COUNCIL OPINION

of 8 March 2005

on the updated stability programme of Spain, 2004-2008

(2005/C 177/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 8 March 2005 the Council examined the updated stability programme of Spain, which covers the period 2004-2008. The programme complies with the data requirements of the ‘code of conduct on the content and format of stability and convergence programmes’. However, the updated programme was presented three weeks beyond the 1 December deadline set in the code of conduct.

(2) The macroeconomic scenario underlying the programme envisages real GDP growth to pick up from 2,6 % in 2004 to 2,9 % in 2005 and to average 3,0 % over the rest of the programme period. On the basis of currently available information, this scenario seems to reflect rather favourable growth assumptions. The update also considers a ‘moderate scenario’ that projects annual GDP growth of 2,4 % in 2005 and 2,5 % thereafter. While the baseline scenario can be considered as relatively optimistic, the moderate growth scenario is on the low side. The programme's projections for inflation (based on the GDP deflator) appear realistic, but still remain relatively high thus posing risk to competitiveness.

(3) According to the update, the general principle guiding fiscal policy is that of budgetary stability over the full economic cycle. This general principle could lead to budgetary deficits in the event of a cyclical slowdown, although the update does not target any deficit positions between 2005 and 2008 after the temporary deficit recorded in 2004, which reflected the impact of accounting adjustments. The update targets small, but rising surpluses; from 0,1 % of GDP in 2005 to 0,4 % of GDP at the end of the projection period. Since interest payments are expected to decrease only slightly over the programme period, the primary surplus is projected to remain fairly stable at around 2

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% of GDP. While the targets for the general government balance are broadly the same as in the previous update, the targeted primary surpluses are slightly less ambitious, which reflects higher interest payments projected in the 2003 update. Based on trend GDP calculated by the Commission services(2) from the projected growth rates in the update, and after netting out the effect of the 2004 one-off accounting adjustments, the cyclically-adjusted budget balance remains between 0,2 % and 0,5 % of GDP throughout the programme period.

(4) The risks to the budgetary projections in the programme appear broadly balanced. In particular, although growth assumptions are somewhat favourable, the risk of sizeable deviations from the programme's objectives appears limited.

(5) In view of this risk assessment, the budgetary stance in the programme is sufficient to maintain the Stability and Growth Pact's medium-term objective of a position of close-to-balance throughout the programme period (with a temporary deviation in 2004 related to the one-off accounting adjustments). It also provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations over the period covered in the update.

(6) The debt ratio is estimated to have declined to 49,1 % of GDP in 2004, well below the 60 % of GDP Treaty reference value. The programme projects the debt ratio to further decline by 9 percentage points over the programme period, mainly on account of primary surpluses above 2 % of GDP.

(7) The budgetary strategy outlined in the programme puts Spain in a relatively favourable position with regard to long-term sustainability of the public finances, in spite of the projected budgetary costs of an ageing population. However, given the risks surrounding such long-term expenditure projections and the large increase of pension expenditure projected in the very long term, current policies need to be supplemented by measures to prevent the emergence of unsustainable trends in public finances in the long run, in particular through a comprehensive reform of the pension system in line with the recommendations of the multi-partisan agreement ‘Pacto de Toledo’.

(8) Overall, the economic policies outlined in the update are partly consistent with the country-specific broad economic policy guidelines in the area of public finances. In particular, as regards the recommended reform of the public pension system to ensure the long-term viability of the system has not been implemented yet.

In view of the above assessment, the Council is of the opinion that Spain should adopt measures to prevent the emergence of unsustainable trends in public finances in the long run, in particular through a major reform of the pension system.

Comparison of key macroeconomic and budgetary projections

		2004	2005	2006	2007	2008
Real GDP (% change)	SP Dec 2004	2,6	2,9	3,0	3,0	3,0
	COM Oct 2004	2,6	2,6	2,7	n.a.	n.a.
	SP Jan 2004	3,0	3,0	3,0	3,0	n.a.
HICP inflation(4) (%)	SP Dec 2004	3,8	3,7	3,5	3,2	2,8
	COM Oct 2004	3,1	2,9	2,5	n.a.	n.a.
	SP Jan 2004	2,9	2,6	2,6	2,6	n.a.
General government balance (% of GDP)	SP Dec 2004	– 0,8	0,1	0,2	0,4	0,4
	COM Oct 2004	– 0,6	– 0,1	0,0	n.a.	n.a.
	SP Jan 2004	0,0	0,1	0,2	0,3	n.a.
Primary balance (% of GDP)	SP Dec 2004	1,5	2,2	2,2	2,3	2,3
	COM Oct 2004	1,7	2,1	2,0	n.a.	n.a.
	SP Jan 2004	2,6	2,5	2,6	2,6	n.a.
Cyclically-adjusted balance (% of GDP)	SP Dec 2004(3)	– 0,7	0,2	0,3	0,5	0,4
	COM Oct 2004	– 0,7	– 0,1	0,0	n.a.	n.a.
	SP Jan 2004(3)	0,1	0,1	0,2	0,3	n.a.
Government gross debt (% of GDP)	SP Dec 2004	49,1	46,7	44,3	42,0	40,0
	COM Oct 2004	48,2	45,5	42,9	n.a.	n.a.
	SP Jan 2004	46,6	47,7	45,7	43,8	n.a.
Stability programme (SP); Commission services autumn 2004 economic forecasts (COM); Commission services calculations

(1)

OJ L 209, 2.8.1997, p. 1

(2) The commonly agreed methodology based on the production function approach is not yet applied to Spain, pending the resolution of estimation problems. Therefore, cyclically-adjusted balances are calculated based on the Hodrick-Prescott filter methodology.

(3) The commonly agreed methodology based on the production function approach is not yet applied to Spain, pending the resolution of estimation problems. Therefore, cyclically-adjusted balances are calculated by Commission services based on the Hodrick-Prescott filter methodology from the information provided in the programme.

(4) Inflation based on the GDP deflator for the stability programmes.

Sources:

Stability programme (SP); Commission services autumn 2004 economic forecasts (COM); Commission services calculations