Germany has achieved a remarkable budgetary consolidation and reached its MTO of a balanced budget already in 2007 but will relapse into a small deficit in 2008, in structural terms, unless it maintains a firm control over expenditure. No specific recommendation is considered necessary for Finland, which expects to easily achieve and indeed exceed its MTO of a 2% surplus throughout the programme period. Finland is also at low risk with regard to the long-term sustainability of its public finances. Germany, Luxembourg and the Netherlands are at medium risk.
“The budgetary trajectories of the four euro-area countries examined today are remarkable in many ways. Germany has reached a balanced budget by carefully refraining from spending the unexpectedly high tax revenues it recorded in 2007. It is also recommended to maintain strict expenditure control for 2008 to keep its budgetary balance and to reduce government debt. Finland is commended for the budgetary surpluses it plans to run throughout the programme period. Luxembourg and the Netherlands will also respect their medium-term objective over the programme period. In order to further reduce risks to the long-term sustainability of public finances, it is vital that Germany continues to implement the enacted economic reforms and that it strengthens its budgetary institutions, while in Luxembourg reform measures that curb the projected increase in age-related expenditure are crucial”, said Economic and Monetary Affairs Commissioner Joaquín Almunia.

Today the Commission has assessed the updated Stability Programmes of Finland, Germany, Luxembourg and the Netherlands. It also assessed the Convergence Programmes of Hungary, Sweden and the United Kingdom. On 30 January it will examine a second group of programmes. All are expected to be then discussed at the 12 February EU Finance Ministers Council. The remaining programmes will be assessed by the Commission in February.

GERMANY

Germany submitted a new update of its stability programme on 5 December 2007, covering the period 2007-2011.

In 2007, it achieved its medium-term objective (MTO) of a balanced budget, much earlier than envisaged in the 2006 update of the programme. This was helped by economic growth in 2006 and 2007 that was significantly stronger than in the first half of the decade. But the achievement of such positive results also reflects the continued control on public expenditure and the decision by Germany to use the unexpected extra tax revenues to reduce the deficit rather than increase spending. In 2008, however, public finances are expected to relapse into a small structural deficit of 0.4% of GDP (cyclically adjusted and net of one-off and other temporary measures). The budgetary strategy foresees a gradual return to the medium-term objective thereafter, based on sustained expenditure restraint. The risks attached to the budgetary projections are neutral. On the debt front, Germany projects its debt to be below the 60% of GDP reference value by 2010, continuing the debt reduction which brought the ratio down to 65% last year. Germany is at medium risk as regards the sustainability of public finances.

In view of the Commission assessment, it is proposed that the Council invites Germany to: (i) preserve the positive results achieved in 2007 by maintaining firm control over expenditures in line with programme targets and by using unexpected extra revenues for debt reduction; and (ii) improve the long-term sustainability of public finances, by continuing to implement the economic reforms enacted and underpinning the fiscal consolidation achieved to date with a strengthening of budgetary institutions, in particular through the ongoing revision of federal fiscal relations.

LUXEMBOURG

Luxembourg submitted a new update of its stability programme on 27 October 2007, covering the period 2007-2010.

Public finances have been back in surplus since 2006 in a context of strong GDP and employment growth. In fact recently released revised data[3] indicate that the earlier deterioration in public finances was significantly less than previously estimated. Consequently, Luxembourg has consistently met, and even over-achieved, its MTO of a small deficit of 0.8% and the projection for the general government balance in the programme is at least 1% of GDP better in each year than in the previous update. While tax cuts will result in a small decrease in the surplus in 2008, the programme aims at maintaining a surplus of 1% of GDP on average throughout the period. The macroeconomic scenario and budgetary targets of the programme seem plausible and budgetary outcomes might even be slightly better than planned. However, Luxembourg will in the coming decades have to bear a particularly heavy burden resulting from population ageing, and no corrective measures have been taken to date. This explains why the country is considered to be at medium risk as regards the long-term sustainability of its public finances, in spite of its currently sound budgetary position.

In view of the above, the Council should invite Luxembourg to improve the long-term sustainability of its public finances by implementing structural reform measures, in particular in the area of pensions.

THE NETHERLANDS

The Netherlands submitted a new update of its stability programme on 29 November 2007, covering the period 2007-2010.

The programme aims to achieve and maintain a broadly stable surplus, thereby ensuring a sound budgetary position throughout the period. While fiscal policy was pro-cyclical in 2007, when the Netherlands enjoyed a healthy economic growth close to 3%, the budgetary stance from 2008 onwards is in line with the Pact. The risks to the budgetary targets seem broadly balanced in 2008. From 2009 onwards, if economic growth turns out better than expected in the programme, as seems likely in light of the cautious economic scenario it sets out, this should be reflected in a better budgetary outcome than planned, thereby avoiding a pro-cyclical fiscal stance. As regards the long-term sustainability of public finances, the Netherlands appears to be at medium risk.

In view of the Commission’s assessment and of the projected increase in age-related expenditure and the recent deterioration of the structural balance, the Council should invite the Netherlands to improve the long-term sustainability of public finances by securing the budgetary consolidation planned in the programme.

FINLAND

Finland submitted a new update of its stability programme on 29 November 2007, covering the period 2007-2011.

Finland is expected to have recorded a budgetary surplus of 4.5% in 2007 and envisages continued, albeit smaller, surpluses until the end of the programme, reflecting slower economic growth. While the risks attached to the budgetary targets are balanced overall, the programme's fiscal projections appear somewhat cautious for 2008. The medium-term budgetary position is sound and should limit the risks to long-term sustainability. Continuing with expenditure restraint will remain crucial to stem the risk of a pro-cyclical fiscal policy stance in 2008 and to adjust to the lower growth path and the implied slower growth of tax revenue over the programme period.- Source: By European Union