Evidencias Directas

The overall conclusion is that benefiting from earlier consolidation and the achievement of a close-to-balance position in 2008, Germany was able to introduce a sizeable fiscal stimulus. This is welcome as it is commensurate with the scale of the economic downturn.

Given the sharp deterioration in the global economic environment and distress in the financial sector, the budgetary strategy is subject to downside risks. Full reversibility of the short-term measures adopted in response to the crisis is however currently not ensured. Hence, the implementation of an enhanced medium-term budgetary framework as currently envisaged and the strong commitment at all levels of government to adhere to it will be crucial to return to fiscal consolidation once the crisis has abated. Given increasing public debt, ad hoc changes to the pension adjustment formula and uncertainty as to the impact of the health-care reform, preserving the achievements made to improve long- term sustainability is critical.

Table (continued)

POLICY INVITATIONS:

In view of the above assessment, Germany is invited to:

(i) implement the 2009 and 2010 fiscal policy as planned including stimulus measures in line with the EERP and within the framework of the SGP, reverse the fiscal stimulus in order to support significant budgetary consolidation towards the MTO, starting in 2011 at the latest;

(ii) to this end strengthen the institutional fiscal framework by implementing the new budgetary rule as currently envisaged in order to underpin the necessary consolidation course after 2010;

(iii) give renewed attention to measures strengthening the long-term sustainability of public finances and ensure that the deviation from the pension adjustment formula in 2008 is reversed as envisaged.

IE SUMMARY ASSESSMENT:

The overall conclusion is that, following a very sharp deterioration in 2008, the general government deficit will widen further in 2009, to 9,5 % of GDP. The fiscal consolidation measures and the measures to support the economy can be regarded as welcome and adequate given the high deficit and sharply increasing debt position and are in line with the European Economic Recovery Plan. After the budgetary deterioration in 2009, the programme envisages a reduction of the deficit below the 3 % of GDP reference value by 2013, while debt would breach the 60 % of GDP reference value from 2010. This would take place against the background of a rapid recovery of economic activity after 2010. The budgetary outcomes are subject to downside risks throughout the programme period, mainly due to (i) the lack of information on the envisaged consolidation measures after 2009; and (ii) the favourable macro-economic outlook especially in the outer years of the programme. Further risks stem from the measures in place to support the financial sector.

There is a need to regain competitiveness through measures enhancing productivity growth and adequate wage policies. A reduction of the headline deficit below 3 % of GDP by 2013, as envisaged in the programme, will require addressing the significant risks to the budgetary targets and standing ready to adopt additional measures if necessary. Also with a view to improving the long-term sustainability of public finances, the fiscal consolidation plans should be backed up with measures.

POLICY INVITATIONS:

In view of the above assessment Ireland is invited to:

(i) limit the widening of the deficit in 2009 and specify and rigorously implement substantial annual efforts within a broad-based fiscal consolidation programme for 2010 and beyond;

(ii) in order to limit risks to the adjustment, strengthen the binding nature of the medium-term budgetary framework as well as closely monitor adherence to the budgetary targets throughout the year;

(iii) in view of the significant projected increase in age-related expenditure, and also of the increase in debt, albeit from a low level, expected over the programme period, improve the long-term sustainability of public finances by implementing further pension reform measures in addition to pursuing fiscal consolidation.

EE SUMMARY ASSESSMENT:

The overall conclusion is that Estonia, while facing a severe economic downturn following years of above-potential economic growth, is planning a restrictive fiscal stance from 2009 until 2011 which is an appropriate response in light of the existing imbalances. The economic downturn is being aggravated by the global financial crisis and subdued external demand. Weakened cost competitiveness, in particular due to the prolonged period of wage growth above that of productivity, also hinders the return to a sustainable growth path. The general government balance deteriorated considerably in 2008 and turned to deficit, following six years of surpluses. According to the programme the general government is expected to be in deficit also in 2009 and 2010, with the deficit gradually declining. Taking into account macro-economic risks and the lack of information on expenditure-based consolidation in 2010, the budgetary outcomes are subject to downside risks, with the headline deficit possibly exceeding the 3% threshold in 2009 and 2010.

However, the risks to the budgetary outcome are mitigated by the adoption of the supplementary restrictive budget in February 2009.

POLICY INVITATIONS:

In view of the above assessment and also given the need to ensure sustainable convergence and a smooth participation in ERM II, Estonia is invited to:

(i) implement the consolidation of public finances in the short term, ensure keeping the general government deficit below 3 % of GDP and take necessary measures to underpin the consolidation in the medium term;

(ii) implement prudent public sector wage policies to support the adjustment of the economy and to strengthen competitiveness;

Part I Current developments and prospects

Table (continued)

(iii) reinforce the medium-term budgetary framework, particularly by improving expenditure planning and efficiency.

EL SUMMARY ASSESSMENT:

The overall conclusion is that the programme envisages reducing the budget deficit over the medium term, but falls short to address timely and effectively the structural imbalances of the Greek economy and reverse the upward trend of public debt. Although the consolidation strategy beyond 2009 relies on permanent expenditure restraint and increasing tax revenues, the programme does not spell out concrete measures to back fully the planned budgetary adjustment in 2010 and 2011. Moreover, against the background of a sharp deterioration in the global economic environment, the budgetary strategy is also subject to significant downside risks, with the growth assumptions underlying the macro-economic scenario of the programme being favourable. Consolidation relies to some extent on the results from the fight against tax Strengthening the fiscal consolidation path, based on permanent measures to control current primary expenditure including public wages, would be paramount to achieve sound and sustainable public finances in Greece. Moreover, the envisaged adjustment in the programme is only partly supported by structural policies to improve the quality of public finances. The structural nature of the factors underlying competitiveness losses and the widening external imbalances urgently requires the implementation of bold structural reforms. In the long term, the level of debt which remains among the highest in the EU, coupled with the projected increase in age-related spending, will also affect negatively the long term sustainability of public finances.

POLICY INVITATIONS:

In view of the above assessment, Greece is invited to:

(i) strengthen significantly the fiscal consolidation path already in 2009, through well-specified permanent measures curbing current expenditure, including a prudent public sector wage policy, thereby contributing to a necessary reduction in the debt-to-GDP ratio;

(ii) ensure that fiscal consolidation measures are also geared towards enhancing the quality of public finances, within the framework of a comprehensive reform programme, in the light of the necessary adjustment of the economy, with a view to recovering competitiveness losses and addressing the existing external imbalances;

(iii) implement swiftly the policies to reform the tax administration and further improve the functioning of the budgetary process by increasing its transparency, spelling out the budgetary strategy within a longer time perspective and set up mechanisms to monitor, control and improve the efficiency of primary current expenditure;

(iv) in view of the mounting level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances, by continuing the on-going reforms in the healthcare and pension system.

Greece is also urged to improve statistical governance and the quality of its statistical data, and invited to improve compliance with the data requirements of the code of conduct.

ES SUMMARY ASSESSMENT:

The overall conclusion is that the sharp slowdown of economic activity and some discretionary measures led to a deficit above 3 % of GDP in 2008, after a prolonged period in which the Spanish public finances were close to balance or in surplus. The updated stability programme aims at a significant fiscal impulse in 2009 in line with the EERP to counteract the continued slowdown in economic activity. This will lead to a widening of the government deficit, while the debt ratio remains comfortably below 60 % of GDP. Improving long-term fiscal sustainability should be a priority. The favourable macroeconomic assumptions may imply a lower contribution of economic growth to fiscal consolidation than envisaged in the programme, while the adjustment path is not fully backed up with concrete measures. In addition, fostering the quality of public finances is important also with a view to underpinning a smooth adjustment of the economy in the light of the imbalances it is faced with.

POLICY INVITATIONS:

In view of the above assessment, Spain is invited to:

(i) implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP, while avoiding a further deterioration of public finances in 2009, and carry out with determination significant structural consolidation in 2010 and beyond, backing it up with measures;

(ii) improve the long-term sustainability of public finances by implementing further measures aimed at curbing the increase in age-related expenditure;

(iii) ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public finances as planned in the light of the needed adjustment of existing imbalances.

FR SUMMARY ASSESSMENT:

The overall conclusion is that the insufficient progress when economic conditions were more favourable and the deterioration of the economic situation, especially in the last quarter of 2008, led to a deficit slightly above 3% of GDP in 2008. In order to counteract the strong economic downturn the government adopted a recovery plan in line with the EERP which is well targeted, temporary and timely. This temporary fiscal expansion, coupled with the strong economic downturn will lead to a further widening of the government deficit in 2009. Thereafter, the programme foresees a consolidation of public finances through a restrictive stance, especially in 2010.

Risks are linked, in particular, to the markedly favourable macro-economic assumptions in the programme and the current uncertain environment, but they also reflect the non-binding character of expenditure rules. Further consolidation efforts may therefore become necessary in the outer years as the economy strengthens. The structural reforms already adopted are expected to contribute to increasing potential growth, improving competitiveness and sustaining the consolidation process.

Table (continued)

POLICY INVITATIONS:

In view of the above assessment, France is invited to:

(i) implement the fiscal measures in 2009 as planned, including stimulus measures in line with the EERP and within the framework of the SGP while maintaining the objective of avoiding a further deterioration of public finances;

(ii) in light of the forecast pick-up of economic activity, make a consolidation effort in 2010 and strengthen the pace of adjustment thereafter in order to ensure that the deficit is brought rapidly below the reference value, thereby setting the debt-to-GDP ratio on a declining path;

(iii) effectively enforce existing expenditure rules and take further steps in order to guarantee the respect of the multi- annual expenditure reduction targets of the general government by all sub-sectors and continue to implement measures in the context of the General Review of Public Policies. Implement the structural reform programme, in particular as regards the sustainability of the pension system.

IT SUMMARY ASSESSMENT:

The overall conclusion is that fiscal policy and the economic recovery package for 2009 are in line with the European Economic Recovery Plan (EERP) and can be regarded as adequate in view of the very high debt ratio. Reflecting the strong economic downturn associated with the financial crisis, the headline deficit is expected to increase significantly in 2009 to above the 3 % of GDP reference value. In 2010 and 2011, the programme foresees an expenditure-based adjustment, which would bring the deficit just below 3 % of GDP in 2011. However, the achievement of the deficit targets throughout the programme period might be hampered as economic growth could be even lower than planned. In addition, possible slippages in the implementation of the planned restraint in primary expenditure may materialise, even though the improved fiscal framework enhances the conditions for fiscal discipline and spending efficiency. The debt ratio is set to increase from 104,1 % of GDP in 2007 to over 111 % of GDP by the end of programme period. The gross debt ratio might increase further also as a result of possible capital injections into the banking sector.

Finally, important structural weaknesses still hamper sustained productivity growth in Italy and weigh on its external competitive position, while the current composition of social spending is not supportive of adjustment in the labour market.

POLICY INVITATIONS:

In view of the above assessment, Italy is invited to:

(i) implement the planned fiscal policy for 2009 and carry out with determination the adjustment path planned over the programme period in order to set the very high debt ratio on a steadily declining path and ensure the long-term sustainability of public finances;

(ii) continue the progress made to improve fiscal governance and the work on a new framework for fiscal federalism that ensures the accountability of local governments and underpins fiscal discipline;

(iii) pursue efforts to improve the quality of public finances by focussing on spending efficiency and composition, also by reallocating social expenditure so as to create room for a more comprehensive and uniform unemployment benefit system that ensures appropriate work incentives and effective activation policies, without compromising the fiscal consolidation process.

CY SUMMARY ASSESSMENT:

The overall conclusion is that fiscal stance in 2009 will be expansionary due to the adoption of significant stimulus measures in 2009 in line with the EERP. In the subsequent years, the fiscal balance is projected to continue worsening. The implied fiscal loosening does not appear justified in view of the relatively good economic prospects and the existence of a large external imbalance. Moreover, against the background of a sharp deterioration in the global economic environment, the budgetary strategy is subject to significant downside risks, with the growth assumptions underlying the macroeconomic scenario of the programme being favourable. In the light of the high external imbalances, maintaining prudent policies and strengthening fiscal sustainability should be a major priority. Therefore, controlling current expenditure and avoiding procyclicality represents a major challenge for the fiscal policy in Cyprus. In addition, fostering the quality of public finances is important also with a view to underpinning a smooth adjustment of the economy in the light of the imbalances it is faced with.

POLICY INVITATIONS:

In view of the above assessment, Cyprus is invited to:

(i) Implement the 2009 fiscal policy as planned in line with the EERP and within the framework of the SGP, while avoiding further deterioration of public finances in 2009 compared to the target;

(ii) Reverse the projected increase of the fiscal deficit in 2010 and beyond, by limiting the increase in expenditures in order to ensure a sound fiscal position in the medium term;

(iii) In view of the projected impact of ageing on government expenditure, strengthen the long-term sustainability of public finances by pursuing the reform of the pension and health care systems.

Part I Current developments and prospects

Table (continued)

LV SUMMARY ASSESSMENT:

The overall conclusion is that Latvia, while facing a severe economic downturn following years of above potential economic growth, is planning a restrictive fiscal stance in 2009 and until 2011, which is an adequate response to the economic situation considering the absence of scope for fiscal manoeuvre and the need to correct economic imbalances. The global financial crisis has amplified the shock of the reversal of Latvia's own lending and house price boom by tightening credit availability and conditions, reinforcing the steep decline of domestic demand over the course of 2008. The concomitant downturn on export markets has hit the relatively small tradable sector, already weakened by huge domestic cost increases over the previous years. The headline deficit exceeded the 3 % of GDP Maastricht Treaty Taking into account risks of lower demand and output in 2009 and lack of information underpinning the revenue-based consolidation in 2010 and 2011, the budgetary outcome could be worse than projected in the programme.

POLICY INVITATIONS:

In view of the above assessment, the commitments made in the framework of international financial assistance, and also given the need to ensure sustainable convergence and a smooth participation in ERM II,

Latvia is invited to:

(i) implement fully the planned consolidation in the supplementary budget adopted on 12 December 2008; submit to Parliament by the end of March 2009 the details of the supplementary budget; take sufficient further measures to achieve the targeted general government deficit in 2009 and continue the targeted fiscal consolidation thereafter;

(ii) rigorously implement public sector nominal wage reductions to facilitate the alignment of whole economy wages with productivity, thereby improving cost competitiveness;

(iii) strengthen fiscal governance and transparency, by improving the medium-term budgetary framework and reinforcing Ministry of Finance spending controls, and strengthen financial market regulation and supervision;

(iv) strengthen the supply side of the economy by wide-ranging structural reforms and by making efficient use of available EU structural funds.

LT SUMMARY ASSESSMENT:

The overall conclusion is that Lithuania is currently facing a severe contraction in domestic demand following years of above-potential economic growth. The deepening global financial crisis and weakening external demand contribute to aggravating the contraction of the economy. For a sustained period wage growth has exceeded productivity growth by far, thus weakening the country's competitiveness hindering prospects of export-led economic recovery. The general government balance deteriorated considerably in 2008 mainly reflecting an expansionary fiscal policy. The programme targets a deficit of 2,1 % of GDP in 2009 and a gradual decline in the headline deficit thereafter to a balanced position in 2011.

Taking into account the risks related to the macro-economic scenario and the lack of information on measures needed to underpin fiscal consolidation after 2009, the budgetary outcomes in the programme are subject to significant downside risks, with the headline deficit possibly exceeding the 3 % of GDP threshold in 2009 and 2010, while the debt ratio will remain very comfortably below the 60 % of GDP reference level. The planned restrictive fiscal stance from 2009 until