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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/83

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Malta
      (2021/C 304/18)
      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 Malta 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 Malta to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

                  The 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 Malta 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, Malta submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

                  (9)

                  In 2020, based on data validated by Eurostat, Malta’s general government deficit was 10,1 % of gross domestic product (GDP), while general government debt increased to 54,3 % of GDP. The annual deterioration in the primary budget balance amounted to 10,6 % of GDP, including discretionary budgetary measures of 5,7 % of GDP in support of the economy and the operation of automatic stabilisers. Malta also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 3,9 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be 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 Malta, as its general government deficit in 2020 exceeded the 3 %-of-GDP Treaty reference value. The report concluded that the deficit criterion was not fulfilled.

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and favourable in 2022. The 2021 Stability Programme projects real GDP to increase by 3,8 % in 2021 and accelerate to 6,8 % in 2022. Growth would be driven exclusively by domestic demand in 2021, while in 2022 a positive contribution would come also from the external sector. The Commission’s 2021 spring forecast assumes a smoother growth trajectory, with GDP projected to grow by 4,6 % and 6,1 % in 2021 and 2022, respectively. A more optimistic outlook for private and public consumption in 2021 and more subdued investment growth in 2022 explain the major part of the different profile in the Commission’s growth forecast.

                  (12)

                  In its 2021 Stability Programme, the government plans an increase in the general government deficit from 10,1 % of GDP in 2020 to 12,0 % of GDP in 2021, while the debt ratio is planned to increase to 65,0 % of GDP 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 12,5 % of GDP, reflecting discretionary budgetary measures of 5,6 % of GDP in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast.

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, Malta has adopted budgetary measures to strengthen the capacity of its health system, contain the 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 Malta in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 are mostly temporary or matched by offsetting measures.

                  (14)

                  The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,3 % of GDP in 2021, 0,8 % in 2022, 0,6 % in 2023, 0,3 % in 2024 and 0,1 % in 2025. The Commission’s 2021 spring forecast does not fully include these grants in its budgetary projections, due to the absence of sufficiently detailed information about the national recovery and resilience plan at the time of the cut-off date. Instead, the Commission’s 2021 spring forecast assumes a simplified and linear integration of expenditure financed by the Recovery and Resilience Facility.

                  (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, Malta’s general government deficit is planned to decrease to 5,6 % 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 65,8 % of GDP. These projections are in line with the Commission’s 2021 spring forecast. Based on the Commision’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 2,1 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by of 0,1 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,2 percentage point of GDP. (7) Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,8 percentage point of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 3,9 % of GDP in 2023 to 2,9 % of GDP in 2024. The general government deficit is planned to no longer exceed the 3 %-of-GDP Treaty reference value in 2024. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 1,3 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,2 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,2 percentage point of GDP (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,4 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 5½ % (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 Malta’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 66 % of GDP in 2023 to 65,6 % of GDP in 2024. Malta is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (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 Malta to the Council Recommendation of 20 July 2020,

            HEREBY RECOMMENDS MALTA TO:

         1.

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

         2.

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

         3.

            Pay particular attention to the composition of public finances, 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 Malta and delivering a Council opinion on the 2020 Stability Programme of Malta (OJ C 282, 26.8.2020, p. 116).

         (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 contractionary contribution of 1,1 percentage points of GDP.

         (8)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,5 percentage point of GDP.

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


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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/88

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of the Netherlands
      (2021/C 304/19)
      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 the Netherlands 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 the Netherlands 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 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 the Netherlands 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, the Netherlands 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 the Netherlands’ general government deficit was 4,3 % of gross domestic product (GDP), while general government debt increased to 54,5 % of GDP. The annual change in the primary budget balance amounted to 6,0 % of GDP, including discretionary budgetary measures of 3,0 % in support of the economy and the operation of automatic stabilisers. The Netherlands 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 5,3 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 2 % 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 the Netherlands, 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 2022 and in line with the Commission’s 2021 spring forecast. The Commission’s 2021 spring forecast shows a stronger growth in private consumption both in 2021 and 2022 (0,5 percentage point stronger in 2021 and 0,4 percentage point stronger in 2022) and a stronger growth in gross fixed capital formation in 2022 (0,3 percentage point stronger). This is offset by a stronger growth in imports in the Commission’s 2021 spring forecast, leading to positive net imports, while the 2021 Stability Programme projects negative net imports.

                  (12)

                  In its 2021 Stability Programme, the government plans an increase in the general government deficit from 4,3 % of GDP in 2020 to 5,9 % of GDP in 2021, while the debt ratio is planned to increase to 58,6 % 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 8,2 % of GDP, reflecting the discretionary budgetary measures of 1,9 % of GDP in support of the economy and the operation of automatic stabilisers. In its 2021 spring forecast, the Commission forecasts an increase of the general government deficit to 5,0 % of GDP in 2021, while the debt ratio is planned to increase to 57,9 % of GDP in 2021. The Commission’s 2021 spring forecast is based on outturn data showing more robust revenues in 2020, which are expected to remain similar in 2021. The smaller estimated deficit leads to smaller debt levels.

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, the Netherlands 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 the Netherlands 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, all of them capital transfers, mostly from the National Growth Investment Fund.

                  (14)

                  The 2021 Stability Programme does not include yet receipts of grants under the Recovery and Resilience Facility. The Commission’s 2021 spring forecast assumed a simplified and linear integration of expenditure financed by the Recovery and Resilience Facility, in the absence of sufficiently detailed information about the national recovery and resilience plan.

                  (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, the Netherlands’ general government deficit is planned to decrease to 1,8 % of GDP in 2022, mainly due to the economic recovery and a discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 56,9 % 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 -0,4 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,1 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,2 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 0,2 percentage point of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 1,4 % in 2023, to 1,1 % of GDP in 2024. The general government deficit is planned to return below 3 % of GDP in 2022. 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 3 % (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 the Netherland’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 56,0 % of GDP in 2023 to 55,3 % of GDP in 2024. The Netherlands 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 the Netherlands to the Council Recommendation of 20 July 2020,

            HEREBY RECOMMENDS THE NETHERLANDS 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 the Netherlands and delivering a Council opinion on the 2020 Stability Programme of the Netherlands (OJ C 282, 26.8.2020, p. 122).

         (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 0,3 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 Austria

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/93

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Austria
      (2021/C 304/20)
      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 Austria 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 Austria to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

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

                  (9)

                  In 2020, based on data validated by Eurostat, Austria’s general government deficit was 8,9 % of gross domestic product (GDP), while general government debt increased to 83,9 % of GDP. The annual change in the primary budget balance amounted to -9,6 % of GDP, including discretionary budgetary measures of 6,8 % of GDP in support of the economy and the operation of automatic stabilisers. Austria also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 3,5 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 2 % 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 Austria, as its general government deficit in 2020 exceeded the 3 %-of-GDP Treaty reference value, while its general government debt exceeded the 60 %-of-GDP Treaty reference value and did not diminish at a satisfactory pace. The report concluded that the deficit criterion was not fulfilled and the debt criterion was not complied with.

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and 2022. The 2021 Stability Programme projects the real GDP to grow moderately by 1,5 % in 2021 and to rebound strongly by 4,7 % in 2022. This compares to real growth of 3,4 % in 2021 and 4,3 % in 2022 in the Commission’s 2021 spring forecast. The difference between the two projections is mainly due to their different cut-off dates, which allowed the Commission’s projections to take into account the better-than-expected flash estimate for first-quarter GDP, published in late April 2021. Additionally, the Commission’s projections take into account the easing of restrictions that took place in April 2021 in parts of the country and the government announcement of a substantial easing of containment measures as of mid-May 2021.

                  (12)

                  In its 2021 Stability Programme, the government plans a decrease in the general government deficit from 8,9 % of GDP in 2020 to 8,4 % of GDP in 2021, while the debt ratio is planned to increase to 89,6 % of GDP in 2021. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -9,2 % of GDP, reflecting the discretionary budgetary measures of 5,8 % of GDP in support of the economy and the operation of automatic stabilisers. These projections are comparatively less favourable than the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, the general government deficit is expected to improve to 7,6 % of GDP in 2021, while the debt ratio is projected to increase to 87,2 % of GDP in 2021. This is largely the result of the more favourable macroeconomic scenario in the Commission’s 2021 spring forecast.

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, Austria has adopted budgetary measures to strengthen the capacity of its health system, contain the 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 Austria in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. Some of the discretionary measures adopted by the government over the period 2020 and 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s 2021 spring forecast, in 2023, the cumulative remaining impact of those non-temporary measures is preliminarily estimated at around 1 % of GDP, mainly consisting of investment premia, the introduction of declining balance depreciation and a personal income tax relief as well as capital transfers. Those non-temporary measures also include investment of approximately 1/10 % of GDP, which is expected to support medium-term potential growth, and thus sustainability.

                  (14)

                  The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,02 % of GDP in 2020, 0,1 % in 2021, 0,3 % in 2022, 0,3 % in 2023 and 0,2 % of GDP in 2024. The Commission’s spring forecast fully includes these grants in its budgetary projections.

                  (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, Austria’s general government deficit is planned to decrease to 4,3 % of GDP in 2022, mainly due to the projected strong economic growth of 4,7 % in real terms, the expected recovery on the labour market and strong private consumption. The general government debt ratio is planned to decrease to 88,1 % of GDP in 2022. These projections are comparatively less favourable than the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, the general government deficit is expected to improve to 3,0 % of GDP in 2022, while the debt ratio is projected to decrease to 85,0 % of GDP in 2022. This is largely the result of a different underlying macroeconomic scenario. Based on the Commission’s 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 to be neutral (at 0,0 % of GDP) (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,1 percentage point of GDP. Nationally financed investment is projected to provide a neutral contribution (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is also projected to provide a neutral contribution.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 3,0 % in 2023 to 2,5 % of GDP in 2024. The general government deficit is thus planned to no longer exceed 3 % of GDP in 2023. Based on the 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 0,6 % of GDP in 2023 and 2024 on average. The positive contribution from expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,1 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 0,4 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 3 % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Austria’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 88,1 % of GDP in 2023 to 87,6 % of GDP in 2024. Over the medium term, Austria is considered to face medium fiscal sustainability risks.

                  (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 Austria to the Council Recommendation of 20 July 2020,

            HEREBY RECOMMENDS AUSTRIA TO:

         1.

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

         2.

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

         3.

            Pay particular attention to the composition of public finances, 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 Austria and delivering a Council opinion on the 2020 Stability Programme of Austria (OJ C 282, 26.8.2020, p. 129).

         (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 contractionary contribution of 0,1 percentage point of GDP.

         (8)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,1 percentage point of GDP.

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


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

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/98

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Convergence Programme of Poland
      (2021/C 304/21)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

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

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Poland 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 Poland to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 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.

                  (4)

                  On 3 March 2021, the Commission adopted a communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States Stability and Convergence Programmes. 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.

                  (5)

                  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.

                  (6)

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

                  (7)

                  In 2020, based on data validated by Eurostat, Poland’s general government deficit was 7,0 % of gross domestic product (GDP), while general government debt increased to 57,5 % of GDP. The annual change in the primary budget balance amounted to -6,4 % of GDP, including discretionary budgetary measures of 4,3 % of GDP in support of the economy and the operation of automatic stabilisers. The change in the debt-to-GDP ratio was driven also by the issuance of bonds by the Polish Development Fund (4,3 % of GDP) in the context of the policy to counteract the crisis caused by the COVID-19 pandemic, part of which has already been included in the 2020 general government deficit. Poland 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 10,5 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission at below ½ % of GDP.

                  (8)

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

                  (9)

                  The macroeconomic scenario underpinning the budgetary projections is overall cautious, particularly for 2022. The 2021 Convergence Programme projects real GDP growth of 3,8 % in 2021 and 4,3 % in 2022, a less robust recovery than the Commission's 2021 spring forecast by 0,2 percentage point in 2021 and by 1,1 percentage points in 2022. This is primarily driven by the fact that the central scenario provided in the 2021 Convergence Programme does not include the impact of the Recovery and Resilience Facility on the Polish economy.

                  (10)

                  In its 2021 Convergence Programme, the government plans a decrease in the general government deficit from 7,0 % of GDP in 2020 to 6,9 % of GDP in 2021, while the debt ratio is planned to increase to 60,0 % of GDP in 2021. According to the 2021 Convergence Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -6,4 % of GDP, reflecting the discretionary budgetary measures of 2,5 % of GDP in support of the economy and the operation of automatic stabilisers. These projections are above the Commission’s 2021 spring forecast. The difference is driven primarily by higher spending, including on the measures to contain the COVID-19 pandemic, planned in the 2021 Convergence Programme.

                  (11)

                  In response to the COVID-19 pandemic and related economic downturn, Poland 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 Poland 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 temporary or matched by offsetting measures.

                  (12)

                  The 2021 Convergence Programme does not yet include receipts of grants under the Recovery and Resilience Facility.

                  (13)

                  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.

                  (14)

                  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.

                  (15)

                  In its 2021 Convergence Programme, Poland’s general government deficit is planned to decrease to 4,2 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 59,2 % of GDP in 2022. These projections are above the Commission’s 2021 spring forecast and result from an assumption of higher spending on, inter alia, intermediate consumption and social transfers, including on the measures to contain the COVID-19 pandemic. 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 +0,1 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,1 percentage point of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0,3 percentage point of GDP (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,2 percentage point of GDP.

                  (16)

                  The quality of Member States’ budgetary measures appears particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help 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.

                  (17)

                  According to the 2021 Convergence Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 3,2 % in 2023 to 2,5 % of GDP in 2024. The general government deficit is thus planned to no longer exceed the 3 %-of-GDP Treaty reference value in 2024. The 2021 Convergence 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 5¾ % (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 Poland’s potential growth.

                  (18)

                  The general government debt ratio is planned to decrease from 58,7 % of GDP in 2023 to 57,9 % of GDP in 2024. Poland is considered to face low fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (19)

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

                  (20)

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

            HEREBY RECOMMENDS POLAND 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 Poland and delivering a Council opinion on the 2020 Convergence Programme of Poland (OJ C 282, 26.8.2020, p. 135).

         (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 contractionary contribution of 0,2 percentage point of GDP.

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