title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Stability Programme of Portugal

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/102

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Portugal
      (2021/C 304/22)
      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 of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating 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 COVID-19 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 that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Portugal to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Portugal 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 2021 Council Recommendation on the economic policy of the euro area indicates that fiscal policies should 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. When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Member States should pursue fiscal policies 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 Portugal was overall in line with the fiscal policy recommendations set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary 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 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to 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. 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 that economic activity will gradually normalise 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 Union, 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)

                  In its communication of 3 March 2021, the Commission also took the 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 Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June 2021 the Commission considered that the conditions for continuing to apply the general escape clause in 2022 and for deactivating it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.

                  (8)

                  On 30 April 2021, Portugal 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, Portugal’s general government deficit was 5,7 % of gross domestic product (GDP), while general government debt increased to 133,6 % of GDP. The annual change in the primary budget balance amounted to - 6 % of GDP, including discretionary budgetary measures of about 3 % of GDP in support of the economy and the operation of automatic stabilisers. Portugal 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 close to 4 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 3½ % of GDP.

                  (10)

                  On 2 June 2021, the Commission issued a report under Article 126(3) of the Treaty. That report discusses the budgetary situation of Portugal, 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.

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and 2022. According to the 2021 Stability Programme, real GDP is projected to expand by 4 % in 2021 and 4,9 % in 2022. This is in line with the Commission’s 2021 spring forecast. Contact-intensive sectors were hit particularly hard by the COVID-19 crisis. Risks to the macroeconomic outlook remain tilted to the downside, due to Portugal’s high reliance on foreign tourism, for which there is still a high level of uncertainty as regards the path to recovery.

                  (12)

                  In its 2021 Stability Programme, the government plans a decrease in the general government deficit from 5,7 % of GDP in 2020 to 4,5 % of GDP in 2021, while the debt ratio is planned to decrease to 128 % of GDP in 2021. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to - 5 % of GDP, reflecting discretionary budgetary measures of about 3 % 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.

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, Portugal has adopted budgetary measures to strengthen the capacity of its health system, contain the COVID-19 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, has 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 Portugal 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 over the period 2020 and 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s 2021 spring forecast, in 2023, the cumulative remaining impact of those non-temporary measures is preliminarily estimated at around 1 % of GDP, mainly consisting of additional spending on public wages. Those non-temporary measures also include investment of approximately 1/10 % of GDP, which is expected to support medium-term potential growth and thus sustainability.

                  (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, 1,3 % of GDP in 2022, 1,5 % of GDP in 2023, 1,3 % of GDP in 2024, and 1,1 % of GDP in 2025. The 2021 Stability Programme also assumes loans under the Recovery and Resilience Facility amounting to 0,7 % of GDP in 2021, 0,2 % of GDP in 2022, and 0,1 % of GDP every year in the period 2023–-2025. 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 COVID-19 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 Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued 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. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore 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 Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess 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.

                  (17)

                  In its 2021 Stability Programme, Portugal’s general government deficit is planned to decrease to 3,2 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021, as well as to the expected economic rebound. The general government debt ratio is planned to decrease to 123 % of GDP in 2022. These projections are in line with the Commission 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -1,1 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,1 percentage point of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0,2 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 0,7 percentage point of GDP.

                  (18)

                  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 to ensure 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 it even more crucial to increase the level and quality of sustainable and growth-enhancing investments, in a manner consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The national recovery and resilience plans will allow to improve the composition of national budgets.

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 2,2 % of GDP in 2023 to 1,6 % of GDP in 2024. The general government deficit is thus planned to no longer exceed the 3 %-of-GDP Treaty reference value in 2023. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 0,3 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to remain unchanged. Nationally financed investment is projected to provide an expansionary contribution of 0,1 percentage point of GDP (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,3 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 3 % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Portugal’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 120,7 % of GDP in 2023 to 117,1 % of GDP in 2024. In light of the high debt ratio, which is projected to gradually fall over time, Portugal is considered to face high fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (21)

                  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.

                  (22)

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

            HEREBY RECOMMENDS PORTUGAL TO:

         1.

            In 2022, use the Recovery and Resilience Facility to finance additional investment in support of the recovery while pursuing a prudent fiscal policy. Preserve nationally financed investment. Limit the growth of nationally financed current expenditure.

         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, on both the revenue and expenditure sides of the national budget, and to the quality of budgetary measures in order to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, in particular investment 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, where relevant, by strengthening the coverage, adequacy and sustainability of health and social protection systems for all.

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997, p. 6).

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Portugal and delivering a Council Opinion on the 2020 Stability Programme of Portugal (OJ C 282, 26.8.2020, p. 142).

         (4)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (5)  In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

         (6)  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.

         (7)  Other nationally financed capital expenditure is projected to provide an expansionary contribution of 0,1 percentage point of GDP.

         (8)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,2 percentage point of GDP.

         (9)  Estimated by the Commission, in accordance with the commonly agreed methodology.


title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Convergence Programme of Romania

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/107

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Convergence Programme of Romania
      (2021/C 304/23)
      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 9(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 of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating 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 COVID-19 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 that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 3 April 2020, the Council adopted Decision (EU) 2020/509 (3) on the existence of an excessive deficit situation in Romania due to non-compliance with the deficit criterion in 2019. This was based on the updated fiscal targets by the government, while the subsequent publication of the general government deficit outturn of 4,3 % of GDP confirmed the breach. The excess over the 3 %-of-GDP Treaty reference value was the result of a continuous build-up of fiscal imbalances due to an expansionary fiscal policy since 2016, in a period of strong economic growth. On 3 April 2020, the Council also issued a Recommendation (4) with a view to bringing an end to the situation of an excessive government deficit in Romania by 2022 at the latest.

                  (3)

                  On 20 July 2020, the Council adopted a Recommendation (5) (‘the Council Recommendation of 20 July 2020’). It recommended Romania to pursue fiscal policies in line with the Council Recommendation of 3 April 2020, while taking all necessary measures to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery.

                  (4)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (6), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (5)

                  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. That communication also stated 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 Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June 2021 the Commission considered that the conditions for continuing to apply the general escape clause in 2022 and for deactivating it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.

                  (6)

                  On 5 May 2021, Romania submitted its 2021 Convergence Programme, beyond the deadline established in Article 8 of Regulation (EC) No 1466/97.

                  (7)

                  In 2020, based on data validated by Eurostat, Romania’s general government deficit was 9,2 % of gross domestic product (GDP), while general government debt increased to 47,3 % of GDP. The annual change in the primary budget balance amounted to -3,6 % of GDP, including discretionary budgetary measures of 1,5 % in support of the economy and the operation of automatic stabilisers. Romania 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 4 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 1½ % of GDP.

                  (8)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and 2022. According to the 2021 Convergence Programme, real GDP growth is projected at 5,0 % in 2021 and 4,8 % in 2022. In both years, domestic demand, with strong consumption and investment growth, is expected to be the main driver. The Commission’s 2021 spring forecast of Romania’s growth is slightly above that of the 2021 Convergence Programme, with 5,1 % in 2021 and 4,9 % in 2022, also driven by domestic demand.

                  (9)

                  In its 2021 Convergence Programme, the government plans a decrease in the general government deficit from 9,2 % of GDP in 2020 to 8 % of GDP in 2021, while the debt ratio is planned to increase to 50,8 % of GDP in 2021. According to the 2021 Convergence Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to 3,3 % of GDP, reflecting the discretionary budgetary measures of 1,5 % 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.

                  (10)

                  In response to the COVID-19 pandemic and related economic downturn, Romania has adopted budgetary measures to strengthen the capacity of its health system, contain the COVID-19 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, has curtailed the increase in government deficit and public debt. The measures taken by Romania in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary measures adopted by the government in 2020 and 2021 are temporary or matched by offsetting measures. At the same time, there has been a continuous fiscal impact of expansionary measures which were adopted before the COVID-19 pandemic. Those measures notably included increases in pensions and other social expenditure and tax cuts.

                  (11)

                  The 2021 Convergence Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,1 % of GDP in 2021, 0,6 % of GDP in 2022, 1,2 % of GDP in 2023, 1,2 % of GDP in 2024, 0,9 % of GDP in 2025 and 0,9 % of GDP in 2026. The 2021 Convergence Programme also assumes loans under the Recovery and Resilience Facility amounting to 2,3 % of GDP in 2025 and 2,5 % of GDP in 2026. The Commission’s 2021 spring forecast includes only the grants in its budgetary projections as the loans are assumed in the 2021 Convergence Programme to start after the Commission’s 2021 spring forecast horizon.

                  (12)

                  To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore 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 Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess 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.

                  (13)

                  In its 2021 Convergence Programme, Romania’s general government deficit is planned to decrease to 6,2 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 52,9 % of GDP in 2022. These projections are more favourable than the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -0,5 % of GDP (7). The positive contribution of the expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,4 percentage point of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0,1 percentage point of GDP (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a neutral contribution.

                  (14)

                  According to the 2021 Convergence Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 4,4 % in 2023, to 2,9 % of GDP in 2024. The general government deficit is planned to no longer exceed the 3 %-of-GDP Treaty reference value in 2024. Based on the 2021 Convergence Programme, the overall fiscal stance — also including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 0,6 % of GDP in 2023 and 2024 on average. The positive contribution of the expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,2 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,1 percentage point of GDP (9). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,8 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 5¾ % (10). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Romania’s potential growth.

                  (15)

                  The general government debt ratio is planned to increase to 53,3 % of GDP in 2023 and decrease to 52,4 % of GDP in 2024. In light of the particularly fast-increasing debt path in the medium term, mainly due to the large deficit forecasted for 2022 and unfavourable financing conditions compared with other Member States, Romania is considered to face high fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (16)

                  On 2 June 2021, the Commission recommended a Council recommendation for the correction of Romania’s excessive deficit by 2024. According to that recommendation, Romania should reach a headline general government deficit target of 8,0 % of GDP in 2021, 6,2 % of GDP in 2022, 4,4 % of GDP in 2023, and 2,9 % of GDP in 2024, which is consistent with a nominal growth rate of net primary government expenditure of 3,4 % in 2021, 1,3 % in 2022, 0,9 % in 2023 and 0,0 % in 2024. This corresponds to an annual structural adjustment of 0,7 % of GDP in 2021, 1,8 % of GDP in 2022, 1,7 % of GDP in 2023 and 1,5 % of GDP in 2024.

                  (17)

                  The Council has assessed the 2021 Convergence Programme and the follow-up by Romania to the Council Recommendation of 20 July 2020,

            HEREBY RECOMMENDS ROMANIA TO:

         1.

            Pursue fiscal policies in line with the Council Recommendation of 18 June 2021 with a view to bringing an end to the situation of an excessive government deficit in Romania (11).

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997, p. 6).

         (3)  Council Decision (EU) 2020/509 of 3 April 2020 on the existence of an excessive deficit in Romania (OJ L 110, 8.4.2020, p. 58).

         (4)  Council Recommendation of 3 April 2020 with a view to bringing an end to the situation of an excessive government deficit in Romania (OJ C 116, 8.4.2020, p. 1).

         (5)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Romania and delivering a Council opinion on the 2020 Convergence Programme of Romania (OJ C 282, 26.8.2020, p. 149).

         (6)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (7)  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.

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

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

         (10)  Estimated by the Commission, in accordance with the commonly agreed methodology.

         (11)  See page XX of this Official Journal.


title: Council Recommendation of 18 June 2021 with a view to bringing an end to the situation of an excessive government deficit in Romania

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/111

      COUNCIL RECOMMENDATION
      of 18 June 2021
      with a view to bringing an end to the situation of an excessive government deficit in Romania
      (2021/C 304/24)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(7) thereof,
      Having regard to the recommendation from the European Commission,
      Whereas:

                  (1)

                  According to Article 126 of the Treaty on the Functioning of the European Union, Member States are to avoid excessive government deficits.

                  (2)

                  The Stability and Growth Pact (SGP) is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation.

                  (3)

                  Following a recommendation from the Commission, on 3 April 2020 the Council decided, by Decision (EU) 2020/509 (1), in accordance with Article 126(6) of the Treaty, that an excessive deficit existed in Romania and issued a recommendation to correct the excessive deficit by 2022 at the latest (2) (the ‘Council Recommendation of 3 April 2020’), in accordance with Article 126(7) of the Treaty and Article 3 of Council Regulation (EC) No 1467/97 (3).

                  (4)

                  On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the SGP. That clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Council Regulation (EC) No 1466/97 (4) and Articles 3(5) and 5(2) of Regulation (EC) No 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In that Communication, the Commission set out its view that, given the severe economic downturn resulting from the COVID-19 pandemic, the conditions to activate the general escape clause of the SGP were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the Commission’s assessment.

                  (5)

                  On 15 September 2020, Romania submitted its report on action taken in response to the Council Recommendation of 3 April 2020. That report pointed to a major deterioration of its public finances during 2020, mainly due to the COVID-19 pandemic.

                  (6)

                  On 18 November 2020, the Commission adopted a Communication on Romania’s fiscal situation. In light of the continued exceptional uncertainty created by the COVID-19 pandemic and its extraordinary macroeconomic and fiscal impact, the Commission considered that no decision on further steps in the excessive deficit procedure initiated for Romania could be taken at that juncture. In particular, the exceptional uncertainty, including as regards designing a credible path for fiscal policy, did not allow the Commission to put forward a recommendation for a Council recommendation under Article 126(7) of the Treaty at that stage. The Commission stated that it would reassess Romania’s budgetary situation in spring 2021 based on the 2020 outturn data, the 2021 budget and the Commission 2021 spring economic forecast, and that, if appropriate, it would propose new steps under the excessive deficit procedure, taking into account the continued application of the general escape clause of the SGP in 2021.

                  (7)

                  On 3 March 2021, the Commission adopted a Communication providing further policy orientation to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes. In that Communication the Commission expressed its view that the decision on the deactivation or continued application of the general escape clause of the SGP should comprise an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end-2019) as the key quantitative criterion. On 2 June 2021 the Commission adopted a Communication entitled ‘Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy’. According to that Communication, the general escape clause of the SGP will continue to be applied in 2022 and is expected to be deactivated as of 2023.

                  (8)

                  According to an update of the Commission’s Debt Sustainability Monitor 2020 to reflect the Commission 2021 spring economic forecast, Romania’s medium and long-term fiscal sustainability risks remain high. Those risks need to be addressed by an adequate medium-term fiscal plan backed by structural measures.

                  (9)

                  In light of the deep contraction in economic activity linked to the COVID-19 pandemic and of the related need for fiscal policies to support the recovery in 2021 and 2022, the Council Recommendation of 3 April 2020 no longer provides a relevant basis for fiscal policy guidance for Romania.

                  (10)

                  Pursuant to the last sentence of Article 3(5) of Regulation (EC) No 1467/97, in the case of a severe economic downturn in the euro area or in the Union as a whole the Council may decide, on a recommendation from the Commission, to adopt a revised recommendation under Article 126(7) of the Treaty, provided that this does not endanger fiscal sustainability in the medium term.

                  (11)

                  In accordance with Article 126(7) of the Treaty and Article 3 of Regulation (EC) No 1467/97, the Council is required to make a recommendation to the Member State concerned establishing a deadline for the correction of the excessive deficit. That recommendation is to establish a maximum deadline of six months for effective action to be taken by the Member State concerned to correct the excessive deficit, which can be reduced to three months when warranted by the seriousness of the situation. Furthermore, in a recommendation to correct an excessive deficit the Council is to request the achievement of annual budgetary targets which, on the basis of the forecast underpinning that recommendation, are consistent with a minimum annual improvement in the structural balance, meaning the cyclically-adjusted balance excluding one-off and other temporary measures, of at least 0,5 % of GDP as a benchmark.

                  (12)

                  Real GDP in Romania contracted by 3,9 % in 2020. According to the Commission 2021 spring economic forecast, real GDP growth is forecast to rebound to 5,1 % in 2021 and 4,9 % in 2022. Private consumption is expected to recover as the vaccination roll-out progresses and social distancing measures are gradually lifted, while wage growth is also expected to remain robust. The phasing-in of projects under the Recovery and Resilience Plan (RRP), as referred to in Regulation (EU) 2021/241 of the European Parliament and of the Council (5), is set to lend new impetus to investment growth. The contribution of net exports, that is export minus imports, is expected to remain negative over the forecast horizon. This is because imports are expected to be spurred by the recovery of private consumption as well as by increasing investment. Exports are expected to be supported by a recovery in external demand but to remain less dynamic than imports. The growth outlook is subject to balanced risks. On the one hand, a credible medium-term fiscal strategy can help dispel concerns about fiscal sustainability, in particular when combined with ambitious reforms (including those contained in the RRP). This would help address Romania’s macroeconomic imbalances, mitigate financial stability risks and contribute to sustainable growth, including by improving the investment climate. On the other hand, uncertainty with regard to public policy-making and delays or inefficiencies in the implementation of the RRP could result in negative confidence effects.

                  (13)

                  On 2 March 2021, the Romanian Parliament adopted Romania’s budget and medium-term fiscal strategy for 2021. That fiscal strategy, together with information on the profile of non-repayable financial support and loans under the Recovery and Resilience Facility established by Regulation (EU) 2021/241 (the ‘Facility’), has been taken into account in the 2021 Convergence Programme of Romania (the ‘Convergence Programme’), which was submitted to the Commission on 5 May 2021. Starting with a general government deficit of 9,2 % of GDP in 2020, the Convergence Programme targets a general government deficit of below 3 % of GDP by 2024 in the following steps: 8,0 % of GDP in 2021, 6,2 % of GDP in 2022, 4,4 % of GDP in 2023 and 2,9 % of GDP in 2024. The fiscal adjustment set out in the Convergence Programme is mostly expenditure-based. Expenditure control (reduction as a percentage of GDP) is envisaged in particular for public sector wages (down by 1,4 percentage points between 2022 and 2024) and social transfers (down by 0,9 percentage points between 2022 and 2024).

                  (14)

                  The Commission 2021 spring economic forecast, extended up to 2024, projects a general government deficit of 8,0 % of GDP in 2021, 7,1 % of GDP in 2022 and 6,8 % of GDP in 2023 and 2024. That forecast takes into account expenditure expected to be financed by non-repayable financial support and loans from the Facility, as presented in the Convergence Programme and in additional information provided by Romania. The decrease of the general headline government deficit projected by the Commission is mostly driven by the gradual expiry of emergency measures adopted in response to the COVID-19 pandemic, by higher revenues driven by the projected economic recovery, and by the additional positive impact of investment and reforms expected to be financed by the Facility. Moreover, the Romanian government has decided to freeze public sector wages in 2021 and 2022, to postpone pension increases in 2021 and to increase pensions moderately in 2022, measures which contribute to an improved outlook as compared to that in the Commission 2020 autumn economic forecast. Those measures have already been adopted. In addition, the Romanian government intends to adopt new pension legislation that would keep pension expenditure as a percentage of GDP broadly stable. The higher deficit projection in the Commission 2021 spring economic forecast, compared to the Convergence Programme, stems from the fact that the planned consolidation is not fully supported by enacted, or as yet credibly announced, measures and could therefore not be taken into account in that forecast. The structural deficit is projected by the Commission to improve by 0,7 percentage points of GDP in 2021 and by 0,5 percentage points of GDP in 2022 and to deteriorate by 0,1 percentage points of GDP in 2023 and by 0,4 percentage points of GDP in 2024.

                  (15)

                  General government debt stood at 34,7 % of GDP at the end of 2018, at 35,3 % of GDP at the end of 2019 and at 47,3 % of GDP at the end of 2020. According to the Commission 2021 spring economic forecast, it is projected to increase to 49,7 % of GDP at the end of 2021, to 52,7 % of GDP at the end of 2022 and to 59,5 % of GDP at the end of 2024, thus approaching for the first time the reference value of 60 % of GDP set out in the Treaty in the absence of corrective measures additional to those already enacted or credibly announced.

                  (16)

                  The analysis of medium to long-term debt sustainability, updated after the Commission 2021 spring economic forecast, confirms that risks to sustainability are high in the medium term. According to a baseline 10-year projection, the general government debt-to-GDP ratio would continue to increase over the projection period and reach a level close to 90 % of GDP. Risks to debt sustainability are driven by large fiscal deficits, costs of ageing, and vulnerability of the debt path to macro-fiscal shocks. Pension increases, adopted in summer 2019, and for the time being postponed until the end of 2022, are the predominant source of the debt sustainability risks. The debt structure, with a high share of foreign denominated debt and a significant share of debt held by non-residents, further adds to the debt sustainability risks, although interventions by the National Bank of Romania on the secondary market have helped keep government borrowing costs at favourable levels in 2020. Moreover, there are risks linked to contingent liabilities stemming from state guarantees (of 1,4 % of GDP) granted to firms and the self-employed during the COVID-19 crisis. Gross financing needs are projected to increase. Conversely, reforms and investment under Next Generation EU, if effectively implemented, are expected to have a positive impact on GDP growth in the coming years, thereby contributing to debt sustainability.

                  (17)

                  Under Article 3(4) of Regulation (EC) No 1467/97, the correction of the excessive deficit is to be completed in the year following its identification unless there are special circumstances. The adjustment path should be determined in line with Regulation (EC) No 1467/97, taking into account the economic and fiscal position of the Member State concerned.

                  (18)

                  In the present situation, such special circumstances exist in Romania. Granting Romania one additional year, which would be in line with the rule established in Article 3(4) of Regulation (EC) No 1467/97, would require a very sharp fiscal adjustment and result in significant output losses, thus risking compromising the economic recovery after the COVID-19 pandemic. An adjustment path with a deadline for correcting the excessive deficit by 2024, while still requiring substantial annual adjustments, would imply a more gradual effort and strike a good balance between fiscal consolidation and supporting the economic recovery. The new adjustment path also takes into account the changed fiscal situation, including budgetary developments in 2020 and the new budgetary strategy put in place by the Romanian government. Reforms, including those that improve the management of public finances, would be instrumental in ensuring a durable correction of the excessive deficit. In light of those considerations, and consistent with the fiscal policy orientations set out in the Communication of the Commission of 3 March 2021, setting a deadline to correct the excessive deficit by 2024 is justified.

                  (19)

                  A credible and sustainable adjustment path under that deadline would require Romania to achieve a headline general government deficit target of 8,0 % of GDP in 2021, 6,2 % of GDP in 2022, 4,4 % of GDP in 2023, and 2,9 % of GDP in 2024, in line with the government’s own targets. This, based on the Commission 2021 spring economic forecast, is consistent with a nominal growth rate of net primary government expenditure of 3,4 % in 2021, 1,3 % in 2022, 0,9 % in 2023 and 0,0 % in 2024 (6). Such growth rates of net primary government expenditure will be the primary indicator used to assess the fiscal effort if a careful analysis is needed. The corresponding annual fiscal adjustment in the structural balance is 0,7 % of GDP in 2021, 1,8 % of GDP in 2022, 1,7 % of GDP in 2023 and 1,5 % of GDP in 2024.

                  (20)

                  To assess the potential impact of overall fiscal policy on output, at the current juncture the sizeable payments from the Union budget (under the Facility and other Union funds) should be included in the relevant expenditure aggregate, as a measure of fiscal stance (7). On this basis, Union funds are expected to have a significant positive impact on the Romanian economy in the coming years. Specifically, investments and reforms supported by the Facility provide an opportunity for Romania to improve its underlying fiscal position in the medium term while still supporting growth and job creation.

                  (21)

                  Budgetary consolidation measures should secure a lasting correction of the excessive deficit, while being geared towards enhancing the quality of public finances and reinforcing the growth potential of the economy. Reforms of a fiscal and broader economic nature, including reforms of the pension system, tax administration, public sector wages and state-owned enterprises governance, should support the fiscal consolidation effort and make it sustainable.

                  (22)

                  Since 2016, Romania has systematically and repeatedly derogated from its national fiscal rules and from the timeline for the adoption of the medium-term fiscal strategy, enshrined in the national fiscal framework. Going forward, Romania’s budgetary adjustment would be supported by the full application of the national fiscal framework,

            HAS ADOPTED THIS RECOMMENDATION:

         1.

            Romania should put an end to the excessive deficit situation by 2024 at the latest.

         2.

            Romania should reach a headline general government deficit target of 8,0 % of GDP in 2021, 6,2 % of GDP in 2022, 4,4 % of GDP in 2023, and 2,9 % of GDP in 2024, which is consistent with a nominal growth rate of net primary government expenditure of 3,4 % in 2021, 1,3 % in 2022, 0,9 % in 2023 and 0,0 % in 2024. This corresponds to an annual structural adjustment of 0,7 % of GDP in 2021, 1,8 % of GDP in 2022, 1,7 % of GDP in 2023 and 1,5 % of GDP in 2024.

         3.

            Romania should fully implement the measures already adopted for 2021. It should specify and implement the additional measures that are necessary to achieve the correction of its excessive deficit by 2024. Budgetary consolidation measures should secure a sustainable correction in a growth-friendly manner. Any windfall gains should be used to reduce the general government deficit.

         4.

            The Council establishes the deadline of 15 October 2021 for Romania to take effective action and, in accordance with Article 3(4a) of Regulation (EC) No 1467/97, to report on the consolidation strategy that is envisaged to achieve the targets. Thereafter, Romania should report on progress made in the implementation of this Recommendation at least every six months until the excessive deficit has been corrected. Furthermore, Romania should ensure the full and effective application of its national fiscal framework. To ensure the success of the medium-term fiscal strategy, it will also be important to support the fiscal consolidation with comprehensive reforms.

         This Recommendation is addressed to Romania.
         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  Council Decision (EU) 2020/509 of 3 April 2020 on the existence of an excessive deficit in Romania (OJ L 110, 8.4.2020, p. 58).

         (2)  Council Recommendation of 3 April 2020 with a view to bringing an end to the situation of an excessive government deficit in Romania (OJ C 116, 8.4.2020, p. 1).

         (3)  Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997, p. 6).

         (4)  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 (OJ L 209, 2.8.1997, p. 1).

         (5)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (6)  Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally-financed gross fixed capital formation is smoothed over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

         (7)  The overall fiscal stance is measured by comparing the change in primary expenditure (net of discretionary revenue measures but including changes in expenditure financed by the Facility and other non-repayable financial support by the Union) to the 10-year average potential growth rate. However, this estimate does not include the impact of the reforms that are part of the RRP and can boost Romania’s economic potential growth. 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.


title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Stability Programme of Slovenia

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/116

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Slovenia
      (2021/C 304/25)
      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 of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating 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 COVID-19 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 that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Slovenia to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 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 2021 Council Recommendation on the economic policy of the euro area indicates that fiscal policies should 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. When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Member States should pursue fiscal policies 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 set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary 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 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to 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. 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 that economic activity will gradually normalise 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 Union, 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)

                  In its communication of 3 March 2021, the Commission also took the 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 Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June 2021 the Commission considered that the conditions for continuing to apply the general escape clause in 2022 and for deactivating it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.

                  (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 gross domestic product (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; the actual take-up of the public guarantees in 2020 is estimated by the Commission at below ½ % of GDP.

                  (10)

                  On 2 June 2021, the Commission issued a report under Article 126(3) of the Treaty. That 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.

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and 2022. The 2021 Stability Programme forecasts real GDP to grow by 4,6 % in 2021 and by 4,4 % in 2022. The Commission’s 2021 spring forecast projects real GDP growth of 4,9 % in 2021 and of 5,1 % in 2022. Private consumption in the Commission’s 2021 spring forecast is expected to recover somewhat faster than in the 2021 Stability Programme due to crisis-induced pent-up demand and higher projected employment and wage growth. The Commission’s 2021 spring forecast also expects higher investment dynamics in 2022 and stronger exports in 2021 and 2022.

                  (12)

                  In its 2021 Stability Programme, the government plans an increase in 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 2021 Stability 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 that is not explained by crisis-related temporary emergency measures, there are differences in their composition. The Commission’s 2021 spring forecast projects a lower public investment path due to a lower absorption of Union 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’s 2021 spring forecast is lower due to more favourable nominal GDP dynamics.

                  (13)

                  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 COVID-19 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, has 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.

                  (14)

                  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 2021 Stability 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 2021 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 that forecast. Instead, the Commission’s 2021 spring 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.

                  (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 COVID-19 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 Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued 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. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore 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 Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess 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.

                  (17)

                  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’s 2021 spring forecast and thus lower share of total expenditure in the GDP. Neither of the two projections includes 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 2021 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 2021 spring forecast, and on the basis of the specific methodology that reflects the above mentioned challenges, the overall fiscal stance –including the impact on aggregate demand in 2022 from investment financed by both the national and the Union budgets, in particular the Recovery and Resilience Facility — is estimated at -0,1 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,3 percentage point of GDP. Nationally financed investment is projected to provide a neutral contribution (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,2 percentage point of GDP.

                  (18)

                  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 to ensure 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 it even more crucial to increase the level and quality of sustainable and growth-enhancing investments, in a manner consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The national recovery and resilience plans will allow to improve the composition of national budgets.

                  (19)

                  According to the 2021 Stability 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 Treaty reference value in 2024. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular 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 Union funds is projected to decrease by 0,6 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,4 percentage point of GDP (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,6 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 4¼ % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Slovenia’s potential growth.

                  (20)

                  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.

                  (21)

                  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.

                  (22)

                  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, on both the revenue and expenditure sides of the budget, and to the quality of budgetary measures in order to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, in particular investment 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, where relevant, by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997, p. 6).

         (3)  Council Recommendation of 20 July 2020 on the 2020 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).

         (4)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (5)  In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

         (6)  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.

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

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

         (9)  Estimated by the Commission in accordance with the commonly agreed methodology.