               EUROPEAN COMMISSION
            Brussels, 26.4.2022
            COM(2022) 166 final

            Recommendation for a
            COUNCIL DECISION
            to authorise the Commission to open negotiations for the amendment of the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, fight against fraud and recovery of claims in the area of value added tax

               EXPLANATORY MEMORANDUM

               1.CONTEXT OF THE PROPOSAL

               •Reasons for and objectives of the proposal

                  The Agreement between the European Union and the Kingdom of Norway (“Norway”) on administrative cooperation, fight against fraud and recovery of claims in the area of value added tax (“the Agreement”) entered into force in September 2018. The Agreement allows the EU Member States and Norway to cooperate in a similar way Member States do under Council Regulation (EU) No 904/2010
                     1
                   and Council Directive 2010/24/EU
                     2
                   to fight against VAT fraud, and assist each other to recover claims in the field of VAT.

               However, in the meantime several amendments to Council Regulation (EU) 904/2010 were made and new tools for administrative cooperation were introduced, namely by the amending Council Regulation (EU) 2018/1541
                  3
               . The new tools include:

               - enhancement of the Eurofisc network through reinforced governance, the so-called follow-up actions (joint processing and analysis of data) and administrative enquiries carried out jointly (joint audits);

               - working with other law enforcement EU bodies (Europol, OLAF);

               - sharing key information on imports and on vehicles.

               The possibility to use other means to exchange information than the standard forms was also introduced.

                  Article 41(5) of the Agreement lays down the formalities if a Party to the Agreement would like to revise it. Thus, this Party shall lay a proposal before the Joint Committee, which shall make recommendations, in particular for the commencement of negotiations according to the rules for international negotiations of the Parties.

                  During the second meeting on 25 November 2021 of the EU-Norway Joint Committee, established under Article 41(1) of the Agreement, the Kingdom of Norway officially submitted a request to supplement and amend the Agreement in order to:

               ·take into account the newly introduced administrative cooperation tools (the use of other means to exchange information than the standard forms, the administrative enquiries carried out jointly and the follow-up actions in the framework of Eurofisc).

               ·update the reference to the repealed Directive 95/46/EC by Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data
                  4
               .

               Norway has so far participated actively in most of the Eurofisc working fields. During the course of 2020 and 2021, Norway alerted the Member States to possible fraud and potential VAT loss amounting to EUR 5 billion in the carbon credit area.

               The amendment of the Agreement by including the above-mentioned new tools would allow for better cooperation and enhance the fight against fraud, thus bringing added value for both parties to the Agreement (Norway and Member States).

               •Consistency with existing policy provisions in the policy area

                  Enhancing VAT administrative cooperation with third countries is one of the actions announced with the 2020 European Commission Communication for a Fair and Simple Taxation supporting the recovery
                     5
                  .

                  Furthermore, it should be noted that the negotiation with Norway would cover cooperation tools already in force and applied by the Member States based on Regulation (EU) No 904/2010.

                  Therefore, this initiative is in line with the present Commission policy in the field of VAT and would harmonise Member States’ cooperation with Norway with the EU acquis.

               2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

               •Legal basis

                  The present proposal to the Council is submitted pursuant to Article 218(3) of the Treaty on the functioning of the European Union (TFEU).

                  Article 3(2) TFEU provides that, in addition to the areas of exclusive Union competence listed in Article 3(1) TFEU, the Union shall "also have exclusive competence for the conclusion of an international agreement when its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope".

                  Under the Court of Justice consistent case law, an agreement may affect common rules or alter their scope when it covers areas where there are harmonising measures.
                     6

                  The subject matter of the revision of the Agreement, i.e. to cover the new administrative cooperation tools introduced by Council Regulation (EU) 2018/1541, falls within the Union`s exclusive competence. The update of the references to Directive 95/46/EC by Regulation (EU) 2016/679 might be done in the framework of the Joint Committee pursuant to Article 41(2)(k) of the Agreement. However, that update can also be included in the reopening of the negotiations on the text of the Agreement.

                  During the second meeting of the Joint Committee on 25 November 2021, Norway officially asked to open negotiations to amend the Agreement as provided for under Article 41(5) of the Agreement.

               •Proportionality

                  The cooperation instruments to be included in the amendment of the Agreement will respect the principle of proportionality and will not go beyond what is necessary to meet the objective of providing a common framework for administrative cooperation between the European Union and the Kingdom of Norway in the field of VAT. This amendment of the Agreement will enable the Member States’ authorities responsible for the application of VAT legislation to cooperate with the Norwegian tax authorities in the same way they cooperate between themselves in the EU and based on the EU acquis.

               3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

               •Stakeholder consultations

               Norway submitted a draft Joint Committee Decision during the second meeting of the Joint Committee on 25 November 2021 proposing to reopen negotiations to amend the Agreement, as foreseen under Article 41(5).

               As such, this draft Joint Committee decision is not binding on the Commission and will be adopted (by written procedure) only after the Council approves to authorise the Commission to re-open the negotiations for the amendment of the Agreement.

               The Council Working Party on Tax Questions (CWPT) was informed on 8 December 2021 about the request of Norway to amend the Agreement.

                  The CWPT will be informed of the state of the negotiations during the whole process and consulted on the results thereof.

               •Impact assessment

               According to tool 7 of the Better Regulation Toolbox
                  7
               , an impact assessment is not needed when the impact cannot be clearly identified ex-ante, the impacts are small or the Commission has little or no choice in the matter.

               Since the level of detail of a Recommendation remains very general giving a wide degree of flexibility, the first condition mentioned in tool 7 of the Better Regulation Toolbox is fulfilled. Furthermore, the recommendation does not commit the Commission to a certain position at this stage. The envisaged Commission Recommendation will only include the Council “authorisation” to enter into negotiations with Norway. As such, there is no impact whatsoever on either tax authorities or EU taxpayers. The negotiations will focus around a few administrative tools that might be added to the already in force EU-Norway agreement on VAT cooperation. The Commission has little or no choice as the recommendation is the mandatory step to open negotiations with a third country.

                  In practice, the outcome of the envisaged Recommendation will not be any new legal act, but only the re-opening of the negotiations.

               •Fundamental rights

                  The envisaged Agreement will respect the key values of the European Union as established in Article 2 of the Treaty on European Union and the Charter of Fundamental Rights of the European Union.

               4.BUDGETARY IMPLICATIONS

                  The proposal has no implication for the EU budget.

               Recommendation for a

               COUNCIL DECISION

               to authorise the Commission to open negotiations for the amendment of the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, fight against fraud and recovery of claims in the area of value added tax

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Article 218(3) and (4),

               Having regard to the recommendation from the European Commission,

               Whereas:

               (1)
                     The cooperation framework under the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, combating fraud and recovery of claims in the field of value added tax
                  8
                (‘the Agreement’) has already shown very positive outcome, as demonstrated at the second meeting of the Joint Committee, held in Oslo on 25 November 2021.

               (2)
                     The Member States would benefit from an extension of the cooperation tools that would allow a more effective cooperation with Norway, in particular as regards Eurofisc follow-up actions.

               (3)
                     Negotiations should be opened with a view to amending the Agreement ,

               HAS ADOPTED THIS DECISION:

               Article 1

               The Commission is hereby authorised to open negotiations, on behalf of the Union, to amend the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, combating fraud and recovery of claims in the field of value added tax.

               Article 2

               The negotiating directives are set out in the Annex.

               Article 3

               The negotiations shall be conducted in consultation with the Council Working Party on Tax Questions.

               Article 4

               This Decision is addressed to the Commission.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of VAT (OJ L 268, 12.10.2010, p. 1)

                     (2)

                        Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (OJ L 84, 31.3.2010, p. 1)

                     (3)

                        Council Regulation (EU) 2018/1541 of 2 October 2018 amending Regulations (EU) No 904/2010 and (EU) 2017/2454 as regards measures to strengthen administrative cooperation in the field of value added tax (OJ L 259/1, 16.10.2018, p. 1-11)

                     (4)

                        Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), (OJ L 119, 4.5.2016, p. 1–88)

                     (5)

                        Action 14, COM/2020/312 final

                     (6)

                        Opinion 3/15 of the Court, ECLI:EU:C:2017:114, paragraph 118 and the case law quoted therein.

                     (7)

                        https://ec.europa.eu/info/sites/default/files/br_toolbox-nov_2021_en_0.pdf

                     (8)

                        https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A22018A0801%2801%29

    ---documentbreak---

               EUROPEAN COMMISSION
            Brussels, 26.4.2022
            COM(2022) 166 final

            ANNEX
            to the
            Recommandation for a COUNCIL DECISION
            to authorise the Commission to open negotiations for the amendment of the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, fight against fraud and recovery of claims in the area of value added tax

               ANNEX

               DIRECTIVES FOR THE NEGOTIATION OF THE AMENDMENT OF THE AGREEMENT BETWEEN THE EUROPEAN UNION AND THE KINDGOM OF NORWAY ON ADMINISTRATIVE COOPERATION, FIGHT AGAINST FRAUD AND RECOVERY OF CLAIMS IN THE AREA OF VALLUE ADDED TAX

                  The Agreement between the European Union and the Kingdom of Norway (“Norway”) on administrative cooperation, fight against fraud and recovery of claims in the area of value added tax (“the Agreement”) entered into force in September 2018. The Agreement allows the EU Member States and Norway to cooperate in a similar way Member States do under Council Regulation (EU) No. 904/2010
                     1
                   and Council Directive 2010/24/EU
                     2
                   to fight against VAT fraud, and assist each other to recover claims in the field of VAT.

                  However, in the meantime several amendments to Council Regulation (EU) 904/2010 were made and new tools for administrative cooperation were introduced, namely by the amending Council Regulation (EU) 2018/1541
                     3
                  . The new tools include:

               (a)enhancement of the Eurofisc network through reinforced governance, the so-called follow-up actions (joint processing and analysis of data) and administrative enquiries carried out jointly (joint audits);

               (b)the possibility to use other means to exchange information than the standard forms;

               (c)exchanging information with other law enforcement EU bodies (Europol, OLAF);

               (d)sharing key information on imports and on vehicles.

               However, the tools mentioned in the above points c) and d) are not useful for Member States’ cooperation with Norway

                  Furthermore, the Agreement concluded in 2018 makes reference to Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, that has been repealed by Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data
                     4
                  .

                  Thus, the aim of the negotiations should be twofold:

               (1)provide Member States, to the extent possible and so far as necessary, with new cooperation tools with Norway, similar to the ones introduced in the Regulation 904/2010 with Regulation (EU) 2018/1541. In particular, negotiations should cover:

               –the exchange information by using other means than standard forms;

               –administrative enquiries carried out jointly;

               –Eurofisc follow-up actions.

               (2)update the legal references Directive 95/46/EC by Regulation (EU) 2016/679.

                  The negotiations should not lead to the possibility for Norway to “access the databases of the Member States”.

                     (1)

                        Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of VAT (OJ L 268, 12.10.2010, p. 1)

                     (2)

                        Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures (OJ L 84, 31.3.2010, p. 1)

                     (3)

                        Council Regulation (EU) 2018/1541 of 2 October 2018 amending Regulations (EU) No 904/2010 and (EU) 2017/2454 as regards measures to strengthen administrative cooperation in the field of value added tax (OJ L 259/1, 16.10.2018, p. 1-11)

                     (4)

                        Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), (OJ L 119, 4.5.2016, p. 1–88)


               EUROPEAN COMMISSION
            Brussels, 22.2.2021
            COM(2021) 76 final
            Recommendation for a
            COUNCIL DECISION
            authorising the opening of negotiations on an agreement between the European Union and Panama under Article XXVIII of the General Agreement on Tariffs and Trade 1994 regarding the withdrawal of its WTO tariff rate quotas on liquid milk and evaporated milk

               EXPLANATORY MEMORANDUM

               CONTEXT OF THE PROPOSAL

               •Reasons for and objectives of the proposal

               By communication G/SECRET/45 dated 12 August 2020, Panama notified the WTO Members of its intention to withdraw its tariff quotas for liquid milk and evaporated milk under tariff lines 0401.10.00, 0401.20.10, 0401.20.90, 0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99 from its Schedule of Concessions CXLI, in accordance with the procedure laid down in Article XXVIII:1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994). At the same time, Panama indicated it is ready to negotiate and consult with Members concerned (i.e. substantial suppliers and Initial Negotiating Right holders for the tariff lines concerned) pursuant to Article XXVIII GATT 1994. To this end, Panama has submitted import statistics by country of origin covering the last three years for which data are available.

                  According to Article XXVIII of the GATT 1994, as the WTO Member having Initial Negotiating Right for the tariff lines covering evaporated milk (0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99) and being a substantial supplier for the tariff lines covering the liquid milk (0401.10.00, 0401.20.10, 0401.20.90), the EU has the right to negotiate with Panama appropriate compensation, in order to maintain a general level of concessions not less favourable to trade than before the change envisaged by Panama.

               According to the Procedures for Negotiations under Article XXVIII adopted by the GATT Council on 10 November 1980
                  1
               , on 26 October 2020 the EU presented a claim of interest as Member holding an Initial Negotiating Right on items covered under HS 0402 and as Member being a substantial supplier of items covered under HS 0401 10 and 0401 20.

               The objective of the proposal is to obtain from the Council the authorisation for the Commission to open the negotiations pursuant to Article XXVIII of the GATT 1994 with Panama in order to agree adequate compensation for the EU following Panama's decision to withdraw certain tariff concessions for liquid milk and evaporated milk from Schedule of Concessions CXLI.

               This proposal is without prejudice to Commission Recommendation of 29 July 2015 (COM (2015) 369 final) authorising the opening of negotiations under Article XXIV:6 and/or  XXVIII of GATT 1994 with WTO members modifying their tariff concessions.

               •Consistency with existing policy provisions in the policy area

                  The proposal is consistent with the EU commercial policy and with the rules of the World Trade Organization.

               •Consistency with other Union policies

                  Not applicable.

               2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

               •Legal basis

                  The Commission does not indicate the substantive legal basis when it recommends the Council to adopt a decision authorising the negotiations of an international agreement. Therefore, Article 218(3) and (4) shall be indicated as legal basis for this proposal.

               •Subsidiarity (for non-exclusive competence)

                  According to Article 5(3) of the TEU, the subsidiarity principle does not apply in areas of exclusive EU competence. The common commercial policy is listed among the areas of exclusive competence of the Union in Article 3 of the TFEU. Negotiations under Article XXVIII GATT concern matters falling with trade policy.

               •Proportionality

               The present Recommendation proposes to the Council to authorise the Commission to open negotiations, on behalf of the EU, under Article XXVIII of the GATT 1994 with Panama. Panama notified WTO Members the intention to negotiate under Article XXVIII of the GATT 1994 in order to withdraw from its Schedule of Concessions CXLI its tariff quotas for liquid milk and evaporated milk under tariff lines 0401.10.00, 0401.20.10, 0401.20.90, 0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99. According to WTO rules, the EU, as WTO member having Initial Negotiating Right for the tariff lines covering evaporated milk (0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99) and being a substantial supplier for the tariff lines covering the liquid milk (0401.10.00, 0401.20.10, 0401.20.90), has the right to negotiate with Panama appropriate compensation. The Commission recommendation proposed is in line with the principle of proportionality and necessary in view of the objectives set out above.

               •Choice of the instrument

                  The only available instrument to achieve the objective is an international agreement. An authorisation to open negotiations over an international agreement is therefore required.

               3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

               •Ex-post evaluations/fitness checks of existing legislation

                  Not applicable.

               •Stakeholder consultations

                  Not applicable. According to the WTO rules, negotiations under Article XXVIII of the GATT 1994 should be conducted with the greatest possible secrecy.

               •Collection and use of expertise

                  Not applicable.

               •Impact assessment

                  Not applicable.

               •Regulatory fitness and simplification

                  Not applicable.

               •Fundamental rights

                  Not applicable.

               4.BUDGETARY IMPLICATIONS

                  Not applicable.

               5.OTHER ELEMENTS

               •Implementation plans and monitoring, evaluation and reporting arrangements

                  Not applicable.

               •Explanatory documents (for directives)

                  Not applicable.

               •Detailed explanation of the specific provisions of the proposal

                  Not applicable.

               Recommendation for a

               COUNCIL DECISION

               authorising the opening of negotiations on an agreement between the European Union and Panama under Article XXVIII of the General Agreement on Tariffs and Trade 1994 regarding the withdrawal of its WTO tariff rate quotas on liquid milk and evaporated milk

               THE COUNCIL OF THE EUROPEAN UNION,

                  Having regard to the Treaty on the Functioning of the European Union, and in particular Article 218(3) and (4) thereof,

                  Having regard to the recommendation from the European Commission,

                  Whereas,

               (1)Panama notified World Trade Organization (‘WTO’) Members on 12 August 2020 of its intention to launch negotiations under Article XXVIII of the General Agreement on Tariffs and Trade 1994 (‘GATT 1994’) in order to withdraw its tariff quotas for liquid milk and evaporated milk under tariff lines 0401.10.00, 0401.20.10, 0401.20.90, 0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99 from its Schedule of Concessions CXLI, in accordance with the procedure laid down in Article XXVIII:1 of the GATT 1994.

               (2)The Union communicated its claim of interest to Panama on 26 October 2020 as a WTO Member holding an Initial Negotiating Right regarding the tariff lines covering evaporated milk and being a substantial supplier regarding the tariff lines covering liquid milk, with respect to the concessions which are the subject of negotiation and consultation under Article XXVIII of the GATT 1994.

               (3)The Commission should therefore be authorised to open negotiations under Article XXVIII of the GATT 1994 with Panama in order to agree adequate compensation for the Union following Panama's decision to withdraw certain tariff concessions for liquid milk and evaporated milk from Schedule of Concessions CXLI,

               HAS ADOPTED THIS DECISION:

               Article 1

               The Commission is hereby authorised to negotiate, on behalf of the Union, an agreement with Panama, pursuant to Article XXVIII of the GATT 1994 for appropriate compensation, following Panama’s decision to withdraw quotas for liquid milk and evaporated milk under tariff lines 0401.10.00, 0401.20.10, 0401.20.90, 0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99 from its Schedule of Concessions CXLI.

               Article 2

               The negotiating directives are set out in the Annex.

               Article 3

                  The negotiations shall be conducted in consultation with the Trade Policy Committee.

               Article 4

                  This decision is addressed to the Commission.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        Guidelines adopted on 10 November 1980, GATT documents C/113 and C/113/Corr.1, GATT BISD 27S/26-28.

    ---documentbreak---

               EUROPEAN COMMISSION
            Brussels, 22.2.2021
            COM(2021) 76 final
            ANNEX
            to the
            Recommendation for aCOUNCIL DECISION
            authorising the opening of negotiations on an agreement between the European Union and Panama under Article XXVIII of the General Agreement on Tariffs and Trade 1994 regarding the withdrawal of its WTO tariff rate quotas on liquid milk and evaporated milk

               ANNEX

               ·The Commission shall negotiate an agreement with Panama pursuant to Article XXVIII of the GATT 1994
                  1
               , following Panama's decision to withdraw its tariff quotas for liquid milk and evaporated milk under tariff lines 0401.10.00, 0401.20.10, 0401.20.90, 0402.91.91, 0402.91.92, 0402.91.99, 0402.99.91, 0402.99.92 and 0402.99.99 from its Schedule of Concessions CXLI.

               ·The Commission shall conduct the negotiations, with a view to agree with Panama adequate compensation following Panama's decision to withdraw its tariff quotas for liquid milk and evaporated milk from its Schedule of Concessions CXLI.

               ·The Commission shall follow the relevant WTO provisions, in particular Article XXVIII of the GATT 1994 and the Understanding on the Interpretation of Article XXVIII of the GATT 1994
                  2
               .

               ·The Commission shall report to the Council on the outcome of the negotiations and, where appropriate, on any problem that may arise during the negotiations.

                     (1)

                        https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm.

                     (2)

                        https://www.wto.org/english/docs_e/legal_e/12-28_e.htm.


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 509 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Spain
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Spain

               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 Spain
                  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 Spain 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 Spain 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, Spain 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, Spain’s general government deficit was at 11.0% of GDP, while general government debt increased to 120.0% of GDP. The annual change in the primary budget balance amounted to 8.1% of GDP, including discretionary budgetary measures of 4.0% of GDP in support of the economy and the operation of automatic stabilisers. Spain 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 8.0% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Spain, 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 of the authorities is realistic in 2021 and 2022. The deviation of 0.6 percentage points of GDP between the Commission’s (5.9%) and the Programme’s (6.5%) estimates for GDP growth in 2021 is explained by the somewhat different spending profiles linked to RRF grants. The Commission expects a more gradual absorption of the grants whereas the Stability Programme’s macroeconomic scenario is based on a more frontloaded use of the funds, resulting in higher economic growth. In 2022, projections are broadly in line with only minor discrepancy.

               (11)In its 2021 Stability Programme, the government plans an decrease in the general government deficit from 11.0% of GDP in 2020 to 8.4% of GDP in 2021, while the debt ratio is planned to decrease to 119.5% 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 5.8% of GDP, reflecting the discretionary budgetary measures in support of the economy and the operation of automatic stabilisers. These projections are above the Commission’s 2021 spring forecast, which projects the deficit at 7.6% of GDP. The difference is explained by the difference in the projections for government expenditure. In particular, the Commission expects the government expenditure on social transfers and other expenditure smaller than projected in the Stability Programme.

               (12)In response to the COVID-19 pandemic and related economic downturn, Spain 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 Spain 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 were 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 0.04% of GDP in 2020, 1.8% in 2021, 1.9% in 2022, 1.4% in 2023, and 0.1% in 2024. The financing from the Facility is planned to be used almost entirely within the Programme period, as about 95% of the RRF grants allocated to Spain would be used in 2021-2023. The Programme also indicates the possibility to request loans under the RRF amounting to 6.3% of GDP at a later stage. This could double the size of the Spanish Recovery and Resilience Plan. The Stability Programme’s fiscal projections however do not include the direct impact of the RRF grants on expenditure and revenue plans, but only the indirect impact on revenues related to higher GDP growth. The Commission’s spring forecast does not fully include the RRF grants as planned by Spain in its budgetary projections until 2022 due to different assumptions on when projects under the Spanish Recovery and Resilience Plan advance to a stage where expenditure will effectively take place so that they would also start having impact on GDP growth.

               (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, Spain’s general government deficit is planned to decrease to 5.0% 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 decrease to 115.1% of GDP in 2022. These projections are broadly in line with the Commission’s 2021 spring forecast.

               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 -0.5% of GDP.
                  11
                The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.6 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.2 percentage points of GDP.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary 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 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 4.0% in 2023, to 3.2% of GDP in 2024. The general government deficit is not planned to return below 3% of GDP over the Programme’s horizon.

               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 +0.9% 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 0.9 percentage points 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 an expansionary contribution of 0.2 percentage points of GDP.

               The current estimate of the 10-year average nominal potential growth is 2½%. However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Spain’s potential growth.

               (18)The general government debt ratio is planned to decrease from 113.3% of GDP in 2023 to 112.1% of GDP in 2024. In light of the high debt ratio, which is projected to only gradually fall over time, Spain is considered to face high 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 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 the Spain to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS SPAIN 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.

               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, 2.6.2021

                     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 Spain and delivering a Council opinion on the 2020 Stability Programme of Spain, OJ C 282, 26.8.2020, p. 54.

                     (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 an expansionary contribution of 0.5 percentage points of GDP.

                     (13)

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

                     (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) 517 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Convergence Programme of Hungary
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Convergence Programme of Hungary

               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
                  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 Hungary
                  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 Hungary to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)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
                  6
                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.

               (4)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.
                  7
                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.

               (5)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.
                  8

               (6)On 30 April 2021, Hungary submitted its 2021 Convergence Programme, in line with Article 8 of Regulation (EC) No 1466/97.

               (7)In 2020, based on data validated by Eurostat, Hungary’s general government deficit was 8.1% of GDP, while general government debt increased to 80.4% of GDP. The annual change in the primary budget balance amounted to -5.9% of GDP, including discretionary budgetary measures of 6.3% of GDP in support of the economy and the operation of automatic stabilisers. Hungary 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 around 6.8% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Hungary, 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.

               (8)The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and 2022. The Convergence Programme projects real GDP growth of 4.3% in 2021 and 5.2% in 2022, a less robust recovery than the Commission spring forecast, mainly due to the slower expected revival of exports and private consumption. The Convergence Programme projections for the growth rate of nominal GDP and the main tax bases, including compensation of employees and private consumption, are slightly lower than the Commission spring forecast in 2021 and broadly similar in 2022.

               (9)In its 2021 Convergence Programme, the government plans a decrease in the general government deficit from 8.1% of GDP in 2020 to 7.5% of GDP in 2021, while the debt ratio is planned to decrease to 79.9% 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 -5.1% of GDP, reflecting discretionary budgetary measures of 3.0% of GDP in support of the economy and the operation of automatic stabilisers. The Commission’s 2021 spring forecast projects lower deficit (6.8%) and debt ratios (78.6%) in 2021, reflecting stronger economic and tax revenue growth.

               (10)In response to the COVID-19 pandemic and related economic downturn, Hungary 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 Hungary 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 preliminary estimated at around 2% of GDP, mainly consisting of wage increases for health care workers, a gradual re-introduction of the 13th monthly pension and the personal income tax exemption for employees under the age of 25.

               (11)The 2021 Convergence Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0.9% of GDP in 2021, 0.9% of GDP in 2022, 1.0% of GDP in 2023, 0.6% of GDP in 2024 and 0.4% of GDP in 2025. The Commission’s spring forecast does not fully include these grants in its budgetary projections, due to the absence of sufficiently detailed information about the national Recovery and Resilience Plan at the time of the cut-off date. Instead, the Commission forecast assumes a linear absorption of the full grant allocation over the Recovery and Resilience Facility’s lifetime, starting from the second half of 2021 and ending in 2026. Thus, investment and reforms financed by grants under the Recovery and Resilience Facility amount to 0.4% of GDP in 2021 and 0.8% in 2022 in the Commission forecast.

               (12)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
                  9
                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.

               (13)In its 2021 Convergence Programme, Hungary’s general government deficit is planned to decrease to 5.9% of GDP in 2022, mainly driven by the economic recovery. The general government debt ratio is planned to decrease to 79.3% of GDP. The Commission’s 2021 spring forecast projects lower deficit (4.5%) and debt ratios (77.1%), owing to the stronger economic and tax revenue growth as well as to the lower deficit base in 2021 in the Commission forecast.

               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 +0.7% of GDP
                  10
               . The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.2 percentage points of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0.1 percentage points of GDP.
                  11
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 1.0 percentage points of GDP.

               (14)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.

               (15)According to the programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 3.9% in 2023, to 3.0% of GDP in 2024 and to 2.0% of GDP in 2025. 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 +0.3% 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 0.4 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 0.6 percentage points of GDP.

               The current estimate of the 10-year average nominal potential growth is 6¾%
                  13
               . However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Hungary’s potential growth.

               (16)The general government debt ratio is planned to decrease from 77.5% of GDP in 2023, to 75.7% of GDP in 2024 and to 73.1% of GDP in 2025. Hungary is found to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis
                  14
               .

               (17)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 Convergence Programme and the follow-up by Hungary to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS HUNGARY 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 Hungary and delivering a Council opinion on the 2020 Convergence Programme of Hungary OJ C 282, 26.8.2020, p. 107.

                     (6)

                  OJ
                   L57, 18.2.2021, p.17.

                     (7)

                        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.

                     (8)

                        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.

                     (9)

                        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.

                     (10)

                        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.

                     (11)

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

                     (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) 518 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Malta
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Malta

               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 Malta
                  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 Malta 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 Malta 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.

               (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, Malta 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, Malta’s general government deficit was 10.1% of GDP, while general government debt increased to 54.3% of GDP. The annual deterioration in the primary budget balance amounted to 10.6% of GDP, including discretionary budgetary measures of 5.7% of GDP in support of the economy and the operation of automatic stabilisers. Malta 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 3.9% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Malta, 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 cautious in 2021 and favourable in 2022. The Stability Programme projects real GDP to increase by 3.8% in 2021 and accelerate to 6.8% in 2022. Growth would be driven exclusively by domestic demand in 2021, while in 2022 a positive contribution would come also from the external sector. The Commission 2021 spring forecast assumes a smoother growth trajectory with GDP forecast to grow by 4.6% and 6.1% in 2021 and 2022, respectively.  A more optimistic outlook for private and public consumption in 2021 and more subdued investment growth in 2022 explain the major part of a different profile of the Commission growth forecast.

               (11)In its 2021 Stability Programme, the government plans an increase in the general government deficit from 10.1% of GDP in 2020 to 12.0% of GDP in 2021, while the debt ratio is planned to increase to 65.0% 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 12.5% of GDP, reflecting discretionary budgetary measures of 5.6% 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.

               (12)In response to the COVID-19 pandemic and related economic downturn, Malta 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 Malta 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 0.3% of GDP in 2021, 0.8% in 2022, 0.6% in 2023, 0.3% in 2024 and 0.1% in 2025. The Commission’s spring forecast does not fully include these grants in its budgetary projections, due to the absence of sufficiently detailed information about the national Recovery and Resilience Plan at the time of the cut-off date. Instead, the Commission forecast assumes a simplified and linear integration of Recovery and Resilience Facility-financed expenditure.

               (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, Malta’s general government deficit is planned to decrease to 5.6% 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 65.8% of GDP. These projections are in line with the Commission’s 2021 spring forecast.

               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 2.1 of GDP
                  11
               . The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to decrease by of 0.1 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.2 percentage points of GDP.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0.8 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 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 3.9% of GDP in 2023 to 2.9% 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 1.3% 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 0.2 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.2 percentage points of GDP.
                  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.

               The current estimate of the 10-year average nominal potential growth is 5½%
                  14
               . However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Malta’s potential growth.

               (18)The general government debt ratio is planned to decrease from 66% of GDP in 2023 to 65.6% of GDP in 2024. Malta 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 Malta to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS MALTA 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 Malta and delivering a Council opinion on the 2020 Stability Programme of Malta, OJ C 282, 26.8.2020, p. 116.

                     (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 1.1 percentage points of GDP.

                     (13)

                        Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0.5 percentage points 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