title: Council Recommendation of 12 July 2011 on the National Reform Programme 2011 of Malta and delivering a Council opinion on the updated Stability Programme of Malta 2011-2014

text:
               21.7.2011

               EN

               Official Journal of the European Union

               C 215/10

         COUNCIL RECOMMENDATION
   of 12 July 2011
   on the National Reform Programme 2011 of Malta and delivering a Council opinion on the updated Stability Programme of Malta 2011-2014
   2011/C 215/04
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
   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(3) thereof,
   Having regard to the recommendation of the European Commission,
   Having regard to the conclusions of the European Council,
   Having regard to the opinion of the Employment Committee,
   After consulting the Economic and Financial Committee,
   Whereas:

               (1)

               On 26 March 2010, the European Council agreed to the Commission's proposal to launch a new strategy for jobs and growth, Europe 2020, based on enhanced coordination of economic policies, which will focus on the key areas where action is needed to boost Europe's potential for sustainable growth and competitiveness.

               (2)

               On 13 July 2010, the Council adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines for the employment policies of the Member States (2), which together form the ‘integrated guidelines’. Member States were invited to take the integrated guidelines into account in their national economic and employment policies.

               (3)

               On 12 January 2011, the Commission adopted the first Annual Growth Survey, marking the start of a new cycle of economic governance in the EU and the first European semester of ex-ante and integrated policy coordination, which is anchored in the Europe 2020 strategy.

               (4)

               On 25 March 2011, the European Council endorsed the priorities for fiscal consolidation and structural reform (in line with the Council's conclusions of 15 February and 7 March 2011 and further to the Commission's Annual Growth Survey). It underscored the need to give priority to restoring sound budgets and fiscal sustainability, reducing unemployment through labour market reforms and making new efforts to enhance growth. It requested Member States to translate these priorities into concrete measures to be included in their Stability or Convergence Programmes and National Reform Programmes.

               (5)

               On 25 March 2011, the European Council also invited the Member States participating in the Euro Plus Pact to present their commitments on time for their inclusion in their Stability or Convergence Programmes and their National Reform Programmes.

               (6)

               On 28 April 2011, Malta submitted its 2011 National Reform Programme and, on 29 April 2011, its 2011 Stability Programme update covering the period 2011-2014. In order to take account of the interlinkages, the two programmes have been assessed at the same time.

               (7)

               As the economic crisis hit, exports and investment fell sharply and real GDP contracted by 3,4 % in 2009. Employment contracted only mildly, also supported by government assistance. With exports and business investment picking up strongly in 2010, Malta experienced a marked rebound in economic activity in 2010 and unemployment inched down. Given the high government debt (61,5 % of GDP in 2008), the government did not undertake a large fiscal stimulus and the general government deficit in 2009 (3,7 % of GDP) remained below that for the euro area as a whole. In 2010, the government's fiscal deficit and debt ratios remained broadly stable.

               (8)

               Based on the assessment of the updated Stability Programme pursuant to Regulation (EC) No 1466/97, the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections is slightly favourable, especially in the later years of the Stability Programme period. From 3,6 % of GDP in 2010, the Stability Programme plans to bring the general government deficit below the Treaty reference value by 2011. Thereafter, gradual progress towards the medium-term objective (MTO) of a balanced position in structural terms is to be backed up by a commitment to ensure a sustainable, largely expenditure-based consolidation. However, the Stability Programme does not envisage the achievement of the MTO within the Stability Programme horizon. The debt ratio is projected to decline from its 2010 peak of 68 % of GDP to 63,7 % in 2014, due to a positive and strengthening primary balance. The average annual structural adjustment effort in the period 2012-2014, as calculated by the Commission, is broadly in line with the Stability and Growth Pact. However, budgetary outcomes could be worse than targeted because of possible expenditure overruns and the lack of information on the measures underpinning the consolidation effort after 2011.

               (9)

               Pursuing fiscal consolidation to achieve the MTO is a key challenge for Malta. While the budget for 2011 put in place measures to correct the excessive deficit in 2011, additional action would be required in case of slippages. The credibility of the medium-term consolidation strategy, which is not yet underpinned by concrete measures, would be enhanced by a stronger multi-annual budgetary framework. A key weakness is the non-binding nature of the multi-annual targets, which implies a relatively short fiscal planning horizon. The Stability Programme states that the introduction of an expenditure rule is being considered.

               (10)

               According to the Commission's latest assessment, the risks with regard to long-term sustainability of public finances appear to be high as the long-term budgetary impact of ageing, including pensions, is significantly higher in Malta than the EU average. Moreover, the labour market participation of older workers is very low, due to a still relatively low retirement age, frequent recourse to early retirement schemes and the very low participation of older women. The 2006 pension reform started to address sustainability by increasing the retirement age, albeit very gradually, and addressed the adequacy of future pensions, in particular through more generous indexation arrangements and the introduction of a guaranteed national minimum pension. The National Reform Programme reports on the ongoing consultation on the proposals for further pension reform put forward by the Pensions Working Group, including the establishment of an explicit link between retirement age and life expectancy and the introduction of a mandatory second pension pillar and a voluntary third pillar. However, the National Reform Programme does not put forward a comprehensive active ageing strategy to accompany the ongoing and envisaged legislative changes. Undeclared work poses a risk to the sustainability of public finances in the long run. The government presents some measures to address this problem in the National Reform Programme, but there are no proposals to revise the tax-benefit system with a view to making work pay. Fostering participation of women in the labour market is another major challenge for Malta, given that its female employment rate is the lowest in the EU. In the National Reform Programme the government has put forward a substantial number of initiatives targeting female workers. Their implementation and impact should be evaluated in 2012.

               (11)

               In recent years, Malta has experienced intensive industrial restructuring with traditional, labour-intensive manufacturing being replaced by new high added-value activities. This has led to a mismatch between the demand and supply of skills on the labour market, pointing to the need to provide the skills required by the new sectors, particularly through higher education, in a bid to diversify Malta's economic base further.

               (12)

               Malta has the highest rate of early school-leavers in the EU, standing at 36,8 % in 2009 compared to an EU average of 14,4 %. The country also records a low share of people aged 30-34 with a tertiary level of education or equivalent (21,1 % compared to an EU average of 32,3 % in 2009). Malta aims to reduce early school-leaving to 29 % and to increase the share of tertiary or equivalent education for 30 to 34-year-olds to 33 % by 2020. In 2011, it introduced measures to channel potential early school-leavers to interesting career paths through vocational educational training or second-chance learning opportunities.

               (13)

               Malta is one of the few EU Member States with a generalised wage indexation mechanism. Wage increases are linked to a mandatory cost-of-living adjustment (COLA) mechanism, resulting in wage increases in line with past inflation developments though proportionately higher at the low end of the wage spectrum. Adding to the minimum wage, this adjustment may further hamper the competitiveness of the labour-intensive sectors. The issue is particularly pertinent in view of the recent increases in energy prices, which could lead to wage-price spirals.

               (14)

               Malta is almost entirely dependent on imported oil for energy, making the economy vulnerable to oil price changes. This, together with the inadequacy of Malta's energy system, may be posing problems to entrepreneurship and the competitiveness of small and medium-sized enterprises. Exploiting the potential to produce energy from renewable sources could bring the double benefit of improving competitiveness and achieving energy and climate targets. The information provided in the National Reform Programme on energy measures is limited, however, making it difficult to assess their feasibility and cost-effectiveness.

               (15)

               Malta has made a number of commitments under the Euro Plus Pact. The commitments relate to two areas of the Pact: competitiveness and the sustainability of public finances. On the fiscal side, the commitments involve strengthening the accountability and transparency of the budgetary framework, together with consideration given to introducing mechanisms to increase discipline in budgetary execution. To address productivity, there are measures to improve the business environment and financing conditions for firms, as well as enhancing competition in services, especially in telecommunications. Although present in the National Reform Programme, the Euro Plus Pact commitments do not address employment and financial stability. While the authorities focus on raising productivity, they do not acknowledge that the current wage indexation mechanism affects Malta's competitiveness. The Euro Plus Pact commitments have been assessed and taken into account in the recommendations.

               (16)

               The Commission has assessed the Stability Programme and National Reform Programme, and the Euro Plus Pact commitments for Malta. It has taken into account not only their relevance for sustainable fiscal and socio-economic policy in Malta but also their conformity with EU rules and guidance, given the need to reinforce the overall economic governance of the EU by providing EU-level input into future national decisions. In this light, the Commission considers that, while the targeted progress towards the MTO is appropriate, there are important risks to the consolidation strategy, because it is not backed up with concrete measures and expenditure could overrun as has happened in the past. In addition, the non-binding nature of the medium-term budgetary framework may not foster fiscal discipline. The relatively high long-term cost of ageing, particularly pension expenditure, puts the long-term sustainability of Malta's public finances at risk. The National Reform Programme acknowledges the main structural challenges that Malta's economy is facing, though additional attention to certain issues, particularly better utilisation of the economy's labour potential, and reviewing and taking the necessary steps to reform the wage-setting mechanism to ensure better alignment of wage and productivity developments, and energy diversification, appear warranted.

               (17)

               In the light of this assessment, also taking into account the Council Recommendation of 16 February 2010 under Article 126(7) of the Treaty on the Functioning of the European Union, the Council has examined the 2011 update of the Stability Programme of Malta and its opinion (3) is reflected in particular in its recommendations (1) and (2) below. Taking into account the European Council conclusions of 25 March 2011, the Council has examined the National Reform Programme of Malta,

         HEREBY RECOMMENDS that Malta take action within the period 2011-2012 to:

               1.

               Ensure correction of the excessive deficit in 2011, in line with the EDP recommendations, standing ready to take additional measures so as to prevent possible slippages, and adopt concrete measures to back up the 2012 deficit target. Bring the high public debt ratio on a downward path and ensure adequate progress towards the MTO. With a view to strengthening the credibility of the medium-term consolidation strategy, define the required broad measures from 2013 onwards, embed the fiscal targets in a binding, rule-based multi-annual fiscal framework and improve the monitoring of budgetary execution.

               2.

               Take action to ensure the sustainability of the pension system such as by accelerating the progressive increase in the retirement age and by linking it to life expectancy. Accompany the higher statutory retirement age with a comprehensive active ageing strategy, discourage the use of early retirement schemes and encourage private pension savings.

               3.

               Focus education outcomes more on labour market needs, notably by making additional efforts to improve access to higher education and by strengthening the effectiveness of the vocational training system. Take further measures to reduce early school-leaving by identifying, analysing and measuring its causes by 2012 and by setting up a regular monitoring and reporting mechanism on the success rate of the measures.

               4.

               Review and take the necessary steps to reform, in consultation with social partners and in accordance with national practices, the system of wage bargaining and wage indexation to ensure that wage growth better reflects developments in labour productivity and competitiveness.

               5.

               Strengthen efforts to reduce Malta's dependence on imported oil, by bringing forward investments in renewable energies and making full use of available EU funds to upgrade infrastructure and promote energy efficiency.

      Done at Brussels, 12 July 2011.

            For the Council

            The President

         J. VINCENT-ROSTOWSKI

      (1)  OJ L 209, 2.8.1997, p. 1.

      (2)  Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011 on guidelines for the employment policies of the Member States (OJ L 138, 26.5.2011, p. 56).

      (3)  Foreseen in Article 5(3) of Regulation (EC) No 1466/97.


title: Council Recommendation of 9 July 2013 on the National Reform Programme 2013 of Lithuania and delivering a Council opinion on the Convergence Programme of Lithuania, 2012-2016

text:
               30.7.2013

               EN

               Official Journal of the European Union

               C 217/51

      COUNCIL RECOMMENDATION

   of 9 July 2013
   on the National Reform Programme 2013 of Lithuania and delivering a Council opinion on the Convergence Programme of Lithuania, 2012-2016
   2013/C 217/13
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
   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 conclusions of the European Council,
   Having regard to the opinion of the Employment Committee,
   Having regard to the opinion of the Economic and Financial Committee,
   Having regard to the opinion of the Social Protection Committee,
   Having regard to the opinion of the Economic Policy Committee,
   Whereas:

               (1)

               On 26 March 2010, the European Council agreed to the Commission’s proposal to launch a new strategy for jobs and growth, Europe 2020, based on enhanced coordination of economic policies, which focuses on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

               (2)

               On 13 July 2010, the Council adopted a recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and, on 21 October 2010, it adopted a decision on guidelines for the employment policies of the Member States (2), which together form the ‘integrated guidelines’. Member States were invited to take the integrated guidelines into account in their national economic and employment policies.

               (3)

               On 29 June 2012, the Member States' Heads of State or Government decided on a Compact for Growth and Jobs, providing a coherent framework for action at national, EU and euro area levels using all possible levers, instruments and policies. They decided on action to be taken at the level of the Member States, in particular expressing full commitment to achieving the objectives of the Europe 2020 strategy and to implementing the country-specific recommendations.

               (4)

               On 10 July 2012, the Council adopted a recommendation (3) on Lithuania’s National Reform Programme for 2012 and delivered its opinion on Lithuania’s Convergence Programme for 2012-2015.

               (5)

               On 28 November 2012, the Commission adopted the Annual Growth Survey, marking the start of the 2013 European Semester of economic policy coordination. Also on 28 November 2012, the Commission, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (4), adopted the Alert Mechanism Report, in which Lithuania was not identified as one of the Member States for which an in-depth review would be carried out.

               (6)

               The European Parliament has been duly involved in the European Semester, in accordance with Regulation (EC) No 1466/97, and, on 7 February 2013, adopted a resolution on employment and social aspects in the Annual Growth Survey 2013 and a resolution on the contribution to the Annual Growth Survey 2013.

               (7)

               On 14 March 2013, the European Council endorsed the priorities for ensuring financial stability, fiscal consolidation and action to foster growth. It underscored the need to pursue differentiated, growth-friendly fiscal consolidation, to restore normal lending conditions to the economy, to promote growth and competitiveness, to tackle unemployment and the social consequences of the crisis, and to modernise public administration.

               (8)

               On 9 April 2013, Lithuania submitted its 2013 National Reform Programme and, on 26 April 2013, its Convergence Programme for the period 2012-2016. In order to take account of their interlinkages, the two Programmes have been assessed at the same time.

               (9)

               Based on the assessment of the Convergence Programme pursuant to Regulation (EC) No 1466/97, the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections in the Programme is plausible and broadly in line with the assessment in the Commission services 2013 spring forecast. Following an ambitious fiscal consolidation since 2009, the general government deficit was brought down to 3,2 % of GDP in 2012, which is considered sufficient for the abrogation of the decision on the existence of an excessive deficit, taking into account the cost of the systemic pension reform. The deficit reduction was to some extent also based on robust economic growth and temporary expenditure freezes. The Convergence Programme has changed the medium-term objective (MTO) from 0,5 % to – 1,0 %, which is still in line with the objectives of the Stability and Growth Pact.
               The budgetary strategy outlined in the Convergence Programme aims to reach the MTO by 2016. Based on the (recalculated) structural budget balance, annual progress towards the MTO in structural terms is higher than 0,5 % of GDP. The expenditure benchmark of the Stability and Growth Pact over the Programme period is met. The adjustment is slightly front-loaded and relies mainly on expenditure restraint, but is only partially supported by concrete measures, including one-offs that are not always specified. According to the Commission services 2013 spring forecast, the structural adjustment in 2013 and 2014 is expected to be at 0,3 % and 0,0 % of GDP respectively and thus below the required progress of 0,5 % of GDP, which also casts doubt on the Convergence Programme’s adjustment path. Further consolidation measures have yet to be specified, and structural reforms including a shift to revenue based measures, should be considered. General government debt remains below 60 % of GDP with 40,7 % in 2012 and is expected to drop slightly over the Programme period. While the Convergence Programme expects debt to ease to 39,7 % in 2013 and to decline further to 34,5 % by 2016, the Commission services 2013 spring forecast projects a drop to 40,1 % of GDP in 2013 and 39,4 % in 2014. Differences are above all the result of lower assumed deficits in the Convergence Programme.

               (10)

               Although its deficit position has improved over the years, Lithuania still lacks sufficient fiscal space to react to adverse shocks. There is, however, scope for less-distortive taxation and further improvements in tax compliance. Lithuania continues to have the lowest tax-to-GDP ratio in the Union and consolidation has mainly been focused on the expenditure side. There is still scope to look at additional tax revenue sources that are least detrimental to growth, such as environmental and recurrent immovable property taxation. While Lithuania has taken steps to increase recurrent property tax revenue, there seems to be scope for further effort. Lithuania’s revenues from environmental taxes are on a downward trend and were the second lowest in the Union in 2011, also due to the lowest level of transport taxes in the Union; this does not facilitate reductions in the high energy intensity of the Lithuanian economy. At the same time, growth-enhancing expenditure, for example on research and education, should be prioritised in fiscal consolidation. The implementation of laws strengthening the fiscal framework has been delayed. Lithuania’s fiscal framework has failed to prevent pro-cyclical fiscal policy in years of positive output gap. The amendment of the Law on Budget Structure in 2012 is a step in the right direction. There is a need to improve monitoring, accountability and the execution of the budgetary process, in particular of municipalities, and to secure the binding character of the medium-term framework.

               (11)

               Demographic developments are a challenge for Lithuania’s long-term fiscal sustainability. A comprehensive pension reform, targeting both sustainability and adequacy of pensions, therefore remains important. Adequacy of pensions is a challenge as the older population is at a high risk of poverty and exclusion. The 2012 reform of the pension accumulation system encourages second pillar pension accumulation with financial incentives from the state budget. It also introduces the possibility to opt out from private pension accumulation and to return to the state social insurance fund during a transitional period, as well as a gradual increase of the retirement age. The reform will enter into force on 1 January 2014. These are important but isolated steps in the right direction and more significant changes are needed, particularly within the first pension pillar. In addition, measures that promote the employability of older workers and age friendly working environments are necessary.

               (12)

               Tackling unemployment and low labour-market participation of the low-skilled remains a key challenge. Young and unskilled workers in particular suffer from high unemployment rates. Skill mismatches became especially evident during the crisis and represent a growing problem, hinting at structural shortcomings in education and labour-market policies. Ensuing shortages of skilled labour are compounded by high emigration rates. Hence, additional measures to improve labour-market flexibility and to boost participation in the labour market, especially for young people, unskilled persons and older workers, are necessary. The overall coverage of active labour-market measures, and the financial allocation per individual measure, remain insufficient and measures are poorly targeted for low skilled and the long-term unemployed. A comprehensive review of labour law, with the involvement of social partners, could identify unnecessary restrictions and administrative hurdles affecting flexible contractual agreements, dismissal provisions and flexible working time arrangements. To ensure a better transfer from education to the labour market, apprenticeships and internships could be made more attractive.

               (13)

               Poverty and social exclusion are still worryingly high. In particular, the increase in child poverty is of concern. Cash social assistance reform measures designed to increase work incentives (in-work benefits for the long-term unemployed, gradual reduction of social benefits for people of working age who are inactive) and reduce poverty were launched in 2012. A pilot project in five municipalities delivered impressive results on saving expenditure and better targeting beneficiaries. It is now necessary to put in place a monitoring system to assess its efficiency in, and impact on, tackling poverty and exclusion. The reform should also be linked with activation measures that enhance participation, in particular for long-term social beneficiaries. Measures taken to reduce poverty include increased coverage of social benefits and a new method for calculating the benefit amounts. Moreover, on 1 January 2013, the minimum wage increased by 18 %, which might help reduce the inactivity trap and in-work poverty. However, these measures appear insufficient given the size of the challenge, and a comprehensive strategy or action plan to fight poverty is lacking.

               (14)

               The government has been undertaking an ambitious reform of state-owned enterprises (SOEs) since 2010. The reform is relevant and credible, involving legislative as well as organisational changes. The regulatory aspects of the reform have been put in place and broad compliance with reporting requirements has been achieved. The challenge now is to avoid conflicts of interest, with respect to regulatory and non-regulatory functions, and to distinguish between commercial and non-commercial activities of SOEs. Once fully implemented, the reform could help to boost competitiveness and growth. Monitoring of compliance will, therefore, be key.

               (15)

               Electricity and gas links to neighbours remain underdeveloped. As a result, competition in the energy sector is very limited and energy prices are high. Furthermore, energy efficiency continues to be an issue. Progress has been sluggish as regards the renovation of buildings, including with respect to investments under the JESSICA holding fund, and major challenges in the renovation of private housing remain.

               (16)

               In the context of the European Semester, the Commission has carried out a comprehensive analysis of Lithuania’s economic policy. It has assessed the National Reform Programme and the Convergence Programme. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Lithuania but also their compliance with EU rules and guidance, given the need to reinforce the overall economic governance of the Union by providing EU-level input into future national decisions. Its recommendations under the European Semester are reflected in recommendations (1) to (6) below.

               (17)

               In the light of this assessment, the Council has examined the Convergence Programme, and its opinion (5) is reflected in particular in recommendation (1) below,

         HEREBY RECOMMENDS that Lithuania take action within the period 2013-2014 to:

               1.

               Ensure growth friendly fiscal consolidation and implement the budgetary strategy as planned, pursuing a structural adjustment effort that will enable Lithuania to reach the MTO. Prioritise growth-enhancing expenditure. Continue to strengthen the fiscal framework, in particular by securing enforceable and binding expenditure ceilings in the medium-term budgetary framework. Review the tax system and consider increasing those taxes that are least detrimental to growth, such as recurrent property and environmental taxation, including the introduction of car taxation, while continuing to reinforce tax compliance.

               2.

               Adopt and implement legislation on a comprehensive pension system reform. Align the statutory retirement age with life expectancy, restrict access to early retirement, establish clear rules for the indexation of pensions, and promote the use of complementary savings schemes while ensuring implementation of ongoing reforms. Underpin pension reform with measures that promote the employability of older workers.

               3.

               Tackle high unemployment amongst the low-skilled and the long-term unemployed by refocusing resources on active labour-market policies while improving their coverage and efficiency. Improve the employability of young people, for example through a Youth Guarantee, enhance the implementation and effectiveness of apprenticeship schemes, and address persistent skill mismatches. Review the appropriateness of labour legislation with regard to flexible contract agreements, dismissal provisions and flexible working time arrangements, in consultation with social partners.

               4.

               Implement concrete targeted measures to reduce poverty and social exclusion. Continue to strengthen the links between the cash social assistance reform and activation measures.

               5.

               Complete the implementation of the reform of the SOEs, in particular to ensure separation of ownership and regulatory functions, and closely monitor compliance with the requirements of the reform.

               6.

               Step up measures to improve the energy efficiency of buildings, including through removing disincentives and rapid implementation of the holding fund. Promote competition in energy networks by improving interconnectivity with other Member States for both electricity and gas.

      Done at Brussels, 9 July 2013.

            For the Council

            The President

         R. ŠADŽIUS

      (1)  OJ L 209, 2.8.1997, p. 1.

      (2)  Maintained for 2013 by 2013/208/EU of 22 April 2013 on guidelines for the employment policies of the Member States (OJ L 118, 30.4.2013, p. 21).

      (3)  OJ C 219, 24.7.2012, p. 54.

      (4)  OJ L 306, 23.11.2011, p. 25.

      (5)  Under Article 9(2) of Regulation (EC) No 1466/97.


title: Council Recommendation of 12 July 2016 on the 2016 National Reform Programme of Poland and delivering a Council opinion on the 2016 Convergence Programme of Poland

text:
               18.8.2016

               EN

               Official Journal of the European Union

               C 299/15

         COUNCIL RECOMMENDATION
   of 12 July 2016
   on the 2016 National Reform Programme of Poland and delivering a Council opinion on the 2016 Convergence Programme of Poland
   (2016/C 299/04)
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
   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,
   Having regard to the conclusions of the European Council,
   Having regard to the opinion of the Employment Committee,
   Having regard to the opinion of the Economic and Financial Committee,
   Having regard to the opinion of the Social Protection Committee,
   Having regard to the opinion of the Economic Policy Committee,
   Whereas:

               (1)

               On 26 November 2015, the Commission adopted the Annual Growth Survey, marking the start of the 2016 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Poland as one of the Member States for which an in-depth review would be carried out.

               (2)

               The 2016 country report for Poland was published on 26 February 2016. It assessed Poland's progress in addressing the country-specific recommendations adopted by the Council on 14 July 2015 and Poland's progress towards its national Europe 2020 targets.

               (3)

               On 28 April 2016, Poland submitted its 2016 National Reform Programme and its 2016 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (4)

               Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of this provision in guidelines on the application of the measures linking effectiveness of the European Structural and Investment Funds to sound economic governance.

               (5)

               Poland is currently in the preventive arm of the Stability and Growth Pact. In its 2016 Convergence Programme, the Government plans for the headline deficit to increase from 2,6 % of GDP in 2015 to 2,9 % of GDP in 2017 before declining to 1,3 % of GDP in 2019. The medium-term budgetary objective — a deficit of 1 % of GDP in structural terms — is not expected to be achieved by 2019, the period covered by the programme. According to the convergence programme, the government debt-to-GDP ratio is expected to increase from 51,3 % in 2015 to 52,5 % in 2017 before declining to 50,4 % in 2019. The macroeconomic scenario underpinning these budgetary projections is plausible in 2016 and favourable thereafter. Based on the Commission 2016 spring forecast, there is a risk of a significant deviation from the recommended adjustment both in 2016 and, under unchanged policies, in 2017. Based on its assessment of the Convergence Programme and taking into account the Commission 2016 spring forecast, the Council is of the opinion that there is a risk that Poland will not comply with the provisions of the Stability and Growth Pact. Therefore further measures will be needed to ensure compliance in 2016 and 2017.

               (6)

               Poland is the only Member State without a fully-fledged independent fiscal council and with no known plans to create one, even though it has independent fiscal institutions covering some of its functions. In addition to the debt brake built into the Polish constitution, Poland introduced an expenditure stabilising rule in 2013, which was fully applied for the first time in the 2015 budget. The rule was, however, amended in December 2015 and will allow for higher expenditure, particularly in the current low inflation environment. There are significant fiscal sustainability risks in the longer term due to an unfavourable initial budgetary position and the projected increase in the costs of population ageing, mainly in relation to healthcare spending. From a debt sustainability perspective, under unchanged policies the medium-term fiscal risk is high, owing to the projected increase in the stock of debt.

               (7)

               VAT revenues for 2015 are projected to have remained low as a proportion of GDP, despite the measures introduced so far, which include the reverse charge mechanism and the joint liability of firms in sensitive sectors. Increasing VAT collection and fighting VAT fraud are priorities for the Government and a strategy is being prepared in this respect. It is expected to include measures such as new IT tools for detecting and combating VAT fraud and a reform of the tax administration. A lower limit for cash payments between companies will be introduced in January 2017. Poland still faces the long-standing challenge of inefficient tax administration. The cost-of-collection ratio, i.e. administrative costs per net tax revenue collected, is the highest in the Union.

               (8)

               Poland continues to apply reduced VAT rates to a large number of goods and services. This contributes to lost revenues and reduces the efficiency of the VAT system. Evidence suggests that reduced VAT rates are not an effective social policy instrument, particularly as they are not specifically targeted to vulnerable households. They tend to translate into significant subsidies to rich taxpayers. Social benefits and income tax are considered to be better targeted and thus more suitable for achieving redistributive goals. The potential lost revenue due to reduced VAT rates and optional exemptions is among the highest in the Union.

               (9)

               Despite recent improvements, the Polish labour market faces significant challenges — an ageing labour force, low productivity and high segmentation of the labour market. These are coupled with shortcomings in the education system. Although the education system has improved significantly in recent years, it still fails to equip pupils sufficiently with the transversal skills needed for the rapidly changing labour market and innovation. The relatively low average standing of Polish higher education and science has a negative effect on the quality of provision. The degree of internationalisation of Polish higher education is very limited, both in terms of the number of foreign students and participation in international scientific collaboration. The financing model of higher education does not promote quality sufficiently, as it largely uses past university standings and quantity variables, such as the number of students and academic staff. According to employers, graduates lack transversal skills such as problem solving, critical thinking, or teamwork. Participation in lifelong learning is low, and vocational education and training do not correspond to market needs.

               (10)

               While the availability and take-up of pre-school education has increased significantly in recent years, the availability of early childcare services remains among the lowest in the Union. Raising the obligatory school starting age to the age of seven years, and removing the obligation for five-year-olds to attend pre-school, combined with the new child benefit, may have negative effects on labour market participation, especially of women, and deserves close monitoring.

               (11)

               Despite a strong rise in permanent employment contracts in 2015, the proportion of fixed-term employment in Poland is among the highest in the Union. Poland has recently taken a number of measures to tackle labour market segmentation. An amendment to the Labour Code has been introduced, the social security contributions connected to some civil law contracts have been increased and a minimum hourly remuneration for those working on civil law contracts is expected to be introduced in January 2017. However, certain features of the Labour Code create disincentives for employers to hire people on open-ended contracts and the use of these contracts remains limited. This is predominantly due to the complexity of labour regulation and the high implicit costs of dismissals under such contracts. These include high procedural costs, costs associated with lengthy and uncertain dispute resolution mechanisms and provisions such as the special protection of older workers from layoffs.

               (12)

               Preferential sector-specific social security arrangements, in particular the highly subsidised pension systems for farmers and miners, have high budgetary costs and may contribute to reducing labour mobility. The number of insured persons under the special security system for farmers has been slowly decreasing since 2007, and the Government expects that in 2019 it will amount to 1,18 million people, while the number of retirement beneficiaries, which amounts to 1,229 million, will probably grow until 2018. Since 2011, the share of state budget expenditure for KRUS in GDP has been constant at 1 %. There is no general tax requirement for the farmers or an obligation to have an accounting system, and the self-financing of KRUS is low. There were 1,382 million farms in Poland in 2014 of which 52 % under 5 ha (GUS). Miners are exempt from the general defined-contribution public pension system with special preferential pension multiplier coefficients, which is a significant yearly cost to the public finances of over 0,5 % of GDP. The unfavourable demographic outlook has already translated into a declining working-age population. Preserving the positive trend in employment, especially of older workers, is therefore essential, also with a view to preserving public pension system adequacy and sustainability. Although the average effective retirement age increased in recent years, it remains significantly below the statutory retirement age. Therefore, an increase in the effective retirement age is crucial for the longer-term social adequacy of future pensions and the stability of public finances, as well as to increase labour market participation.

               (13)

               Despite sizeable investment in recent years, bottlenecks and deficiencies in transport, energy and communication networks persist. Investment activity is hampered by barriers in relation to the functioning of the public administration, taxation, the environment for research, development and innovation activities, and lengthy contract enforcement. Weaknesses in managerial and administrative capacity have a negative effect on the timely implementation of investment projects in the railway sector and other transport, energy and telecommunication infrastructure projects. The Polish economy is still energy- and carbon-intensive, and the potential gains from improving energy efficiency are significant. Electricity generation facilities are ageing and remain heavily dependent on coal. The power network is insufficiently connected to neighbouring countries. The renewable energy support scheme, which was meant to take effect on 1 January 2016, has been delayed, creating investment uncertainty. Key factors hampering investments, in particular in construction, are very low coverage of and instability in spatial planning, especially at the local level, as well as over-regulation and regulatory and administrative inconsistencies that impede the issuing of construction permits.

               (14)

               In the context of the European Semester, the Commission has carried out a comprehensive analysis of Poland's economic policy and published it in the 2016 country report. It has also assessed the Convergence Programme and the National Reform Programme and the follow-up to the recommendations addressed to Poland in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Poland but also their compliance with EU rules and guidance, given the need to strengthen the EU's overall economic governance by providing EU-level input into future national decisions. The recommendations under the European Semester are reflected in recommendations (1) to (3) below.

               (15)

               In the light of this assessment, the Council has examined the Convergence Programme, and its opinion (4) is reflected in particular in recommendation (1) below,

         HEREBY RECOMMENDS that Poland take action in 2016 and 2017 to:

               1.

               Achieve an annual fiscal adjustment of 0,5 % of GDP towards the medium-term budgetary objective in 2016 and in 2017. Strengthen the fiscal framework, including by establishing an independent fiscal council. Improve tax collection by ensuring better VAT compliance, and limit the extensive use of reduced VAT rates.

               2.

               Ensure the sustainability and adequacy of the pension system and increase participation in the labour market, by starting to reform the preferential pension arrangements, removing obstacles to more permanent types of employment and improving the labour market-relevance of education and training.

               3.

               Take measures to remove obstacles to investment in transport, construction and energy infrastructure, and increase the coverage of spatial planning at local level.

      Done at Brussels, 12 July 2016.

            For the Council

            The President

         P. KAŽIMÍR

      (1)  OJ L 209, 2.8.1997, p. 1.

      (2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

      (3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

      (4)  Under Article 9(2) of Regulation (EC) No 1466/97.