               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 515 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Lithuania
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Lithuania

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the Recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               After consulting the Economic and Financial Committee,

               Whereas:

               (1)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause
                  2
                of the Stability and Growth Pact.
                  3
                In its Communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.
                  4

               (2)On 20 July 2020, the Council recommended Lithuania
                  5
                to take all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Lithuania to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)The Council Recommendation on the economic policy of the euro area indicates that fiscal policies remain supportive in all euro area Member States throughout 2021 and that policy measures should be tailored to country-specific circumstances and be timely, temporary and targeted.
                  6

               (4) When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Fiscal policies should be pursued that are aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Member States should pursue reforms that strengthen the coverage, adequacy, and sustainability of health and social protection systems for all.

               (5)On 18 November 2020, the Commission adopted its Opinions on the 2021 Draft Budgetary Plans of the euro area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the Draft Budgetary Plan of Lithuania was overall in line with the fiscal policy recommendations adopted by the Council on 20 July 2020, and that most of the measures included in the plan supported economic activity against the background of considerable uncertainty. On 21 December 2020, Lithuania submitted an updated Draft Budgetary Plan for 2021. The Commission was of the opinion that the Draft Budgetary Plan of Lithuania was overall in line with the fiscal policy recommendations adopted by the Council on 20 July 2020, and that most of the measures included in the plan supported economic activity against the background of considerable uncertainty. However, some measures did not appear to be temporary or matched by offsetting measures.

               (6)Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility
                  7
                came into force on 19 February 2021. This Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. It will contribute to the economic recovery, to the implementation of sustainable and growth-enhancing reforms and investment, notably to promote the green and digital transitions, and it will strengthen the economies’ resilience and potential growth. In turn, it will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances, growth and job creation in the medium and long term.

               (7)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes.
                  8
                The overall fiscal stance, taking into account national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022. At the same time, given the expectation of economic activity gradually normalising in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022. Member States’ fiscal policies should take into account the state of the recovery, fiscal sustainability and the need to reduce economic, social and territorial divergences. In view of the need to support a sustainable recovery for the EU, Member States with low sustainability risks should gear their budgets towards maintaining a supportive fiscal policy in 2022, taking into account the impact of the Recovery and Resilience Facility. Member States with high debt levels should pursue prudent fiscal policies, while preserving nationally financed investment and making use of grants under the Recovery and Resilience Facility to fund additional high-quality investment projects and structural reforms. For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. A refocusing of fiscal policies towards achieving prudent medium-term fiscal positions, including by phasing out support measures in due course, will contribute to ensuring fiscal sustainability in the medium term.

               (8)The Communication of 3 March 2021 also announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions to continue to apply the general escape clause in 2022 and to deactivate it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.
                  9

               (9)On 30 April 2021, Lithuania submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

               (10)In 2020, based on data validated by Eurostat, Lithuania’s general government deficit was 7.4% of GDP, while general government debt increased to 47.3% of GDP. The annual change in the primary budget balance amounted to -8.0% of GDP, including discretionary budgetary measures of 7.1% of GDP in support of the economy and the operation of automatic stabilisers. Lithuania also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 2.7% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Lithuania, as its general government deficit in 2020 exceeded the 3% of GDP Treaty reference value. The report concluded that the deficit criterion was not fulfilled.

               (11)The macroeconomic scenario underpinning the Stability Programme’s budgetary projections is cautious in 2021 and 2022. Real GDP is forecast to grow by 2.6% in 2021 and 3.2% in 2022. The macroeconomic scenario did not take into account investments to be funded by the Recovery and Resilience Facility. According to the Commission 2021 spring forecast, real GDP is expected to grow by 2.9% in 2021 and 3.9% in 2022. The Commission GDP projections are higher mainly due to the assumption about a stronger recovery in domestic demand, including investments to be funded by the Recovery and Resilience Facility.

               (12)In its 2021 Stability Programme, the government plans an increase in the general government deficit from 7.4% of GDP in 2020 to 8.1% of GDP in 2021, while the debt ratio is planned to increase to 52.1% of GDP in 2021. According to the programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -8.9% of GDP, reflecting the discretionary budgetary measures of 5.2% of GDP in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast, which expects the general government deficit in 2021 to reach 8.2%, while the debt-to-GDP ratio is set to reach 51.9% of GDP.

               (13)In response to the COVID-19 pandemic and related economic downturn, Lithuania has adopted budgetary measures to strengthen the capacity of its health system, contain the pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Lithuania in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. Some of the discretionary measures adopted by the government in 2020 and 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s forecast, in 2023, the remaining impact of those non-temporary measures is preliminarily estimated at around 1% of GDP, mainly consisting of increases in wages in the public sector, pensions and other benefits.

               (14)The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0.3% of GDP in 2021, 0.8% in 2022, 1.0% in 2023, and 0.9% in 2024. The Commission’s 2021 spring forecast includes these grants in its budgetary projections.

               (15)The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided by fiscal policies to the economy. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark, in turn, needs to be adapted
                  10
                and complemented with additional information in order to fully gauge the fiscal policy orientation.

               First, similarly to the approach pursed in the assessment of the 2021 Draft Budgetary Plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality.

               Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate.

               Therefore, the fiscal stance is then measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures) including expenditure financed by grants under the Recovery and Resilience Facility and other EU funds.

               Going beyond the overall fiscal stance, the analysis also aims at assessing whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

               (16)In its 2021 Stability Programme, Lithuania’s general government deficit is planned to decrease to 6.0% of GDP in 2022, mainly due to a discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 54.2% of GDP in 2022. These projections are in line with the Commission’s 2021 spring forecast, which expects the general government deficit at 6.0%, while the debt-to-GDP ratio is set to reach 54.1% of GDP.

               Based on the Commission’s forecast, the overall fiscal stance as defined above – also including the impact on aggregate demand in 2022 from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at -2.0% of GDP
                  11
               . The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.5 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.3 percentage points of GDP.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 1.8 percentage points of GDP.

               (17)The quality of Member States’ budgetary measures appears particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help ensuring fiscal sustainability over the longer term, including in view of climate change and health challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of reforms for more efficient and fairer public revenue systems. On the expenditure side, it has made even more crucial to increase the level and quality of sustainable and growth-enhancing investments, consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The Recovery and Resilience Plans will allow to improve the composition of national budgets.

               (18)According to the programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 4.0% in 2023, to 2.2% of GDP in 2024. The general government deficit is planned to no longer exceed 3% of GDP in 2024.

               Based on the programme, the overall fiscal stance – also including the impact on aggregate demand from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at +2.1% of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to decrease by 0.1 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.1 percentage points of GDP.
                  13
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 1.9 percentage points of GDP.

               The current estimate of the 10-year average nominal potential growth is 5¼%.
                  14
                However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Lithuania’s potential growth.

               (19)The general government debt ratio is planned to remain at 57.9% of GDP in 2023 and 2024. Over the medium term, Lithuania is found to face medium fiscal sustainability risks.
                  15

               (20)In view of the currently still exceptionally high degree of uncertainty, the fiscal policy guidance should remain predominantly qualitative and include some differentiated quantified element as part of the medium-term guidance. More precise quantified guidance for the later years should be provided in 2022, if the degree of uncertainty has sufficiently declined by then.

               The Council has assessed the 2021 Stability Programme and the follow-up by Lithuania to the Council Recommendation of 20 July 2020.

                HEREBY RECOMMENDS LITHUANIA TO:

               1.In 2022, maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. Keep the growth of nationally financed current expenditure under control.

               2.When economic conditions allow, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, enhance investment to boost growth potential.

               3.Pay particular attention to the composition of public finances, both on the revenue and expenditure sides of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, notably supporting the green and digital transition. Give priority to fiscal structural reforms that will help provide financing for public policy priorities and contribute to the long-term sustainability of public finances, including by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn.

                     (3)

                        Communication from the Commission to the Council on the activation of the general escape clause of   the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final.

                     (4)

                        Communication from the Commission on Annual Sustainable Growth Strategy 2021, Brussels, 17.9.2020, COM(2020) 575 final.

                     (5)

                        Council Recommendation of 20 July 2020 on the National Reform Programme of Lithuania and delivering a Council opinion on the 2020 Stability Programme of Lithuania, OJ C 282, 26.8.2020, p. 95.

                     (6)

                        Pending final adoption by the Council, after endorsement by the European Council. The text agreed by the Eurogroup on 16 December 2020 is available at:
                  https://data.consilium.europa.eu/doc/document/ST-14356-2020-INIT/en/pdf

                     (7)

                     OJ
                      L57, 18.2.2021, p.17.

                     (8)

                        Communication from the Commission to the Council on one year since the outbreak of COVID-19: fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final.

                     (9)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (10)

                        In particular, the 4-year smoothing of investment used in the expenditure benchmark does not allow assessing properly the fiscal support to the recovery provided by nationally financed investments.

                     (11)

                        A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.

                     (12)

                        Other nationally financed capital expenditure is projected to provide a neutral contribution.

                     (13)

                        Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0.1 percentage point of GDP.

                     (14)

                        Estimated by the Commission, following the commonly agreed methodology.

                     (15)

                        See Commission Staff Working Document – Statistical Annex providing background data relevant for the assessment of the 2021 Stability and Convergence Programmes.


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 516 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Luxembourg
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Luxembourg

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the Recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               After consulting the Economic and Financial Committee,

               Whereas:

               (1)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause
                  2
                of the Stability and Growth Pact.
                  3
                In its Communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.
                  4

               (2)On 20 July 2020, the Council recommended Luxembourg
                  5
                to take all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Luxembourg to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)The Council Recommendation on the economic policy of the euro area indicates that fiscal policies remain supportive in all euro area Member States throughout 2021 and that policy measures should be tailored to country-specific circumstances and be timely, temporary and targeted.
                  6
                When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Fiscal policies should be pursued that are aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Member States should pursue reforms that strengthen the coverage, adequacy, and sustainability of health and social protection systems for all.

               (4)On 18 November 2020, the Commission adopted its Opinions on the 2021 Draft Budgetary Plans of the euro area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the Draft Budgetary Plan of Luxembourg was overall in line with the fiscal policy recommendations adopted by the Council on 20 July 2020, and that most of the measures included in the plans supported economic activity against the background of considerable uncertainty.

               (5)Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility
                  7
                came into force on 19 February 2021. This Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. It will contribute to the economic recovery, to the implementation of sustainable and growth-enhancing reforms and investment, notably to promote the green and digital transitions, and it will strengthen the economies’ resilience and potential growth. In turn, it will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances, growth and job creation in the medium and long term.

               (6)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes.
                  8
                The overall fiscal stance, taking into account national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022. At the same time, given the expectation of economic activity gradually normalising in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022. Member States’ fiscal policies should take into account the state of the recovery, fiscal sustainability and the need to reduce economic, social and territorial divergences. In view of the need to support a sustainable recovery for the EU, Member States with low sustainability risks should gear their budgets towards maintaining a supportive fiscal policy in 2022, taking into account the impact of the Recovery and Resilience Facility. Member States with high debt levels should pursue prudent fiscal policies, while preserving nationally-financed investment and making use of grants under the Recovery and Resilience Facility to fund additional high-quality investment projects and structural reforms. For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. A refocusing of fiscal policies towards achieving prudent medium-term fiscal positions, including by phasing out support measures in due course, will contribute to ensuring fiscal sustainability in the medium term.

               (7)The Communication of 3 March 2021 also announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions to continue to apply the general escape clause in 2022 and to deactivate it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.
                  9

               (8)On 30 April 2021, Luxembourg submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

               (9)In 2020, based on data validated by Eurostat, Luxembourg’s general government deficit was 4.1% of GDP, while general government debt increased to 24.9% of GDP. The annual change in the primary budget balance amounted to -6.6% of GDP, including discretionary budgetary measures of 3.6% of GDP in support of the economy and the operation of automatic stabilisers. Luxembourg also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact), estimated at 5.7% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Luxembourg, as its general government deficit in 2020 exceeded the 3% of GDP Treaty reference value. The report concluded that the deficit criterion was not fulfilled.

               (10)The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and favourable in 2022. The Stability Programme projects real GDP to grow by 4.0% in 2021 compared to 4.5% according to the Commission spring 2021 forecast, which factors in a stronger contribution to growth from domestic demand and net exports. For 2022, real GDP is expected to grow by 4.0% in the Stability Programme on the back of stronger increase in the net export contribution than in the Commission forecast of 3.3%.

               (11)In its 2021 Stability Programme, the government plans a decrease in the general government deficit from 4.1% of GDP in 2020 to 2.0% of GDP in 2021, while the debt ratio is planned to increase to 26.8% of GDP. According to the programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -4.3% of GDP, reflecting discretionary budgetary measures of 0.6% of GDP in support of the economy and the operation of automatic stabilisers. The Commission’s 2021 spring forecast projects a similar debt ratio in 2021 but a larger improvement of the deficit, to 0.3% of GDP, mostly related to a larger decrease in public expenditure.

               (12)In response to the COVID-19 pandemic and related economic downturn, Luxembourg has adopted budgetary measures to strengthen the capacity of its health system, contain the pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Luxembourg in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 are mostly temporary or matched by offsetting measures.

               (13)The 2021 Stability Programme does not include yet receipts of grants under the Recovery and Resilience Facility. Instead, the Commission forecast assumes, in the absence of sufficiently detailed information about the national Recovery and Resilience Plan, a simplified and linear integration of Recovery and Resilience Fund-financed expenditure, amounting to around 0.03% of GDP per year.

               (14)The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided by fiscal policies to the economy. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark, in turn, needs to be adapted
                  10
                and complemented with additional information in order to fully gauge the fiscal policy orientation.

               First, and similarly to the approach pursed in the assessment of the 2021 Draft Budgetary Plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality.

               Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate.

               Therefore, the fiscal stance is then measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures) including expenditure financed by grants under the Recovery and Resilience Facility and other EU funds.

               Going beyond the overall fiscal stance, the analysis also aims at assessing whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

               (15)In its 2021 Stability Programme, Luxembourg’s general government deficit is planned to decrease to 1.3% of GDP in 2022, mainly due to higher government revenues and a decrease in social expenditure on the back of the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 28.0% of GDP in 2022. The Commission’s 2021 spring forecast projects lower deficit (0.1%) and debt ratios (26.8%).

               Based on the Commision’s forecast, the overall fiscal stance as defined above – also including the impact on aggregate demand in 2022 from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at –0.2 of GDP
                  11
               . The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to remain unchanged. Nationally financed investment is projected to provide a contractionary contribution of 0.1 percentage points of GDP.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 0.4 percentage points of GDP.

               (16)The quality of Member States’ budgetary measures appear particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help ensuring fiscal sustainability over the longer term, including in view of climate change and health challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of reforms for more efficient and fairer public revenue systems. On the expenditure side, it has made even more crucial to increase the level and quality of sustainable and growth-enhancing investments, consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The Recovery and Resilience Plans will allow improving the composition of national budgets.

               (17)According to the programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 0.4% of GDP in 2023 to 0.0% of GDP in 2024 and to turn to a surplus of 0.4% of GDP in 2025. The programme does not include the information required to estimate the overall fiscal stance in 2023 and 2024.

               The current estimate of the 10-year average nominal potential growth is 5%
                  13
               . However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Luxembourg’s potential growth.

               (18)The general government debt ratio is planned in the stability programme to decrease from 28.4% of GDP in 2023 to 28.2% of GDP in 2024. Luxemburg is considered to face low fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis
                  14
               .

               (19)In view of the currently still exceptionally high degree of uncertainty, the fiscal policy guidance should remain predominantly qualitative. More precise quantified guidance for the later years should be provided in 2022, if the degree of uncertainty has sufficiently declined by then.

               The Council has assessed the 2021 Stability Programme and the follow-up by Luxembourg to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS LUXEMBOURG TO:

               1.In 2022, pursue a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment.

               2.When economic conditions allow, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, enhance investment to boost growth potential.

               3.Pay particular attention to the composition of public finances, both on the revenue and expenditure sides of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, notably supporting the green and digital transition. Give priority to fiscal structural reforms that will help provide financing for public policy priorities and contribute to the long-term sustainability of public finances, including by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn.

                     (3)

                        Communication from the Commission to the Council on the activation of the general escape clause of   the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final.

                     (4)

                        Communication from the Commission on Annual Sustainable Growth Strategy 2021, Brussels, 17.9.2020, COM(2020) 575 final.

                     (5)

                        Council Recommendation of 20 July 2020 on the National Reform Programme of Luxembourg and delivering a Council opinion on the 2020 Stability Programme of Luxembourg, OJ C 282, 26.8.2020, p. 101.

                     (6)

                        Pending final adoption by the Council, after endorsement by the European Council. The text agreed by the Eurogroup on 16 December 2020 is available at: https://data.consilium.europa.eu/doc/document/ST-14356-2020-INIT/en/pdf

                     (7)

                     OJ
                      L57, 18.2.2021, p.17.

                     (8)

                        Communication from the Commission to the Council on one year since the outbreak of COVID-19: fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final.

                     (9)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (10)

                        In particular, the 4-year smoothing of investment used in the expenditure benchmark does not allow assessing properly the fiscal support to the recovery provided by nationally financed investments.

                     (11)

                        A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.

                     (12)

                        Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0.2 percentage points of GDP.

                     (13)

                        Estimated by the Commission, following the commonly agreed methodology.

                     (14)

                        See Commission Staff Working Document – Statistical Annex providing background data relevant for the assessment of the 2021 Stability and Convergence Programmes.


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 520 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Austria
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Austria

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular  Article 5(2) thereof,

               Having regard to the Recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               After consulting the Economic and Financial Committee,

               Whereas:

               (1)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause
                  2
                of the Stability and Growth Pact.
                  3
                In its Communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.
                  4

               (2)On 20 July 2020, the Council recommended Austria
                  5
                to take all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Austria to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)The Council Recommendation on the economic policy of the euro area indicates that fiscal policies remain supportive in all euro area Member States throughout 2021 and that policy measures should be tailored to country-specific circumstances and be timely, temporary and targeted.
                  6
                When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Fiscal policies should be pursued that are aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Member States should pursue reforms that strengthen the coverage, adequacy, and sustainability of health and social protection systems for all.

               (4)On 18 November 2020, the Commission adopted its Opinions on the 2021 Draft Budgetary Plans of the euro area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the Draft Budgetary Plan of Austria was overall in line with the fiscal policy recommendations adopted by the Council on 20 July 2020, and that most of the measures included in the plan supported economic activity against the background of considerable uncertainty.

               (5)Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility
                  7
                came into force on 19 February 2021. This Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. It will contribute to the economic recovery, to the implementation of sustainable and growth-enhancing reforms and investment, notably to promote the green and digital transitions, and it will strengthen the economies’ resilience and potential growth. In turn, it will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances, growth and job creation in the medium and long term.

               (6)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes.
                  8
                The overall fiscal stance, taking into account national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022. At the same time, given the expectation of economic activity gradually normalising in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022. Member States’ fiscal policies should take into account the state of the recovery, fiscal sustainability and the need to reduce economic, social and territorial divergences. In view of the need to support a sustainable recovery for the EU, Member States with low sustainability risks should gear their budgets towards maintaining a supportive fiscal policy in 2022, taking into account the impact of the Recovery and Resilience Facility. Member States with high debt levels should pursue prudent fiscal policies, while preserving nationally-financed investment and making use of grants under the Recovery and Resilience Facility to fund additional high-quality investment projects and structural reforms. For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. A refocusing of fiscal policies towards achieving prudent medium-term fiscal positions, including by phasing out support measures in due course, will contribute to ensuring fiscal sustainability in the medium term.

               (7)The Communication of 3 March 2021 also announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions to continue to apply the general escape clause in 2022 and to deactivate it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.
                  9

               (8)On 28 April 2021, Austria submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

               (9)In 2020, based on data validated by Eurostat, Austria’s general government deficit was 8.9% of GDP, while general government debt increased to 83.9% of GDP. The annual change in the primary budget balance amounted to -9.6% of GDP, including discretionary budgetary measures of 6.8% of GDP in support of the economy and the operation of automatic stabilisers. Austria also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 3.5% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Austria, as its general government deficit in 2020 exceeded the 3% of GDP Treaty reference value, while its general government debt exceeded the 60% of GDP Treaty reference value and did not diminish at a satisfactory pace. The report concluded that the deficit criterion was not fulfilled and the debt criterion was not complied with.

               (10)The macroeconomic scenario underpinning the Stability Programme’s budgetary projections is cautious in 2021 and 2022. The programme projects the real GDP to grow moderately by 1.5% in 2021 and to rebound strongly by 4.7% in 2022. This compares to real growth of 3.4% in 2021 and 4.3% in 2022 in the Commission 2021 spring forecast. The difference between the two projections is mainly due to their different cut-off dates, which allowed the Commission projections to take into account the better-than-expected flash estimate for first-quarter GDP, published in late April. Additionally, the Commission projections take into account the easing of restrictions that took place in April in parts of the country and the government announcement of a substantial easing of containment measures as of mid-May.

               (11)In its 2021 Stability Programme, the government plans a decrease in the general government deficit from 8.9% of GDP in 2020 to 8.4% of GDP in 2021, while the debt ratio is planned to increase to 89.6% of GDP in 2021. According to the programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -9.2% of GDP, reflecting the discretionary budgetary measures of 5.8% of GDP in support of the economy and the operation of automatic stabilisers. These projections are comparatively less favourable than the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, the general government deficit is expected to improve to 7.6% of GDP in 2021, while the debt ratio is projected to increase to 87.2% of GDP in 2021. This is largely the result of the more favourable macroeconomic scenario in the Commission’s forecast.

               (12)In response to the COVID-19 pandemic and related economic downturn, Austria has adopted budgetary measures to strengthen the capacity of its health system, contain the pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Austria in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. Some of the discretionary measures adopted by the government in 2020 and 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s forecast, in 2023, the remaining impact of those non-temporary measures is preliminarily estimated at around 1% of GDP, mainly consisting of investment premia, the introduction of declining balance depreciation and a personal income tax relief as well as capital transfers. Those non-temporary measures also include investment of approximately ⅒% of GDP, which is expected to support medium-term potential growth, and thus sustainability.

               (13)The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0.02% of GDP in 2020, 0.1% in 2021, 0.3% in 2022, 0.3% in 2023 and 0.2% of GDP in 2024. The Commission’s spring forecast fully includes these grants in its budgetary projections.

               (14)The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided by fiscal policies to the economy. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark, in turn, needs to be adapted
                  10
                and complemented with additional information in order to fully gauge the fiscal policy orientation.

               First, similarly to the approach pursed in the assessment of the 2021 Draft Budgetary Plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality.

               Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate.

               Therefore, the fiscal stance is then measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures) including expenditure financed by grants under the Recovery and Resilience Facility and other EU funds.

               Going beyond the overall fiscal stance, the analysis also aims at assessing whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

               (15)In its 2021 Stability Programme, Austria’s general government deficit is planned to decrease to 4.3% of GDP in 2022, mainly due to the projected strong economic growth of 4.7% in real terms, the expected recovery on the labour market and strong private consumption. The general government debt ratio is planned to decrease to 88.1% of GDP in 2022. These projections are comparatively less favourable than the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, the general government deficit is expected to improve to 3.0% of GDP in 2022, while the debt ratio is projected to decrease to 85.0% of GDP in 2022. This is largely the result of a different underlying macroeconomic scenario.

               Based on the Commission’s forecast, the overall fiscal stance as defined above – also including the impact on aggregate demand in 2022 from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated to be neutral (at 0.0% of GDP).
                  11
                The positive contribution from expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.1 percentage points of GDP. Nationally financed investment is projected to provide a neutral contribution.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is also projected to provide a neutral contribution.

               (16)The quality of Member States’ budgetary measures appears particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help ensuring fiscal sustainability over the longer term, including in view of climate change and health challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of reforms for more efficient and fairer public revenue systems. On the expenditure side, it has made even more crucial to increase the level and quality of sustainable and growth-enhancing investments, consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The Recovery and Resilience Plans will allow to improve the composition of national budgets.

               (17)According to the programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 3.0% in 2023 to 2.5% of GDP in 2024. The general government deficit is thus planned to no longer exceed 3% of GDP in 2023.

               Based on the programme, the overall fiscal stance – also including the impact on aggregate demand from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at 0.6% of GDP in 2023 and 2024 on average. The positive contribution from expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to decrease by 0.1 percentage point of GDP. Nationally financed investment is projected to provide a neutral contribution.
                  13
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0.4 percentage points of GDP.

                     14
                  The current estimate of the 10-year average nominal potential growth is 3%. However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Austria’s potential growth.

               (18)The general government debt ratio is planned to decrease from 88.1% of GDP in 2023 to 87.6% of GDP in 2024. Over the medium term, Austria is found to face medium fiscal sustainability risks.
                  15

               (19)In view of the currently still exceptionally high degree of uncertainty, the fiscal policy guidance should remain predominantly qualitative. More precise quantified guidance for the later years should be provided in 2022, if the degree of uncertainty has sufficiently declined by then.

               The Council has assessed the 2021 Stability/Convergence Programme and the follow-up by the Member State to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS AUSTRIA TO:

               1.In 2022, maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment.

               2.When economic conditions allow, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, enhance investment to boost growth potential.

               3.Pay particular attention to the composition of public finances, both on the revenue and expenditure sides of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, notably supporting the green and digital transition. Give priority to fiscal structural reforms that will help provide financing for public policy priorities and contribute to the long-term sustainability of public finances, including by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn.

                     (3)

                        Communication from the Commission to the Council on the activation of the general escape clause of   the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final.

                     (4)

                        Communication from the Commission on Annual Sustainable Growth Strategy 2021, Brussels, 17.9.2020, COM(2020) 575 final.

                     (5)

                        Council Recommendation of 20 July 2020 on the National Reform Programme of Austria and delivering a Council opinion on the 2020 Stability Programme of Austria, OJ C 282, 26.8.2020, p. 129.

                     (6)

                        Pending final adoption by the Council, after endorsement by the European Council. The text agreed by the Eurogroup on 16 December 2020 is available at:
                  https://data.consilium.europa.eu/doc/document/ST-14356-2020-INIT/en/pdf

                     (7)

                     OJ
                      L57, 18.2.2021, p.17.

                     (8)

                        Communication from the Commission to the Council on one year since the outbreak of COVID-19: fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final.

                     (9)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (10)

                        In particular, the 4-year smoothing of investment used in the expenditure benchmark does not allow assessing properly the fiscal support to the recovery provided by nationally financed investments.

                     (11)

                        A negative e sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.

                     (12)

                        Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0.1 percentage points of GDP.

                     (13)

                        Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0.1 percentage point of GDP.

                     (14)

                        Estimated by the Commission, following the commonly agreed methodology.

                     (15)

                        See Commission Staff Working Document – Statistical Annex providing background data relevant for the assessment of the 2021 Stability and Convergence Programmes.


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 524 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Slovenia
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Slovenia

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the Recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               After consulting the Economic and Financial Committee,

               Whereas:

               (1)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause
                  2
                of the Stability and Growth Pact.
                  3
                In its Communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.
                  4

               (2)On 20 July 2020, the Council recommended Slovenia
                  5
                to take all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Slovenia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)The Council Recommendation on the economic policy of the euro area indicates that fiscal policies remain supportive in all euro area Member States throughout 2021 and that policy measures should be tailored to country-specific circumstances and be timely, temporary and targeted.
                  6
                When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Fiscal policies should be pursued that are aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Member States should pursue reforms that strengthen the coverage, adequacy, and sustainability of health and social protection systems for all.

               (4)On 18 November 2020, the Commission adopted its Opinions on the 2021 Draft Budgetary Plans of the euro area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the Draft Budgetary Plan of Slovenia was overall in line with the fiscal policy recommendations adopted by the Council on 20 July 2020, and that most of the measures included in the plan supported economic activity against the background of considerable uncertainty.

               (5)Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility
                  7
                came into force on 19 February 2021. This Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. It will contribute to the economic recovery, to the implementation of sustainable and growth-enhancing reforms and  investment, notably to promote the green and digital transitions, and it will strengthen the economies’ resilience and potential growth. In turn, it will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances, growth and job creation in the medium and long term.

               (6)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes.
                  8
                The overall fiscal stance, taking into account national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022. At the same time, given the expectation of economic activity gradually normalising in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022. Member States’ fiscal policies should take into account the state of the recovery, fiscal sustainability and the need to reduce economic, social and territorial divergences. In view of the need to support a sustainable recovery for the EU, Member States with low sustainability risks should gear their budgets towards maintaining a supportive fiscal policy in 2022, taking into account the impact of the Recovery and Resilience Facility. Member States with high debt levels should pursue prudent fiscal policies, while preserving nationally financed investment and making use of grants under the Recovery and Resilience Facility to fund additional high-quality investment projects and structural reforms. For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. A refocusing of fiscal policies towards achieving prudent medium-term fiscal positions, including by phasing out support measures in due course, will contribute to ensuring fiscal sustainability in the medium term.

               (7)The Communication of 3 March 2021 also announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions to continue to apply the general escape clause in 2022 and to deactivate it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.
                  9

               (8)On 30 April 2021, Slovenia submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

               (9)In 2020, based on data validated by Eurostat, Slovenia’s general government deficit was 8.4% of GDP, while general government debt increased to 80.8% of GDP. The annual change in the primary budget balance amounted to -8.9% of GDP, including discretionary budgetary measures of 5.2% of GDP in support of the economy and the operation of automatic stabilisers. Slovenia also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 5.5% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Slovenia, as its general government deficit in 2020 exceeded the 3% of GDP Treaty reference value, while its general government debt exceeded the 60% of GDP Treaty reference value and did not diminish at a satisfactory pace. The report concluded that the deficit criterion was not fulfilled and the debt criterion was not complied with.

               (10)The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and 2022. The Stability Programme forecasts real GDP to grow by 4.6% in 2021 and by 4.4% in 2022. The Commission’s spring forecast projects real GDP growth of 4.9% in 2021 and of 5.1% in 2022. Private consumption in the Commission’s spring forecast is expected to recover somewhat faster than in the Stability Programme due to crisis-induced pent up demand and higher projected employment and wage growth. The Commission’s spring forecast also expects higher investment dynamics in 2022 and stronger exports in 2021 and 2022.

               (11)In its 2021 Stability Programme, the government plans an increase of the general government deficit from 8.4% of GDP in 2020 to 8.6% of GDP in 2021 and a decrease in the debt ratio to 80.4% of GDP in 2021. According to the programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -9.2% of GDP in 2021, reflecting discretionary budgetary measures of 2.6% of GDP in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast, according to which the general government deficit is expected to reach 8.5% of GDP and the debt ratio is set to amount to 79.0% of GDP. Although both projections foresee a significant increase in primary expenditure not explained by crisis related temporary emergency measures, there are differences in their composition. The Commission forecast projects a lower public investment path due to a lower absorption of EU funds in 2021 and a slower roll-out of nationally financed investment projects. Higher nominal growth in some current expenditure categories is also to be expected. The projected debt ratio in the Commission forecast is lower due to more favourable nominal GDP dynamics.

               (12)In response to the COVID-19 pandemic and related economic downturn, Slovenia has adopted budgetary measures to strengthen the capacity of its health system, contain the pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Slovenia in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 are mostly temporary or matched by offsetting measures.

               (13)The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0.6% of GDP in 2021, 1.2% in 2022 and 0.7% in 2023. It projects further expenditure of 0.2% of GDP in 2024 and around 0.3% in 2025 and 2026. The programme also assumes loans under the Recovery and Resilience Facility amounting to 0.1% of GDP in 2022 and reaching up to 0.4% of GDP in 2025. The Commission’s spring forecast does not fully include these grants in its budgetary projections due to the fact that this information was not available at the cut-off date of the Commission’s forecast. Instead, the Commission forecast assumes expenditure financed by the grants of 0.2% of GDP in 2021 and 0.6% of GDP in 2022 based on the information in the Recovery and Resilience Plan adopted by the government on 28 April 2021.

               (14)The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided by fiscal policies to the economy. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark, in turn, needs to be adapted
                  10
                and complemented with additional information in order to fully gauge the fiscal policy orientation.

               First, similarly to the approach pursed in the assessment of the 2021 Draft Budgetary Plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality.

               Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate.

               Therefore, the fiscal stance is then measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures) including expenditure financed by grants under the Recovery and Resilience Facility and other EU funds.

               Going beyond the overall fiscal stance, the analysis also aims at assessing whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

               (15)In its 2021 Stability Programme, Slovenia’s general government deficit is planned to decrease to 5.7% of GDP in 2022, mainly driven by the economic recovery and the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 79.6% of GDP in 2022. The Commission’s 2021 spring forecast projects lower deficit (4.7% of GDP) and debt ratios (76.7% of GDP). In both projections, primary expenditure path (excluding crisis related temporary emergency measures) remains high. The difference in the deficit projections is explained largely by a more favourable macroeconomic scenario in the Commission forecast and thus lower share of total expenditure in the GDP. Both projections do not include the impact of a number of measures, including a large tax reform package adopted recently by the government. According to the information provided in the Stability Programme, if adopted by the parliament, those measures may have a deficit-increasing impact of at least 0.7% of GDP in 2022.

               Based on the Commision’s forecast, the overall fiscal stance as defined above – also including the impact on aggregate demand in 2022 from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at -0.1% of GDP
                  11
               . The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.3 percentage points of GDP. Nationally financed investment is projected to provide a neutral contribution.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0.2 percentage points of GDP.

               (16)The quality of Member States’ budgetary measures appears particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help ensuring fiscal sustainability over the longer term, including in view of climate change and health challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of reforms for more efficient and fairer public revenue systems. On the expenditure side, it has made even more crucial to increase the level and quality of sustainable and growth-enhancing investments, consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The Recovery and Resilience Plans will allow to improve the composition of national budgets.

               (17)According to the programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 3.8% of GDP in 2023 to 2.8% of GDP in 2024. The general government deficit is thus planned to no longer exceed 3% of GDP in 2024.

               Based on the programme, the overall fiscal stance – also including the impact on aggregate demand from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at 1.5% of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to decrease by 0.6 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.4 percentage points of GDP.
                  13
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0.6 percentage points of GDP.

               The current estimate of the 10-year average nominal potential growth is 4¼%
                  14
               . However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Slovenia’s potential growth.

               (18)The general government debt ratio is planned to decrease from 79.0% of GDP in 2023 to 78.0% of GDP in 2024. Slovenia is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.
                  15

               (19)In view of the currently still exceptionally high degree of uncertainty, the fiscal policy guidance should remain predominantly qualitative. More precise quantified guidance for the later years should be provided in 2022, if the degree of uncertainty has sufficiently declined by then.

               The Council has assessed the 2021 Stability Programme and the follow-up by Slovenia to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS SLOVENIA TO:

               1.In 2022, maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment.

               2.When economic conditions allow, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, enhance investment to boost growth potential.

               3.Pay particular attention to the composition of public finances, both on the revenue and expenditure sides of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, notably supporting the green and digital transition. Give priority to fiscal structural reforms that will help provide financing for public policy priorities and contribute to the long-term sustainability of public finances, including by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn.

                     (3)

                        Communication from the Commission to the Council on the activation of the general escape clause of   the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final.

                     (4)

                        Communication from the Commission on Annual Sustainable Growth Strategy 2021, Brussels, 17.9.2020, COM(2020) 575 final.

                     (5)

                        Council Recommendation of 20 July 2020 on the National Reform Programme of Slovenia and delivering a Council opinion on the 2020 Stability Programme of Slovenia, OJ C 282, 26.8.2020, p. 157.

                     (6)

                        Pending final adoption by the Council, after endorsement by the European Council. The text agreed by the Eurogroup on 16 December 2020 is available at: https://data.consilium.europa.eu/doc/document/ST-14356-2020-INIT/en/pdf

                     (7)

                     OJ
                      L57, 18.2.2021, p.17.

                     (8)

                        Communication from the Commission to the Council on one year since the outbreak of COVID-19: fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final.

                     (9)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (10)

                        In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow assessing properly the fiscal support to the recovery provided by nationally financed investments.

                     (11)

                        A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.

                     (12)

                        Other nationally financed capital expenditure is also projected to provide a neutral contribution.

                     (13)

                        Other nationally financed capital expenditure is projected to provide a neutral contribution.

                     (14)

                        Estimated by the Commission, following the commonly agreed methodology.

                     (15)

                        See Commission Staff Working Document – Statistical Annex providing background data relevant for the assessment of the 2021 Stability and Convergence Programmes