               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 528 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2018-2019 Convergence Programme of the United Kingdom

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2018-2019 Convergence Programme of the United Kingdom

               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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify the United Kingdom as one of the Member States for which an in-depth review would be carried out.

               (2)The 2019 country report for the United Kingdom
                  2
                was published on 27 February 2019. It assessed the United Kingdom’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and the United Kingdom's progress towards its national Europe 2020 targets.

               (3)On 23 April 2019, the United Kingdom submitted its 2019 National Reform Programme and its 2018-2019 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (4)On 29 March 2017, the United Kingdom notified the European Council of its intention to leave the European Union. When the United Kingdom leaves the European Union, it will become a third country. As there is uncertainty over the date and terms of the United Kingdom’s withdrawal, as well as the United Kingdom’s future relations with the EU, this document does not speculate on the possible economic implications of different scenarios. In the instance that the United Kingdom leaves the European Union on the basis of the Withdrawal Agreement, which has been agreed by the government of the United Kingdom and which the European Council (Article 50) endorsed on 25 November 2018, Union law, including the European Semester, will continue to apply to and in the United Kingdom, for the duration of the transition period established by that Agreement.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  4
               .

               (6)The United Kingdom is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule until 2019-2020. In its 2018-2019 Convergence Programme, the government expects the headline deficit to increase from 1.2% of GDP in 2018-2019 to 1.4% of GDP in 2019-2020 and to fall to 1.1% of GDP in 2020-2021. The Convergence Programme does not include a medium-term budgetary objective. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to fall from 85.5% in 2018-2019 to 83.3% in 2019-2020 and to 82.9% of GDP in 2020-2021. The macroeconomic scenario underpinning those budgetary projections is plausible. While the measures needed to support the planned deficit targets are overall well specified, growing pressures on government expenditure
                  5
                in a number of areas pose a risk to the achievement of the planned deficit path.

               (7)On 13 July 2018, the Council recommended the United Kingdom to ensure that the nominal growth rate of net primary government expenditure does not exceed 1.6% in 2019-2020, corresponding to an annual structural adjustment of 0.6% of GDP. Based on the Commission 2019 spring forecast, there is a risk of a significant deviation from the requirements of the preventive arm in 2019-2020.

               (8)In 2020-2021, in view of the United Kingdom's general government debt ratio above 60% of GDP and projected output gap of 0.3%, the nominal growth rate of net primary government expenditure should not exceed 1.9%, in line with the structural adjustment of 0.6% of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Under unchanged policies, there is a risk of a significant deviation from the requirement in 2020-2021. The United Kingdom is projected to comply with the transitional debt rule in 2019-2020, as a result of the allowed annual deviation of 0.25%, and with the debt rule in 2020-2021. Overall, the Council is of the opinion that the United Kingdom needs to stand ready to take further measures as of 2019-2020 to comply with the provisions of the Stability and Growth Pact.

               (9)The United Kingdom has long been the G7 economy with the lowest capital investment as a share of GDP. Investment also fell particularly sharply in the financial crisis, and a post-crisis recovery in private investment has stalled. The United Kingdom’s research and development investment intensity has been around 1.7% of GDP for the past decade, below the EU average. Research and development investment is concentrated in a limited number of companies and regions. These broad-based shortfalls in both physical and human capital are a root cause of the United Kingdom's relatively low and stagnant labour productivity.

               (10)The United Kingdom has a persistent housing shortage. A post-crisis recovery in house building has lost momentum. Capacity constraints are emerging while residential construction remains below what is required to meet estimated demand. House prices and rents remain high, especially in areas of high housing demand, with signs of overvaluation. Significantly fewer young adults now own their own homes. The government is implementing a range of measures to boost housing supply. At the same time, the amount and location of land available for new housing remains limited by tight regulation of the land market, particularly around big towns and cities.

               (11)Major investment is needed to modernise and expand infrastructure networks while bringing down project costs and greenhouse gas emissions. There are growing capacity pressures in road, rail and aviation networks. The United Kingdom needs to deliver significant new and greener energy generation and supply capacity. The United Kingdom’s infrastructure development has tended to be costly and slow. After decades of public under-investment, the government is starting to deal with the infrastructure deficit, but it will be challenging to secure the amount of outside funding required in the government’s projections in a cost effective manner.

               (12)Although unemployment is low, real wages remain below their pre-crisis peak. The high proportion of low-skilled employees has limited career progression prospects, weighing on productivity and contributing to high levels of in-work poverty. There is scope to improve the effectiveness of the education and training systems in basic and technical skills. The government is making reforms to both classroom and work-based training, but overall registrations for the new twin-track system are far fewer than expected.

               (13)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of the United Kingdom’s economic policy and published it in the 2019 country report. It has also assessed the 2018-2019 Convergence Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to the United Kingdom in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the United Kingdom, but also their compliance with Union rules and guidance. This reflects the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (14)In the light of this assessment, the Council has examined the 2018-2019 Convergence Programme and its opinion
                  6
                is reflected in particular in recommendation (1) below.

               HEREBY RECOMMENDS that the United Kingdom take action in 2019 and 2020 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 1.9% in 2020-2021, corresponding to an annual structural adjustment of 0.6% of GDP.

               2.Focus investment-related economic policy on research and innovation, housing, training and improving skills, sustainable transport and low carbon and energy transition, taking into account regional diversity.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1027 final.

                     (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)

                        COM(2014) 494 final.

                     (5)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (6)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 527 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Sweden and delivering a Council opinion on the 2019 Convergence Programme of Sweden

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Sweden and delivering a Council opinion on the 2019 Convergence Programme of Sweden

               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 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
                  2
               , and in particular Article 6(1) 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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Sweden as one of the Member States for which an in-depth review would be carried out.

               (2)The 2019 country report for Sweden
                  3
                was published on 27 February 2019. It assessed Sweden’s progress in addressing the country-specific recommendation adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Sweden's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that Sweden is experiencing macroeconomic imbalances. In particular, overvalued house price levels coupled with a continued rise in household debt poses risks of a disorderly correction. The high household debt has continued to grow as a share of GDP. There was a correction of house prices in the second half of 2017 and since then they have gradually stabilised. Nevertheless, valuation indicators suggest that house prices remain high relative to fundamentals. Although the banking sector appears adequately capitalised, a disorderly correction would negatively affect the financial sector given the large exposure to household mortgages. In such a case, there could also be negative spill-overs to neighbouring countries given the systemic financial interlinkages. Structural bottlenecks for housing supply persist and construction output has weakened. Although steps have been taken in recent years in the macro prudential field to address mortgage debt growth, the impact so far appears limited. Key policy gaps remain, particularly in relation to tax incentives for home ownership and the functioning of housing supply and the rental market.

               (3)On 26 April 2019, Sweden submitted its 2019 National Reform Programme and, on 29 April 2019, its 2019 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 ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (5)Sweden is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Convergence Programme, the government plans to achieve a surplus of 0.6% of GDP in 2019, which is expected to strengthen further over the programme horizon. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective — a structural deficit of 1% of GDP — is planned to be overachieved throughout the programme period. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to fall to 34.5% in 2019 and to continue declining to 28.2% in 2022. Sound public finances and a stable economic growth are set to be the main drivers behind the declining general government debt-to-GDP ratio. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0.5% of GDP in 2019 and 0.6% of GDP in 2020, above medium-term budgetary objective. Overall, the Council is of the opinion that Sweden is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (6)Household debt has continued to rise from already high levels. Household debt grew by 5.5% in 2018, reaching about 88% of GDP and 186% of disposable income, which is among the highest in the EU. This was driven mainly by higher mortgage borrowing linked to high house prices, coupled with structural distortions favouring mortgage-financed property purchases. Sweden has implemented several macro-prudential measures in recent years, including a strengthened repayment rule for high debt-to-income mortgages in force since March 2018, and a decision to raise the countercyclical capital buffer for banks from September 2019. However, the policy steps taken so far appear to have had limited overall impact on the growth of mortgage lending and no policy action has been taken to reform the tax incentives for home ownership and mortgage debt.

               (7)While house prices declined in late 2017 and have since been broadly stable, this follows a long period of strong price rises, and valuations remain well above economic fundamentals. Key issues include tax incentives favouring home ownership and mortgage debt, and accommodative credit conditions coupled with still relatively low mortgage repayment rates. Despite a significant increase in new construction over the past five years, a shortage remains, particularly of affordable homes around major cities. New housing supply failed to reach projected near-term needs, estimated at about 90 000 new homes per year for 2018-2020. This shortage is linked to structural inefficiencies, such as limited competition in the construction sector due to barriers to entry for small and foreign firms and the ability of large developers to control land resources. The housing stock is not used efficiently. In the rental market, below-market rents create lock-in and ‘insider/outsider’ effects. In the owner-occupancy market, capital gains taxes reduce homeowner mobility. The housing shortage makes it harder for people to change jobs and can contribute to intergenerational inequality. The Swedish authorities are continuing to gradually implement the ‘22-point plan’ to increase residential construction and improve the efficiency of the housing sector. So far, there have been no concrete policy steps to liberalise tight rental market regulations and revise the capital tax on owner-occupied homes, although in January 2019 the new government announced plans to introduce reforms in these areas, subject to preparatory inquiry work.

               (8)Labour shortages are emerging in some sectors, such as in construction, education and information and communication technologies. Ensuring a supply of specialist human capital is vital to support research and development investment as well as digitalisation. Investing in education and skills, including digital skills, will help to address those challenges. So far, the educational outcomes have improved somewhat, but there is a large and increasing educational performance gap between different social groups. Demographic developments will lead to an increase in the number of pupils, exacerbating the present shortage of teachers. The situation of non-EU migrants and their descendants and the effects of recently adopted programmes deserve closer monitoring, as the school integration of foreign-born pupils, and the sustainable inclusion of the low-skilled and non-EU migrants (in particular women) into the labour market remain a challenge.

               (9)Maintaining investments in transport infrastructure can contribute to improved labour mobility, regional cohesion and housing market and foster Sweden's long-term productivity growth. The government has announced considerable investments in transport infrastructure through the national plan for infrastructure 2018-2029 to upgrade the different transport modes (in particular railway and road). The plan contains major investments to develop the railway system, promoting the switch in goods transport from roads to railways, thus also helping to reduce emissions. Maintaining high levels of investment in research and development, favourable framework conditions and a broader innovation base are key to securing Sweden's position as innovation leader. Sweden's innovation model has traditionally relied on a limited number of large, globally active, technology companies. It would be important to create an environment that also nurtures the innovation potential of SMEs and start-ups. Sweden's innovation capacity could also be further improved by increased collaboration between academia and SMEs.

               (10)Preventing money laundering has become a priority for Sweden against the background of an evolving money laundering scandal related to one of the largest financial institutions in the country. The Swedish and Estonian financial supervisors have started a joint investigation, together with their Latvian and Lithuanian counterparts. While Sweden’s anti-money laundering framework has been strengthened in 2017, when the money laundering act entered into force, continued work to identify and correct any remaining deficiencies of the framework remain important. Challenges remain and the supervisor still needs to adopt additional measures and guidelines on how to strengthen supervision in this area. Attention should be paid to the effective implementation of these measures, once adopted.

               (11)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  8
               . This would allow Sweden to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (12)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Sweden’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Sweden in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Sweden, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (13)In the light of this assessment, the Council has examined the 2019 Convergence Programme and is of the opinion that Sweden is expected to comply with the Stability and Growth Pact.

               (14)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (1) below.

               HEREBY RECOMMENDS that Sweden take action in 2019 and 2020 to:

               1.Address risks related to high household debt by gradually reducing the tax deductibility of mortgage interest payments or increasing recurrent property taxes. Stimulate investment in residential construction where shortages are most pressing, in particular by removing structural obstacles to construction. Improve the efficiency of the housing market, including by introducing more flexibility in rental prices and revising the design of the capital gains tax.

               2.Focus investment related economic policy on education and skills, maintaining investment in sustainable transport to upgrade the different transport modes, in particular railways, and research and innovation, taking into account regional disparities.

               3.Ensure effective supervision and the enforcement of the anti-money laundering framework.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2019) 1026 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

                        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).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (8)

                        SWD(2019) 1026 final.


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 502 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Bulgaria and delivering a Council opinion on the 2019 Convergence Programme of Bulgaria

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Bulgaria and delivering a Council opinion on the 2019 Convergence Programme of Bulgaria

               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 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
                  2
               , and in particular Article 6(1) 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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Bulgaria as one of the Member States for which an in-depth review would be carried out.

               (2)The 2019 country report for Bulgaria
                  3
                was published on 27 February 2019. It assessed Bulgaria’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Bulgaria's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that Bulgaria is experiencing macroeconomic imbalances. In particular, vulnerabilities in the financial sector are coupled with high indebtedness and non-performing loans in the corporate sector. While there is progress in addressing sources of the imbalances, the full implementation and monitoring of recent reforms of supervision and governance in the bank and non-bank financial sectors will be crucial.

               (3)On 24 April 2019, Bulgaria submitted its 2019 National Reform Programme and its 2019 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 ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (5)Bulgaria is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Convergence Programme, the government, starting from a headline surplus of 2% of GDP in 2018, aims at a deficit of 0.3% of GDP in 2019, a surplus of 0.4% of GDP in 2020, 0.2% in 2021 and 0.1% in 2022. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective — a structural deficit of 1% of GDP in structural terms — continues to be overachieved throughout the programme period. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to decline gradually from 22.6% of GDP in 2018 to 16.7% in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0.7% of GDP in 2019 and 0.6% of GDP in 2020, above the medium-term budgetary objective. Overall, the Council is of the opinion that Bulgaria is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (6)Tax revenues and tax compliance are improving and a number of initiatives are in place. However, tax collection does not seem to be improving everywhere at the same pace. This is particularly the case for labour-related taxes and social security contributions and in some categories of excise taxes. There is also evidence that undeclared work and illicit trade in fuels remains a challenge. Maintaining the efforts to improve tax collection and taking additional targeted measures to face the challenges in specific areas of the tax system is of paramount importance for reducing further the still large shadow economy.

               (7)The government has taken steps to improve the effectiveness of public expenditure. The World Bank completed a spending review covering a number of public institutions (ministries and municipalities) and two pilot studies, on policing and firefighting and waste water, and delivered a manual for future reviews by the government. In the 2018 medium-term fiscal strategy, the government introduced a number of new performance indicators to assess the impact of spending in the different policy areas over time and to inform evaluation and planning of the budget. Following up on these initiatives is expected to raise the quality, efficiency and transparency of public spending, and consequently the quantity and quality of public goods.

               (8)State-owned enterprises suffer from weak corporate governance, which is also to a large extent reflected in their economic performance. A reform of the legal framework for the corporate governance of state-owned enterprises is under way in cooperation with the Organisation for Economic Co-operation and Development (OECD) and with the support of the European Commission’s Structural Reform Support Service. The reform aims to address the current weaknesses by aligning the national legislation with the OECD’s corporate governance guidelines for state-owned enterprises. The adoption and effective implementation of the framework will ensure the continuity and will be critical for the success of the reform.

               (9)In a favourable economic environment, banks’ capital and liquidity ratios improved on average. In parallel, non-performing loans by non-financial corporations declined, although they remain high. While the secondary market for non-performing loans has become more dynamic, no specific policy measures have been undertaken to that effect. The follow-up measures resulting from the financial sector reviews have strengthened the banking sector, but some vulnerabilities remain. New regulatory initiatives in 2018 included the rules for large exposures and the identification of connected clients, an increase in the counter-cyclical capital buffer rate and the introduction of macroprudential tools for borrower-based measures. Following up on legislative initiatives on related-party exposures, sustained supervisory efforts to limit loans to related parties and penalise infringements of collateral provisions are crucial to support sound business practices. Enhancing the bank resolution framework is another pending measure that will contribute to the resilience of the financial sector.

               (10)Completing the insolvency reform could help reduce the high outstanding private sector debt and the still high share of non-performing loans. Some missing elements reduce the efficiency and effectiveness of the insolvency framework, resulting in slow and costly insolvency proceedings. At the same time, the absence of adequate monitoring tools prevents a proper analysis of current and new pre-insolvency and insolvency procedures and does not allow concrete bottlenecks or weak points to be identified. In October 2018, Bulgaria asked for assistance from the European Commission's Structural Reform Support Service to help it advance the reform of the insolvency framework. This project identifies gaps in the insolvency framework and will produce a roadmap to address them. It is important to sustain the reform momentum and implement the forthcoming roadmap.

               (11)Bulgaria has adopted legislative amendments in 2018 and is working towards a fully conform transposition of the Directive 2015/849 (Fourth Anti-Money Laundering Directive). Attention should be paid to the effective implementation of these measures. The authorities have still not finalised and notified the National Risk Assessment, which is a cornerstone to devising adequate national policies to combat money laundering and terrorist financing. Moreover, recent developments in the banking sector suggest that there is need to enhance the national supervision of international financial transactions and to ensure the effective enforcement of the anti-money laundering framework. The risk of corruption needs to be better addressed, as it is a predicate offence to money laundering. The Bulgarian authorities will need to show concrete results and build a track record evidenced by final decisions in high level corruption cases. The use of financial investigation and financial profiling is limited.

               (12)Non-bank supervision is being reformed. The Financial Supervision Commission adopted an action plan for reforming non-bank financial supervision in September 2017, in cooperation with the European Insurance and Occupational Pensions Authority. The full and timely implementation and enforcement of the action plan, still ongoing, will contribute to adequate supervision of the non-banking financial sector. Amendments to secondary legislation are in place, aiming to improve the valuation rules and their application. Their effective implementation and enforcement would address remaining valuation issues that have been identified in the past. Lastly, group-level supervision remains a challenge for ensuring an adequate risk-based insurance supervision.

               (13)The car insurance sector presents some vulnerabilities. Well-specified rules on compensation would facilitate a more harmonised approach by judges when deciding on individual cases. In the longer term, such a methodology would help to reduce costs, volatility and underwriting risk in the motor third-party liability line of business. The sustainability of the sector would also benefit from improved pricing that takes into account clients' driving history. The Financial Supervision Commission has proposed a bonus-malus system, which is undergoing broad public debate with an uncertain outcome. Lastly, the liquidity of the ‘Green Card Bureau’ has raised substantial concerns, mainly due to the non-payment of claims by two Bulgarian insurers. Strict compliance of all members with their obligations is crucial for the credibility and efficiency of the system.

               (14)Infrastructure suffers from major investment gaps. The coverage and quality of transport infrastructure have improved but remain below the EU average. The Trans-European Transport Network in Bulgaria is still incomplete. Moreover, greenhouse gas emissions from road transport have increased strongly over the last 5 years. There is a need for further development of rail and road sections and the respective European rail traffic management systems and intelligent transport systems. Bulgaria has low connection and treatment rates for urban waste water, high air pollution levels and landfilling rates for municipal waste and a recycling rate, considerably lower than the EU average. Investments to promote sustainable water management, resource efficiency and the transition to a circular economy are necessary. In addition, investment needs in the fields of energy and climate change mitigation and adaptation are significant. The high energy intensity of the economy and the slow progress towards meeting energy efficiency targets, in particular in the buildings sector, are holding back the productivity and competitiveness of businesses in the country. Efforts thus need to be stepped up to ensure that significant energy savings are achieved via targeted investments in the industrial, transport and buildings sectors. Increased investments in clean energy infrastructure (such as clean and low-carbon power generation, interconnections, and smart grids), in line with the priorities outlined in Bulgaria’s draft national climate and energy plan, would further help improve the economy’s overall competitiveness and people's quality of life.

               (15)Despite an increase in the public research budget in 2018, research and development spending remains very low in both private and public sector. Private research and development investment is dominated by large multinational companies and concentrated in the capital region. The slow pace of implementing reforms and high fragmentation in the research, development and innovation system hampers the contribution of research and development investment to productivity and growth. The large number of universities and research institutes continue to perform poorly in high quality scientific research. Science-business links remains very weak and the availability of human capital in the research and development system is a source of significant concern. Clusters and their potential in Bulgaria are underdeveloped as they often lack a critical mass. Further reforms, combined with efficient governance and more effective public investment can maximise the impact on productivity and improve the competitiveness of the economy. In addition, increasing the digitisation of companies and introducing new business models are critical for the country’s productivity.

               (16)Public administration and e-government reforms continue to be slow and are yielding insufficient improvements while the business environment remains weak. A number of reform measures have been adopted, but their practical implementation is lagging behind. Institutional shortcomings, regulatory uncertainty, corruption, and an insufficient labour supply remain among the main obstacles to investment. Governance in the public sector could benefit from more transparency, clearer rules and a long-term perspective. Shortcomings are also apparent in the area of product testing and safety due to limited financial and human resources. Moreover, while the vast majority of measures included in the national procurement strategy have been adopted, their implementation requires continuous monitoring, control and assessment. The frequent use of direct awards and the high number of single bids represent a threat to the system's transparency and effectiveness. The public procurement sector's administrative capacity is an ongoing challenge, as are also the professionalisation of public buyers and aggregated purchases. The significant delay in the uptake of electronic procurement is preventing further improvement in the transparency and efficiency of public procurement processes.

               (17)The labour market has improved but challenges remain. The employment rate has reached the highest level since Bulgaria joined the EU and the unemployment rate is below the EU average. Despite these positive developments, some groups such as the low-skilled, young people, Roma and people with disabilities still face difficulties to find work. Specific measures are being implemented to support the long-term unemployed, who represent 3 % of the active population in 2018. A combination of effective and sustained outreach measures, active labour market policies and integrated employment and social services could improve disadvantaged groups' employability and chances of finding work.

               (18)Bulgaria's increasing skills shortages warrant significant investments. Young people might be more employable if the quality and effectiveness of traineeships and apprenticeships were improved. Moreover, the participation in upskilling and reskilling measures among the adult population is very low. Despite measures launched to encourage the development of digital skills, Bulgaria's level of basic digital skills (29% of individuals possess basic digital skills against an EU average of 57%) remains among the lowest in the EU.

               (19)Despite the ratification of the International Labour Organization's Convention concerning Minimum Wage Fixing and of several rounds of negotiations during 2018, employers and trade unions still have diverging views on the criteria to be applied when setting the minimum wage. There is scope for greater consensus about an objective and transparent wage setting mechanism. Meanwhile, although the involvement of the social partners in the design and implementation of policies and reforms seems to have increased, continuous support for a reinforced social dialogue remains necessary.

               (20)Educational outcomes are still low and continue to be strongly influenced by parents' socio-economic status. This reflects challenges relating to the quality and inclusiveness of the education and training system. Bulgaria invests insufficiently in education, particularly in pre-primary and primary education, two areas that are instrumental to creating equal opportunities from an early age. Participation in quality early childhood education and care is low, in particular for Roma and children from other disadvantaged groups. The rate of early school leaving is still high, with negative consequences for future employability and labour market outcomes. The labour market relevance of vocational education and training and the availability of dual vocational education and training remain insufficient. While some measures are underway, further efforts are needed to ensure that the skill set of higher education graduates can address short- and mid-term skills shortages in a consistent way. Some measures to retrain teachers and make the profession more attractive have been put in place. However, initial and continuous education programmes for teachers require further strengthening and efforts are still needed to improve the working conditions of education staff.

               (21)Bulgaria is still facing high income inequality and risk of poverty or social exclusion. Though decreasing, the rate of poverty or social exclusion in 2018 was 32.8 %, still well above the EU average. The social security system does not cover all people in employment and the social protection system is insufficient to tackle the significant social issues. This reflects the low level of social spending, the uneven availability of social services across the territory and the limited redistributive effects of the taxation system. In 2018, the income of the richest 20 % of population was 7.7 times higher than that of the poorest 20 %, still one of the highest in the EU. Despite some measures, the adequacy and coverage of the minimum income remain limited and an objective mechanism for regularly updating it is still missing. Social services are hampered by low quality and lack of an integrated approach towards active inclusion. Disparities in access to social services, healthcare and long-term care persist. This undermines their ability to provide comprehensive support for the most vulnerable, such as the Roma, children, the elderly, persons with disabilities and people living in rural areas. Part of the population has difficulty getting access to affordable housing. More efforts are therefore needed to foster active inclusion, promote the socio-economic integration of vulnerable groups including the Roma, enhance access to quality services and address material deprivation.

               (22)The healthcare sector is still characterised by low public spending. People in Bulgaria face limited access to healthcare caused by an uneven distribution of limited resources and low health insurance coverage. Out-of-pocket payments are considerable, as they need to compensate for the low level of public expenditure. The low availability of general practitioners is constraining the delivery of primary care. There is a significant shortage of nurses with the number per capita among the lowest in the EU. Swifter and more effective implementation of the national health strategy would help tackle these weaknesses.

               (23)Under the Cooperation and Verification Mechanism, the Commission continues to monitor the judicial reform and the fight against corruption and organised crime in Bulgaria. These areas are therefore not covered in the country-specific recommendations for Bulgaria, but are relevant for the development of a positive business environment in the country. The November 2018 Cooperation and Verification Mechanism report noted that Bulgaria had continued its efforts to reform its judiciary and address shortcomings in the fight against corruption and organised crime, but that further efforts were needed in a number of areas. The Commission expects to assess progress again in early autumn 2019.

               (24)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  8
               . This would allow Bulgaria to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

               (25)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Bulgaria’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Bulgaria in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Bulgaria, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (26)In the light of this assessment, the Council has examined the 2019 Convergence Programme and is of the opinion that Bulgaria is expected to comply with the Stability and Growth Pact.

               (27)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (2) below.

               HEREBY RECOMMENDS that Bulgaria take action in 2019 and 2020 to:

               1.Improve tax collection through targeted measures in areas such as fuel and labour taxes. Upgrade the state-owned enterprise corporate governance by adopting and putting into effect the forthcoming legislation.

               2.Ensure the stability of the banking sector by reinforcing supervision, promoting adequate valuation of assets, including bank collateral and promoting a functioning secondary market for non-performing loans. Ensure effective supervision and the enforcement of the Anti-Money Laundering framework. Strengthen the non-banking financial sector by effectively enforcing risk-based supervision, the recently adopted valuation guidelines and group-level supervision. Implement the forthcoming roadmap tackling the gaps identified in the insolvency framework. Foster the stability of the car insurance sector, by addressing market challenges and remaining structural weaknesses.

               3.Focus investment-related economic policy on research and innovation, transport, notably on its sustainability, water, waste and energy infrastructure and energy efficiency, taking into account regional disparities, and improving the business environment.

               4.Strengthen employability by reinforcing skills, including digital skills. Improve the quality, labour market relevance, and inclusiveness of education and training, in particular for Roma and other disadvantaged groups. Address social inclusion through improved access to integrated employment and social services and more effective minimum income support. Improve access to health services, including by reducing out-of-pocket payments and addressing shortages of health professionals.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2019) 1001 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

                        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).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (8)

                        SWD(2019) 1001 final.


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 515 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Lithuania and delivering a Council opinion on the 2019 Stability Programme of Lithuania

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Lithuania and delivering a Council opinion on the 2019 Stability Programme of Lithuania

               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(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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Lithuania as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Lithuania should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (2) and (3) below. In particular, investment measures will help address the second euro area recommendation as regards supporting investment and education measures will help address the third euro area recommendation as regards the functioning of the labour market.

               (3)The 2019 country report for Lithuania
                  2
                was published on 27 February 2019. It assessed Lithuania’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Lithuania's progress towards its national Europe 2020 targets.

               (4)On 10 May 2019, Lithuania submitted its 2019 National Reform Programme and, on 30 April 2019, its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  4
               .

               (6)Lithuania is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans to achieve a headline surplus of 0.4% of GDP in 2019 and 0.2 in 2020, before it is projected to decrease further to 0.1% of GDP in 2021. Based on the recalculated structural balance
                  5
               , the medium-term budgetary objective, set at a deficit of 1% of GDP in structural terms, is overachieved throughout the programme period. In 2017, Lithuania was also granted a temporary deviation linked to the implementation of the structural reforms. This deviation is carried forward for a period of three years. According to the 2019 Stability Programme, the general government debt-to-GDP ratio is expected to fall from 34.2% of GDP in 2018 to 32.9% in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned surplus targets from 2020 onwards have not been sufficiently specified. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a deficit of 1% of GDP in 2019 and 0.9% of GDP in 2020, in compliance with the medium-term budgetary objective. At the same time, expenditure developments should be monitored carefully in the short and the medium term, especially in light of possible future risks to the robustness of revenues. Overall, the Council is of the opinion that Lithuania is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (7)In June 2018, the government adopted a set of legislative acts to implement a comprehensive package of six structural reforms covering the key areas of education, health, taxation, informal economy, pensions and innovation.

               (8)Lithuania has continued to take measures to combat the shadow economy and improve tax compliance. While these measures have shown encouraging results, overall tax compliance remains low. Lithuania still has one of the largest VAT gaps in the EU. Further increasing tax compliance would raise revenues and make the tax system more fair. No measures were taken to broaden the tax base to sources less detrimental to growth. Environmental and property taxes remain below the European Union average and there are no changes envisaged to car taxation or the road-use tax for private passengers.

               (9)Since 2018, public pensions are automatically indexed to the wage bill growth. This is expected to reduce public pension expenditure from 6.9% of GDP in 2016 to 5.2% in 2070.  However, due to the projected fall in employment, pension adequacy is set to decrease because pension benefits would not keep pace with wage growth. The pension benefit ratio – which expresses the average pension in terms of the average wage – is expected to steadily decline from what is already one of the lowest levels in the Union. Current legislation states that when the benefit ratio declines, the government needs to propose corrective measures. Due to uncertainty over the precise nature and timing of such future measures, they are not accounted for in the Ageing Report projections. They do, however, represent a risk to the sustainability of public finances. If the total benefit ratio were kept unchanged until 2070, pension expenditure would increase to 7% of GDP instead of decreasing to 5.2% as projected. There is, therefore, uncertainty about how pension legislation will be applied in practice and what its consequences would be for fiscal sustainability and pension adequacy over time.

               (10)The high proportion of people at risk of poverty or social exclusion, together with high income inequality, remain major challenges for Lithuania that hinder its prospects for inclusive economic growth. Despite continued economic growth, many members of Lithuanian society (e.g. the elderly, people with disabilities, children, single-parent households and the unemployed) face a particularly high risk of poverty and social exclusion. While the social safety net has been improved in recent years, the overall corrective power of the Lithuanian tax and benefit system and social protection expenditure as a share of GDP remain among the lowest in the European Union. Some first steps were taken to address the high level of poverty and income inequality, such as the introduction of the ‘amount of minimum consumption needs’, the increase in the universal child benefit and the indexation of old-age pensions. However, the persistently high levels of poverty and inequality show that the country still has a long way to go to converge towards the European Union average levels of social security and that investment to address social exclusion is needed. Active inclusion strategies for vulnerable groups are more effective when they combine better adequacy of minimum income and pension schemes, labour market activation and enhanced provision of social services, including childcare and social housing.

               (11)The labour market has become tight as a result of employment growth, but also due to adverse demographic developments, including emigration. To mitigate the effect of the shrinking working-age population, investment in human capital and enhanced access to the labour market for all are needed. In the face of the persistent skills’ shortages and mismatches, it is important that Lithuania speeds up the reforms to improve the quality and efficiency at all education levels and ensures equitable access to quality and inclusive education and training. Demographic decline has put the school network under pressure. The demographic shift calls for strategies to preserve access to high-quality education for all while ensuring the efficiency of the school network and supporting teachers affected by school consolidation. Significant steps are still required to consolidate the higher education network, comprising more than 40 state-owned and private universities and colleges. Vocational education and training providers need to modernise the curricula as well as improve their responsiveness to the needs of local and regional labour markets. Effective and easily accessible adult learning, re-skilling and upskilling measures, together with the provision of social services, could bring more people into the labour market. Participation in adult learning remains low, at 6.6% in 2018, well below the EU average of 11.1%. The Lithuanian economy has potential to benefit from investment in skills upgrading, including digital skills, innovation and better integration of the disadvantaged into the labour market (for example persons with disabilities, and older, unemployed or inactive adults). In a broader context, strengthening the capacity of the social partners is important to foster their engagement.

               (12)Weak health outcomes and low investment in healthcare are persisting challenges. There remains significant potential to rationalise the use of resources through a further shift from inpatient to outpatient care. The consumption of hospital services continues to be high, with high rates of hospitalisations for chronic diseases coupled with relatively low bed occupancy rates. Further rationalisation of hospital resources use, together with targeted investments to strengthen primary care services, including in the healthcare workforce, are necessary to drive efficiency gains and improve health outcomes. The quality of care remains one of the main reasons for poor health outcomes. Measures to improve the quality of care are fragmented, with very low take-up of accreditation in the primary care sector and a lack of application of the accreditation system in hospitals. Investment in disease prevention measures is particularly low. Moreover, steps taken to strengthen disease prevention measures at local level lack an overarching vision and are impaired by a lack of systemic co-operation between public health offices and primary care. Lastly, low levels of health spending coupled with relatively high informal payments and high out-of-pocket payments have negative implications for equity of access to healthcare.

               (13)Some measures have been taken in the fight against corruption, but an integrated registry of interest declarations is still missing. Implementing legislation to the whistleblowers' protection law was adopted in 2018, and a new law regulating lobbying is under discussion. Irregularities persist in addressing corruption in the healthcare system.

               (14)Investment as a share of GDP in Lithuania remains below both the averages in the EU and in other Baltic countries. The level of innovation and the technology absorption capacity of businesses in Lithuania is low. Higher investment levels in research and innovation are needed, especially in the private sector. This would boost productivity, which, despite a recent pick-up, remains well below the EU level. The shortage of information and communication technology specialists points to the need to invest in digital skills which support competitiveness, innovation and Lithuania’s capacity to absorb technology, and foster the shift toward more knowledge-based and higher value added economy.

               (15)The economy is relatively resource-intensive, with high dependency on imports of energy and materials. Resource productivity is low while energy consumption is high, especially in the residential and transport sectors. More investment in energy efficiency, in particular in the buildings sector and domestic energy generation from renewable sources would help to 'green' the economy and put it on a more sustainable growth path, while also reducing dependency on energy imports.

               (16)Lithuania still suffers from low international accessibility in terms of rail, road, maritime and air transport and needs to be integrated further with the rest of Europe. Better transport connectivity would increase the economy's productivity and allow it to take full advantage of the single market. Transport sector performance is far below the EU average in terms of the extent of the TEN-T road and rail networks, research and innovation investment in the transport sector, sustainability aspects and road safety. Rail traffic is dominated by East-West flows, while the North-South axis remains underdeveloped. Significant investments are therefore needed to develop a sustainable, climate-resilient, smart, secure and intermodal TEN-T network and its accessibility, as well as to promote sustainable urban mobility. Moreover, greenhouse gas emissions from road transport have increased strongly the last 5 years. The synchronisation of Lithuania’s electricity system with the continental European network is key to ensuring the security of the electricity supply in the entire Baltic region.

               (17)Regional disparities in Lithuania are wider than the EU average and have been widening over the past two decades. The benefits of Lithuania's speedy economic convergence are heavily concentrated in the two metropolitan areas. Predominantly rural regions, which cover most of the territory and host nearly 55% of the population, are experiencing strong population declines compounded by decreasing access to quality public services. Significant socio-economic disparities within the country show that certain regions have distinct investment needs. Increasing links between adjacent territories within Lithuania, including transport and digital connections, also remains a challenge.

               (18)To improve the efficiency of public investment, the Lithuanian authorities updated the rules for preparing and selecting investment projects financed from the state budget. Since 2018 all new investment projects should be screened with a cost-benefit analysis and fulfil additional selection criteria. While this is an important first step, more is needed to maximise the impact of public investment on increasing the long-term growth potential and addressing growing regional disparities. The authorities have started the revision of the state budgeting system with the objective of lengthening the time horizon for budgeting and strengthening the link between expenditure and the overall economic goals. It is crucial to ensure that the new strategic investment planning system is ready for the 2021-2023 budgeting process and the start of the new EU funding cycle in 2021.

               (19)Lithuania has no single strategy for research and innovation. The landscape is characterised by fragmented policies and a proliferation of support schemes that lack synergies. The existence of several implementing agencies that do not take a concerted approach to supporting the research and innovation policy mix adds to a complex governance system that appears to restrict users' access to the panoply of available instruments. This state of affairs is particularly harmful for science-business cooperation and hampers innovative activity. The new division of responsibility for research and innovation policy between the Ministry of Economics and Innovation and the Ministry of Education and Science is not yet conducive to a coherent policy framework with synergetic support schemes, as would be available through a one-stop shop for potential beneficiaries.

               (20)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  6
               . This would allow Lithuania to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (21)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Lithuania’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Lithuania in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Lithuania, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (22)In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion
                  7
                that Lithuania is expected to comply with the Stability and Growth Pact.

               HEREBY RECOMMENDS that Lithuania take action in 2019 and 2020 to:

               1.Improve tax compliance and broaden the tax base to sources less detrimental to growth. Address income inequality, poverty and social exclusion, including by improving the design of the tax and benefit system.

               2.Improve quality and efficiency at all education and training levels, including adult learning. Increase the quality, affordability and efficiency of the healthcare system.

               3.Focus investment-related economic policy on innovation, energy and resource efficiency, sustainable transport and energy interconnections, taking into account regional disparities. Stimulate productivity growth by improving the efficiency of public investment. Develop a coherent policy framework to support science-business cooperation and consolidate research and innovation implementing agencies.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1014 final.

                     (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)

                        COM(2014) 494 final.

                     (5)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (6)

                        SWD(2019) 1014 final.

                     (7)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 516 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Luxembourg and delivering a Council opinion on the 2019 Stability Programme of Luxembourg

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Luxembourg and delivering a Council opinion on the 2019 Stability Programme of Luxembourg

               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(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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Luxembourg as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Luxembourg should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (4) below.

               (3)The 2019 country report for Luxembourg
                  2
                was published on 27 February 2019. It assessed Luxembourg’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Luxembourg's progress towards its national Europe 2020 targets.

               (4)On 30 April 2019, Luxembourg submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  4
               .

               (6)Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans a decrease in the headline surplus from 2.4% of GDP in 2018 to 1.0% of GDP in 2019, followed by an almost steady increase thereafter, reaching a surplus of 2.2% of GDP in 2023. Based on the recalculated structural balance
                  5
               , the medium-term budgetary objective – which has been changed from a structural deficit of 0.5% of GDP in 2019 to a surplus, in structural terms, of 0.5% of GDP as of 2020 – is overachieved throughout the programme period. According to the 2019 Stability Programme, the government debt-to-GDP ratio is expected to remain well below the 60% of GDP Treaty reference value. The macroeconomic scenario underpinning those budgetary projections is favourable throughout the period covered by the programme, except for 2023 when it is plausible. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0.9% of GDP in 2019 and 0.5% of GDP in 2020, lower, in particular for 2020, than in the 2019 Stability Programme, but still above or in line with the medium-term budgetary objective. At the same time, expenditure developments should be monitored carefully in the short and the medium term, especially in light of possible future risks to the robustness of revenues. Overall, the Council is of the opinion that Luxembourg is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (7)In spite of recent reforms, Luxembourg’s age-related spending (pension-related, healthcare and long-term care costs) is expected to increase markedly in the long term. Assuming no policy changes are made to the current system, this could put at risk the sustainability of public finances in the long term. This is despite the current low level of public debt and the accumulated reserves of the social security system, which are expected to ensure the system’s viability until 2041. Recommendations on this challenge have been addressed to Luxembourg since 2011 but limited progress has been made to date. In its 2018 report, the government’s pensions working group discussed various ways to improve the long-term sustainability of the pensions system, including gradually increasing the contribution rate, raising the pensionable age to take account of longer life expectancy and encouraging phased retirement. The report suggests a multi-pronged strategy of calibrated reforms to guarantee the long-term sustainability of the system while minimising the impacts on both the economy and pensioners. Projected increases in age-related expenditure also threaten the long-term sustainability of the healthcare and long-term care systems. More than three quarters of long-term care expenditure comes from public sources. The 2018 reform is expected to ensure financial viability until 2030, by allowing to gradually increase workers’ contributions to the healthcare system from 1.4% of the wage base to 1.7%, in order to keep costs in line with the proportion of dependent people. However, the impacts in terms of long-term fiscal sustainability are not yet clear. To sustain social cohesion and public finances in the long term, demographic policies would need to concur with education and training policies, taking a holistic approach to considering both the challenges and opportunities of changes in demography as well as in the digital economy, given the expected impact of population ageing on labour supply in the near future. Labour shortages have recently emerged in certain sectors, which could hinder productivity growth and reduce the long-term growth potential.

               (8)Despite an overall good labour market performance, the employment rate is stagnating and specific groups still face particular difficulties on the labour market. In particular, the employment rate of older people remains particularly low, and further measures are needed to improve their participation to the labour market. Early retirement schemes encouraging workers to leave employment remain widespread, with 57.5% of newly attributed pensions being early old-age pensions in 2017. In 2018, the government abrogated one of the pre-retirement schemes allowing people to retire from the age of 57, but the effect of this reform was weakened by relieving restrictions on other pre-retirement schemes. Low old-age activity rates also largely result from financial disincentives to work stemming from the tax-benefit system which are comparatively high for this age group. Encouraging the employment of older workers requires a comprehensive strategy including measures to help them remain in active employment for longer. The ‘Age Pact’, a draft law submitted to Parliament in April 2014, which aims to encourage firms with more than 150 employees to hire and retain older workers through age management measures, is still pending in Parliament.

               (9)While Luxembourg remains committed to improving the regulatory environment for the business services sector, regulatory barriers are still high in several sectors, such as legal, accounting, architecture and engineering services, according to the European Commission’s restrictiveness indicator
                  6
               . The OECD’s intra-EEA Services Trade Restrictiveness Index published in December 2018 also confirmed that Luxembourg’s level of regulatory restrictiveness vis-à-vis other EU Member States is higher than the Single Market average for these sectors.

               (10)Luxembourg’s economic model features strong performances consistent with robust and sustained creation of qualified employment. This is supported by high productivity levels, largely reflecting efficiency gains from participation in global markets, in particular in the financial sector. However, productivity growth has stagnated in recent years, hampered by low levels of business investment in innovation and digital integration. Luxembourg’s strategy to diversify its economy, by developing key knowledge-intensive sectors in a transition to a data-driven economy, exhibits strong potential to stimulate high value-added investment and boost productivity growth. In that context, public investment remains high and focused on those sectors, including a strong Information and Communication Technology sector. However, this significant public investment has not spilled over, nor has it helped to stimulate private investment in innovation and digitalisation. Increased investment in research and innovation, as well as in digital integration, especially in firms and specifically in small and medium-sized enterprises, is important for improving productivity growth and further diversifying Luxembourg’s economy. Developing a coherent and integrated national framework for research and innovation policies and support instruments, including prioritisation based on robust assessment of expected economic impacts, is essential to enabling Luxembourg to exploit the full potential of its innovation eco-system.

               (11)Increased investment in skills, in particular information and communications technology skills, employability, education and training, including a better alignment of education curricula to labour market needs and fostering technological and digital transformations, is important for improving Luxembourg’s productivity, employment and long‑term growth potential, and for fostering equal opportunities.

               (12)Air pollution and traffic congestion at peak times still constitute major problems for Luxembourg, from both a competitiveness and environmental point of view. In addition, the CO2 emissions from road transport contribute to climate change. According to the 2017 national projections submitted to the Commission, it is expected that in the absence of additional measures, Luxembourg will miss its 2020 greenhouse gas emission reduction target by 3 percentage points and its 2030 target by 20 percentage points. The number of cross-border workers, who currently represent about 45% of Luxembourg’s labour force, the low taxation of transport fuel and high house prices stimulate increased car use and are an obstacle to improving air quality and traffic conditions. Meanwhile, the use of alternative fuels in new passenger cars sold in Luxembourg has increased over the past few years.

               (13)Insufficient housing supply may negatively affect Luxembourg’s attractiveness. Its strong housing demand remains driven by population growth, favourable financing conditions and a large cross-border workforce. Housing supply and investment appear insufficient, constrained by insufficient land availability and low housing density, largely due to a lack of incentives for landowners to build new housing or to sell. The supply of social housing also appears insufficient and points to a need for significant investment to alleviate rising tensions in the housing market.

               (14)The fight against aggressive tax planning is essential to make tax systems more efficient and fair as acknowledged in the 2019 euro area recommendation. Spillover effects of taxpayers’ aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Luxembourg has taken measures against aggressive tax planning, but the high level of dividend, interest and royalty payments as a percentage of GDP suggests that the country’s tax rules are used by companies that engage in aggressive tax planning. The majority of foreign direct investment is held by 'special purpose entities'. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) interest and royalty payments and the exemption from withholding taxes on dividend payments under certain circumstances may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.

               (15)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  7
               . This would allow Luxembourg to make the best use of those funds in respect of the identified sectors.

               (16)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Luxembourg’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Luxembourg in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Luxembourg, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (17)In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion that Luxembourg is expected to comply with the Stability and Growth Pact.

               HEREBY RECOMMENDS that Luxembourg take action in 2019 and 2020 to:

               1.Increase the employment rate of older workers by enhancing their employment opportunities and employability. Improve the long-term sustainability of the pension system, including by further limiting early retirement.

               2.Reduce barriers to competition in regulated professional business services.

               3.Focus economic policy related to investment on fostering digitalisation and innovation, stimulating skills development, improving sustainable transport, and increasing housing supply, including by increasing incentives and lifting barriers to build.

               4.Address features of the tax system that may facilitate aggressive tax planning, in particular by means of outbound payments.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1015 final.

                     (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)

                        COM(2014) 494 final.

                     (5)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (6)

                        SWD(2016) 436 final

                     (7)

                        SWD(2019) 1015 final.