.7 62.9 60.0 57.2 NL 3.0 2.8 2.5 1.8 0.6 -0.4 0.5 0.6 0.6 -0.4 0.5 0.6 47.9 46.8 45.0 43.0 AT 3.3 3.4 2.4 2.5 -1.4 -0.7 -0.6 -0.2 -1.4 -0.7 -0.6 -0.2 61.7 59.9 58.4 57.0 PT 1.3 1.8 2.2 2.8 -3.9 -3.0 -2.4 -1.5 -3.9 -3.0 -2.4 -1.5 64.8 64.4 64.1 62.5 SI 5.7 5.8 4.6 4.1 -1.2 -0.6 -0.9 -0.6 -1.2 -0.6 -0.9 -0.6 27.1 25.6 24.7 23.8 FI 5.0 4.4 3.3 3.0 3.8 4.5 3.7 3.6 3.8 4.5 3.7 3.6 39.2 35.3 32.8 30.4 EA-15 2.8 2.6 2.3 2.2 -1.5 -0.8 -0.8 -0.4 -1.5 -0.8 -0.8 -0.4 68.6 66.7 65.0 63.3 BG 6.1 6.4 6.4 6.8 3.2 3.1 3.0 3.0 2.9 2.9 3.0 3.1 22.8 19.8 18.3 17.4 CZ 6.4 5.9 5.0 5.1 -2.9 -3.4 -2.9 -2.6 -3.1 -4.1 -3.4 -2.8 30.1 30.4 30.3 30.2 DK 3.5 2.0 1.3 1.1 4.6 3.8 3.0 2.0 2.7 3.5 3.4 2.5 30.1 25.6 21.6 19.2 EE 11.2 7.4 5.2 6.1 3.6 2.6 1.3 1.0 1.8 1.2 0.8 1.4 4.0 2.7 2.3 2.0 LV 11.9 10.5 7.5 7.0 -0.3 0.3 0.7 1.0 -0.9 -0.5 0.4 1.1 10.6 9.4 8.3 7.2 LT 7.7 9.8 5.3 4.5 -0.6 -0.9 -0.5 0.2 -1.0 -1.2 -0.9 0.3 18.2 17.6 17.2 15.0 HU 3.9 1.7 2.8 4.0 -9.2 -6.2 -4.0 -3.2 -8.9 -4.8 -3.5 -2.8 65.6 65.4 65.8 64.4 PL 6.2 6.5 5.5 5.0 -3.8 -2.0 -2.5 -2.0 -4.0 -2.4 -2.8 -1.9 47.6 44.9 44.2 43.3 RO 7.7 6.1 6.5 6.1 -1.9 -2.9 -2.9 -2.9 -2.2 -3.4 -3.4 -3.4 12.4 11.9 13.6 14.2 SK 8.3 8.8 6.8 5.8 -3.7 -2.5 -2.3 -1.8 -3.1 -3.0 -3.1 -2.4 30.4 30.6 30.8 30.5 SE 4.2 3.2 3.2 2.5 2.5 3.0 2.8 3.1 1.7 2.4 2.1 2.8 47.0 39.7 34.8 29.8 UK (2) 3.0 3.0 2.0 2.8 -2.6 -3.0 -2.9 -2.4 -2.5 -3.0 -2.7 -2.3 43.4 43.9 44.8 45.1 EU-27 3.1 2.9 2.4 2.5 -1.6 -1.1 -1.1 -0.7 -1.4 -1.1 -1.1 -0.7 61.3 59.4 58.2 56.7
(1) Data from the low-growth scenario in the stability programme.
(2) Financial years ending in following March.
Source: 2007 updates of the stability and convergence programmes
Notes:
Table I.3.3:
Overview of the Council Opinions on the SCPs - Summary assessments and policy invitations SUMMARY ASSESSMENT:
The overall conclusion is that the programme aims at maintaining a sound budgetary position throughout the period, planning the continuation of high general government surpluses. The budgetary targets seem plausible. The programme proposes a significant upward revision of the MTO from a balanced structural position to a surplus of 1½% of GDP, which will be comfortably met throughout the programme period. Safeguarding macroeconomic stability and sustaining catching up in a context of rising external imbalances and high inflation requires the continuation of tight fiscal policies, further improvements in the quality of public spending, including healthcare, and fiscal institutions and a public sector wage policy that contributes to overall wage moderation in line with productivity gains.