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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/53

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Italy
      (2021/C 304/12)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Italy to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Italy to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

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

                  (4)

                  On 18 November 2020, the Commission adopted its opinions on the 2021 draft budgetary plans of the euro-area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the draft budgetary plan of Italy was overall in line with the fiscal policy recommendations set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary plan supported economic activity against the background of considerable uncertainty. 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 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (6)

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

                  (7)

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

                  (8)

                  On 30 April 2021, Italy 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, Italy’s general government deficit was 9,5 % of gross domestic product (GDP), while general government debt increased to 155,8 % of GDP. The annual change in the primary budget balance amounted to 8,0 % of GDP, including discretionary budgetary measures in support of the economy and the operation of automatic stabilisers. Italy 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 24,8 % of GDP; the actual takeup of this liquidity support in 2020 was roughly equivalent to 7 % of GDP.

                  (10)

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

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and 2022. The 2021 Stability Programme projects real GDP to grow by 4,5 % in 2021 and 4,8 % in 2022. By comparison, the Commission’s 2021 spring forecast projects a moderately lower real GDP growth of 4,2 % in 2021 and 4,4 % in 2022, mainly due to the lower expected use of Recovery and Resilience Facility grants in 2021 and 2022 based on the more recent indications provided in the national recovery and resilience plan.

                  (12)

                  In its 2021 Stability Programme, the government plans an increase in the general government deficit from 9,5 % of GDP in 2020 to 11,8 % of GDP in 2021, while the debt ratio is planned to increase to 159,8 % of GDP in 2021. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to 10,4 % of GDP, reflecting the discretionary budgetary measures in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast.

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, Italy has adopted budgetary measures to strengthen the capacity of its health system, contain the COVID-19 pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, has curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Italy in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. Some of the discretionary measures adopted by the government over the period 2020 to 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s 2021 spring forecast, in 2023, the cumulative remaining impact of those non-temporary measures is preliminarily estimated at around 1 % of GDP, mainly consisting of a reduction of social security contributions in poorer regions, the extension of the tax credit on employment income and the introduction of a family allowance. Those non-temporary measures also include investment of approximately ⅓ % of GDP, which is expected to support medium-term potential growth, and thus sustainability.

                  (14)

                  The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,6 % of GDP in 2021, 0,9 % in 2022, 1,4 % in 2023, 0,5 % in 2024 and 0,2 % in 2025. The 2021 Stability Programme also assumes investment and reforms financed by loans under the Recovery and Resilience Facility amounting to 0,3 % of GDP in 2020, 0,8 % of GDP in 2021, 0,9 % in 2022, 0,7 % in 2023, 1,3 % in 2024, 1,2 % in 2025 and 1,0 % in 2026. The Commission’s 2021 spring forecast does not fully include these grants in its budgetary projections, in line with the more recent indications provided in the national recovery and resilience plan, which was finalised after the 2021 Stability Programme. Instead, the Commission’s 2021 spring forecast assumes that investments and reforms financed by the Recovery and Resilience Facility grants will amount to 0,3 % of GDP in 2021 and 0,7 % of GDP in 2022.

                  (15)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is 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 Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (17)

                  In its 2021 Stability Programme, Italy’s general government deficit is planned to decrease to 5,9 % of GDP in 2022, mainly due to a discontinuation of the temporary support measures adopted in 2020 and 2021 and the lower support from the automatic stabilisers. The general government debt ratio is planned to decrease to 156,3 % of GDP in 2022. These projections are in line with the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -2,2 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,4 percentage point of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0,3 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 1,3 percentage points of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 4,3 % in 2023, to 3,4 % of GDP in 2024. The general government deficit is therefore not planned to return below 3 % of GDP over the programme horizon. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 0,4 % of GDP in 2023 and 2024 on average (8). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,4 percentage point of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0,2 percentage point of GDP (9). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a neutral contribution. The current estimate of the 10-year average nominal potential growth is 2 % (10). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Italy’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 155 % of GDP in 2023 to 152,7 % of GDP in 2024. In light of the high debt ratio, which is projected to only gradually fall over time, Italy is considered to face high fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (21)

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

                  (22)

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

            HEREBY RECOMMENDS ITALY TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

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

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Italy and delivering a Council opinion on the 2020 Stability Programme of Italy (OJ C 282, 26.8.2020, p. 74).

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

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

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

         (7)  Other nationally financed capital expenditure is projected to provide an expansionary contribution of 0,2 percentage point of GDP.

         (8)  The estimates presented in this recital are based on the detailed budgetary projections transmitted by Italy with the 2021 Stability Programme. Except for the overall figures for government deficit and debt, the projections transmitted by Italy do not take into account the fiscal package announced for May 2021. This package, adopted on 20 May 2021, included additional emergency support in 2021 as well as more resources for nationally financed investment projects in the coming years.

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

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


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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/58

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Cyprus
      (2021/C 304/13)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Cyprus to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Cyprus to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

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

                  (4)

                  On 18 November 2020, the Commission adopted its opinions on the 2021 draft budgetary plans of the euro-area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the draft budgetary plan of Cyprus was overall in line with the fiscal policy recommendations set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary plan supported economic activity against the background of considerable uncertainty.

                  (5)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (6)

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

                  (7)

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

                  (8)

                  On 29 April 2021, Cyprus 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, Cyprus’s general government deficit was 5,7 % of gross domestic product (GDP), while general government debt increased to 118,2 % of GDP. The annual change in the primary budget balance amounted to -7,6 % of GDP, including discretionary budgetary measures of 3,6 % in support of the economy and the operation of automatic stabilisers. Cyprus 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 1,9 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be below ½ % of GDP.

                  (10)

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

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is favourable in 2021 and 2022. According to the Commission’s 2021 spring forecast, Cyprus’s real GDP is expected to grow by 3,1 % in 2021 and 3,8 % in 2022. According to the 2021 Stability Programme, the Cypriot economy is expected to grow by 3,6 % in 2021 and 3,8 % in 2022. The 2021 Stability Programme’s comparatively higher growth rate in 2021 is driven by stronger private consumption.

                  (12)

                  In its 2021 Stability Programme, the government plans a decrease in the general government deficit from 5,7 % of GDP in 2020 to 4,7 % of GDP in 2021, while the debt ratio is planned to decrease to 111,9 % of GDP in 2021. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -6,5 % of GDP, reflecting the discretionary budgetary measures of 3,4 % of GDP in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast.

                  (13)

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

                  (14)

                  The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,6 % in 2021, 0,4 % in 2022, 0,4 % in 2023, and 0,4 % in 2024. In contrast, the Commission’s 2021 spring forecast assumes that the total budgetary impact of reforms and investments entailed in the recovery and resilience plan amounts to 0,3 % of GDP in 2021 and 0,5 % of GDP in 2022.

                  (15)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (17)

                  In its 2021 Stability Programme, Cyprus’s general government deficit is planned to decrease to 0,9 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 103,9 % of GDP in 2022. These projections are below the Commission’s 2021 spring forecast. The Commission forecasts a deficit of 2 % of GDP, mainly due to higher expected expenditure and lower revenue, and a general government debt ratio of 106,6 % of GDP in 2022. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -0,3 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase 0,4 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,1 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,1 percentage point of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government surplus is planned to increase from 0,1 % in 2023, to 1,6 % of GDP in 2024. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 2,8 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,1 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,1 percentage point of GDP (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 2,8 percentage points of GDP. The current estimate of the 10-year average nominal potential growth is 3½ % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Cyprus’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 99,5 % of GDP in 2023 to 92,9 % of GDP in 2024. Cyprus is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (21)

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

                  (22)

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

            HEREBY RECOMMENDS CYPRUS TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

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

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus (OJ C 282, 26.8.2020, p. 82).

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

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

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

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

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

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


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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/73

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Luxembourg
      (2021/C 304/16)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Luxembourg to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Luxembourg to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

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

                  (4)

                  On 18 November 2020, the Commission adopted its opinions on the 2021 draft budgetary plans of the euro-area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the draft budgetary plan of Luxembourg was overall in line with the fiscal policy recommendations set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary plan supported economic activity against the background of considerable uncertainty.

                  (5)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (6)

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

                  (7)

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

                  (8)

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

                  (9)

                  In 2020, based on data validated by Eurostat, Luxembourg’s general government deficit was 4,1 % of gross domestic product (GDP), while general government debt increased to 24,9 % of GDP. The annual change in the primary budget balance amounted to -6,6 % of GDP, including discretionary budgetary measures of 3,6 % of GDP in support of the economy and the operation of automatic stabilisers. Luxembourg also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact), estimated at 5,7 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission at below ½ % of GDP.

                  (10)

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

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and favourable in 2022. The 2021 Stability Programme projects real GDP to grow by 4,0 % in 2021 compared to 4,5 % according to the Commission’s spring 2021 forecast, which factors in a stronger contribution to growth from domestic demand and net exports. For 2022, real GDP is expected to grow by 4,0 % in the 2021 Stability Programme on the back of stronger increase in the net export contribution than in the Commission’s 2021 spring forecast of 3,3 %.

                  (12)

                  In its 2021 Stability Programme, the government plans a decrease in the general government deficit from 4,1 % of GDP in 2020 to 2,0 % of GDP in 2021, while the debt ratio is planned to increase to 26,8 % of GDP. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -4,3 % of GDP, reflecting discretionary budgetary measures of 0,6 % of GDP in support of the economy and the operation of automatic stabilisers. The Commission’s 2021 spring forecast projects a similar debt ratio in 2021 but a larger improvement of the deficit, to 0,3 % of GDP, mostly related to a larger decrease in public expenditure.

                  (13)

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

                  (14)

                  The 2021 Stability Programme does not include yet receipts of grants under the Recovery and Resilience Facility. Instead, the Commission’s 2021 spring forecast assumes, in the absence of sufficiently detailed information about the national recovery and resilience plan, a simplified and linear integration of expenditure financed by the Recovery and Resilience Facility, amounting to around 0,03 % of GDP per year.

                  (15)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (17)

                  In its 2021 Stability Programme, Luxembourg’s general government deficit is planned to decrease to 1,3 % of GDP in 2022, mainly due to higher government revenues and a decrease in social expenditure on the back of the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 28,0 % of GDP in 2022. The Commission’s 2021 spring forecast projects lower deficit (0,1 %) and debt ratios (26,8 %). Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the abovementioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -0,2 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to remain unchanged. Nationally financed investment is projected to provide a contractionary contribution of 0,1 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 0,4 percentage point of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 0,4 % of GDP in 2023 to 0,0 % of GDP in 2024 and to turn to a surplus of 0,4 % of GDP in 2025. The 2021 Stability Programme does not include the information required to estimate the overall fiscal stance in 2023 and 2024. The current estimate of the 10-year average nominal potential growth is 5 % (8). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Luxembourg’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 28,4 % of GDP in 2023 to 28,2 % of GDP in 2024. Luxembourg is considered to face low fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (21)

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

                  (22)

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

            HEREBY RECOMMENDS LUXEMBOURG TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

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

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

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

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

         (5)  In particular, the 4-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

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

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

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


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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/121

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Slovakia
      (2021/C 304/26)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Slovakia to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Slovakia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

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

                  (4)

                  On 18 November 2020, the Commission adopted its opinions on the 2021 draft budgetary plans of the euro-area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the draft budgetary plan of Slovakia was overall in line with the fiscal policy recommendations set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary plan supported economic activity against the background of considerable uncertainty. 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 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (6)

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

                  (7)

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

                  (8)

                  On 12 May 2021, Slovakia submitted its 2021 Stability Programme, beyond the deadline established in Article 4 of Regulation (EC) No 1466/97.

                  (9)

                  In 2020, based on data validated by Eurostat, Slovakia’s general government deficit was 6,2 % of gross domestic product (GDP), while general government debt increased to 60,6 % of GDP. The annual change in the primary budget balance amounted to -4,8 % of GDP, including discretionary budgetary measures of 3,6 % of GDP in support of the economy and the operation of automatic stabilisers. Slovakia also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 2,1 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 1 % of GDP.

                  (10)

                  On 2 June 2021, the Commission issued a report under Article 126(3) of the Treaty. That report discusses the budgetary situation of Slovakia, 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. The report concluded that the deficit criterion was not fulfilled, but the debt criterion was complied with.

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and 2022, given the current uncertainty. The 2021 Stability Programme projects real GDP to grow by 3,3 % in 2021 and 6,3 % in 2022. By comparison, the Commission’s 2021 spring forecast projects a more front-loaded recovery, with real GDP growth of 4,8 % in 2021 and 5,2 % in 2022.

                  (12)

                  In its 2021 Stability Programme, the government plans an increase in the general government deficit from 6,2 % of GDP in 2020 to 9,9 % of GDP in 2021, while the debt ratio is planned to increase to 64,1 % of GDP in 2021. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -4,0 % of GDP, reflecting the discretionary budgetary measures of 2,3 % of GDP in support of the economy and the operation of automatic stabilisers. The planned deficit and debt ratios are higher than those projected by the Commission’s 2021 spring forecast. The Commission forecasts a general government deficit of 6,5 % and a debt ratio of 59,5 % in 2021. The Commission’s 2021 spring forecast does not include a provision for pandemic-related expenditure of 2,4 percentage points of GDP, and higher expenditure of State enterprises and of the Social Insurance Agency, which are both included in the general government, because information was not available at the forecast cut-off date. The Commission forecasts revenues that are 0,2 percentage point of GDP higher and expenditure that is 3,4 percentage points lower than the 2021 Stability Programme. The major differences in expenditure are attributed to lower intermediate consumption, lower social payments and lower subsidies assumed in the Commission’s 2021 spring forecast. The Commission’s lower debt forecast is primarily explained by a lower primary balance (by 3,6 percentage points).

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, Slovakia has adopted budgetary measures to strengthen the capacity of its health system, contain the COVID-19 pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, has curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Slovakia in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. However, some of the discretionary measures adopted by the government over the period 2020 to 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s 2021 spring forecast, in 2023, the cumulative remaining impact of those non-temporary measures is preliminarily estimated at around 1 % of GDP, mainly consisting of the reintroduction of Christmas bonuses, changes in the green energy scheme, higher remuneration for military officials, a reduction in the motor vehicles tax, the cancellation of the bank levy, grants to healthcare facilities and tax credits for children. Those non-temporary measures were only partly compensated by the freezing of the minimum pension and the growth of ministries’ operating costs.

                  (14)

                  The 2021 Stability Programme does not include receipts of grants under the Recovery and Resilience Facility in the fiscal aggregates. Nonetheless, it assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,2 % of GDP in 2021, 1,1 % in 2022 and 1,3 % in both 2023 and 2024 in its underpinning macroeconomic scenario. The Commission’s 2021 spring forecast includes these grants in its budgetary projections.

                  (15)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (17)

                  In its 2021 Stability Programme, Slovakia’s general government deficit is planned to decrease to 5,1 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 65,5 % of GDP in 2022. These projections are higher than the Commission’s 2021 spring forecast. The Commission’s forecast assumes smaller COVID-19 measures and a faster drawdown rate of Union funds in 2022 compared to the 2021 Stability Programme. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at +0,9 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,8 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,7 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 1,1 percentage points of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 4,1 % of GDP in 2023 to 3,8 % of GDP in 2024. The general government deficit is thus planned to exceed the 3 %-of-GDP Treaty reference value for the duration of the 2021 Stability Programme. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 0,2 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,3 percentage point of GDP. Nationally financed investment is projected to provide a neutral contribution (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 1,3 percentage points of GDP. The current estimate of the 10-year average nominal potential growth is 4½ % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Slovakia’s potential growth.

                  (20)

                  The general government debt ratio is planned to increase from 64,6 % of GDP in 2023 to 65,8 % of GDP in 2024. Slovakia is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (21)

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

                  (22)

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

            HEREBY RECOMMENDS SLOVAKIA TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

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

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Slovakia and delivering a Council opinion on the 2020 Stability Programme of Slovakia (OJ C 282, 26.8.2020, p. 164).

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

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

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

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

         (8)  Other nationally financed capital expenditure is projected to provide an expansionary contribution of 1,6 percentage points of GDP.

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


title: Recommendation of the European Central Bank of 6 May 2021 to the Council of the European Union on the external auditors of Národná banka Slovenska (ECB/2021/22) 2021/C 187/01

text:
               17.5.2021

               EN

               Official Journal of the European Union

               C 187/1

      RECOMMENDATION OF THE EUROPEAN CENTRAL BANK
      of 6 May 2021
      to the Council of the European Union on the external auditors of Národná banka Slovenska
      (ECB/2021/22)
      (2021/C 187/01)
      THE GOVERNING COUNCIL OF THE EUROPEAN CENTRAL BANK,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to the Statute of the European System of Central Banks and of the European Central Bank, and in particular Article 27.1 thereof,
      Whereas:

                  (1)

                  The accounts of the European Central Bank (ECB) and the national central banks of the Member States whose currency is the euro are audited by independent external auditors recommended by the ECB’s Governing Council and approved by the Council of the European Union.

                  (2)

                  In 2017, Národná banka Slovenska selected Deloitte Audit s.r.o. as its external auditors for the financial years 2017 to 2020, with an option to extend the mandate to the financial years 2021 to 2023 (1).

                  (3)

                  The mandate of Národná banka Slovenska’s current external auditors, Deloitte Audit s.r.o. ended after the audit for the financial year 2020 in accordance with Council Decision (EU) 2017/1849 (2).

                  (4)

                  Národná banka Slovenska intends to extend the mandate of Deloitte Audit s.r.o. to the financial year 2021. This extension is possible in accordance with the contractual arrangements between Národná banka Slovenska and Deloitte Audit s.r.o.,

            HAS ADOPTED THIS RECOMMENDATION:
      It is recommended that Deloitte Audit s.r.o. should be appointed as the external auditors of Národná banka Slovenska for the financial year 2021.

         Done at Frankfurt am Main, 6 May 2021.

               The President of the ECB

            Christine LAGARDE

         (1)  Recommendation ECB/2017/27 of the European Central Bank of 8 September 2017 to the Council of the European Union on the external auditors of Národná banka Slovenska (OJ C 310, 19.9.2017, p. 1).

         (2)  Council Decision (EU) 2017/1849 of 10 October 2017 amending Decision 1999/70/EC concerning the external auditors of the national central banks, as regards the external auditors of Národná banka Slovenska (OJ L 264, 13.10.2017, p. 5).


title: Commission Recommendation (EU) 2021/801 of 18 May 2021 on the tax treatment of losses during the COVID-19 crisis

text:
               20.5.2021

               EN

               Official Journal of the European Union

               L 179/10

      COMMISSION RECOMMENDATION (EU) 2021/801
      of 18 May 2021
      on the tax treatment of losses during the COVID-19 crisis
      THE EUROPEAN COMMISSION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Article 292 thereof,
      Whereas:

                  (1)

                  The COVID-19 outbreak has prompted unprecedented action at national and Union level to support the EU economy and facilitate its recovery. The majority of short-term crisis response measures seek to ensure that businesses have sufficient cash flow.

                  (2)

                  Small and Medium sized Enterprises (SMEs) (1) in particular have been badly hit by the public health measures as they are often less able to absorb or finance losses than larger companies. SMEs are also more likely to be operating in business sectors that have had to close due to public health measures such as hotels, restaurants, cafés and bars.

                  (3)

                  Many jurisdictions have acted quickly to relieve the immediate tax burden on businesses with appropriate support measures, a considerable part of which has been subject to Union State aid rules, in particular the new State Aid Temporary Framework (2). While the most common type of tax measure to enhance business cash flow has been the deferral of tax payments, changes to loss-offset provisions have also been an important tax policy tool.

                  (4)

                  The Member States usually permit three main ways of treating losses for tax purposes. Losses can normally be (a) used in the current accounting period in which they arise so that no tax is due in that period. In addition, excess losses can either be: (b) carried forward and set against the next available future profits to reduce tax liability; or, in some Member States; (c) carried back and set against total profits in the preceding tax year or up to a number of preceding years to generate a refund of tax previously paid.

                  (5)

                  As a policy measure, loss carry forward is less useful to immediately help struggling businesses, because the taxpayer will only get the liquidity benefit when they are profitable again and liable to tax. Losses from previous years can be used in the current accounting period but this would not free up any liquidity unless a taxpayer is profit making. Loss carry back is much more valuable to businesses affected by the crisis because it results in a refund of taxes paid in previous tax years and provides additional liquidity to companies. It would, in particular, benefit SMEs.

                  (6)

                  Loss carry back has the advantage of benefitting only the businesses that were profitable in the years before the pandemic, which means that it would support healthy businesses as a matter of principle. In practice, only businesses that were making a profit and paying taxes in the years prior to 2020 will be able to offset their 2020 and 2021 losses against those taxes. This ensures that the measure is targeted at businesses suffering as a direct result of the pandemic and public money is not spent trying to help private businesses that are failing for reasons unrelated to the crisis.

                  (7)

                  To ensure a targeted measure, the Member States that decide to allow carry back for more than one year, should restrict this to businesses that were not loss-making in the previous years. Therefore, if a loss carry back is allowed for two or three years, this should be for businesses that were not loss-making in 2019, 2018, or 2017.

                  (8)

                  The cost of such measures would mainly be a question of timing: the businesses get the money now when they most urgently need it, and they will not have to wait until they would be able to use their losses against future tax liability. The Member States will forgo tax revenue now, but they will receive tax revenue in the future from businesses that have remained afloat and will return to profitability. In addition, utilising loss carry backs will reduce existing loss carry forwards in future periods, which further mitigates the impact on tax revenues.

                  (9)

                  Some Member States have already introduced or announced measures allowing loss carry back for the 2020 tax year, which will allow taxpayers to carry back their 2020 tax losses against profits earned in previous fiscal years.

                  (10)

                  However, Member States usually operate divergent rules for the treatment of losses, which often creates an uneven playing field.

                  (11)

                  This recommendation to Member States on the domestic treatment of losses, drawing on best practice, could help level the playing field for companies across the Union.

                  (12)

                  This recommendation should apply for fiscal years 2020 and 2021, in order to help businesses during the COVID-19 crisis.

                  (13)

                  Member States should allow loss carry back for businesses to at least the previous fiscal year, i.e. until 2019. However, in order to enable taxpayers to utilise the full amount of their losses against taxes previously paid, the Member States may extend the carry back for up to the previous three years, i.e. until 2017. Smaller sized firms with lower profits can particularly benefit from this extended carry back period of up to three years.

                  (14)

                  The measure should be limited to prevent excessive impacts on national budgets. A limit of EUR 3 million per loss-making fiscal year would provide valuable support for smaller companies in particular, while also ensuring that all taxpayers benefit to some extent.

                  (15)

                  The Commission recalls that where Member States introduce measures fulfilling the conditions to constitute State aid that is not exempt from the obligation of notification, they must notify such measures to the Commission in line with the procedures generally applicable to State aid,

            HAS ADOPTED THIS RECOMMENDATION
      1.   SUBJECT MATTER AND SCOPE

      With the aim to benefit businesses in the light of the economic situation caused by the COVID-19 pandemic, this Recommendation sets out a coordinated approach towards the treatment of losses for businesses incurred in fiscal years 2020 and 2021.
      2.   THE TAX TREATMENT OF LOSSES

      Given the exceptional economic circumstances in the years 2020 and 2021, as a result of the COVID-19 pandemic, Member States should allow loss carry back for businesses to at least the previous fiscal year, i.e. at least 2019.
      Member States may extend that period to allow loss carry back up to the previous three years, thus allowing companies to set off their losses referring to fiscal years 2020 and 2021 against already taxed profits in the fiscal years 2019, 2018, and 2017.
      Member States should allow businesses to immediately claim the carry back of losses which they estimate to incur in fiscal year 2021, without the need for waiting until the end of the year.
      3.   LIMITATIONS

      In order to limit the impact on national budgets, Member States should limit the amount of losses to be carried back. EUR 3 million per loss-making fiscal year should be the maximum amount for the loss carry back.
      If Member States allow the loss carry back up to 2017, eligible businesses should not have incurred losses in any of fiscal years 2019, 2018 and 2017.
      4.   FOLLOW-UP

      Member States are requested to inform the Commission about the measures taken further to the present Recommendation, as well as on any changes made to such measures.
      Member States are invited to discuss with the Commission their plans for providing loss carry back for businesses.
      5.   ADDRESSEES

      This recommendation is addressed to the Member States.

         Done at Brussels, 18 May 2021.

               For the Commission

            Paolo GENTILONI

               Member of the Commission

         (1)  For a definition of an SME see Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36).

         (2)  Communication from the Commission – Temporary framework for State aid measures to support the economy in the current COVID-19 outbreak (OJ C 91 I, 20.3.2020, p. 1), as amended by Commission Communications C(2020) 2215 (OJ C 112 I, 4.4.2020, p. 1), C(2020) 3156 (OJ C 164, 13.5.2020, p. 3), C(2020) 4509 (OJ C 218, 2.7.2020, p. 3), C(2020) 7127 (OJ C 340, 13.10.2020, p. 1) and C(2021) 564 (OJ C 34, 1.2.2021, p. 6).