The Spring Economic Governance Package: Country-Specific ... · The Spring 2017 economic governance...

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The Spring Economic Governance Package: Country-Specific Recommendations &

Article 126.3 Report

Ben Deboeck – Steven Engels European Commission

Our agenda for today

1. The Spring Economic Governance Package

2. Belgium in the Stability and Growth Pact

3. The proposals for country-specific

recommendations

4. Next steps in the framework of the European

Semester

recommendations

Semester

The Spring 2017 economic governance package

• Chapeau Communication: 2017 European Semester – Country Specific Recommendations

• Conclusions in the framework of the macro-economic imbalances procedure (CY, IT & PT)

• Decisions under the Stability and Growth Pact

• Abrogation of EDP in the case of HR and PT

• Article 126.3 Reports on BE and FI

• Follow-up of Article 126.3 Report on IT

• Commission Recommendation on significant deviation from the adjustment path toward the medium-term budgetary target in the case of RO

• Country Specific Recommendations to 27 MS

Main messages of the Communication

• While the European economy has proven resilient, more needs to be done to strengthen the positive trends and convergence with the EU

• Reforms need to support the longer term sustainability of the economic recovery by facilitating investment in social infrastructure, early childhood education and care and lifelong learning

• There are still many restrictions hampering business activities and foreign direct investment

• The correction of macro-economic imbalances continues, albeit in an asymmetrical manner

recommendations

Semester

2.1 Overview of fiscal developments

2.2 Compliance with the provisions of the

Stability and Growth Pact: preventive arm

Stability and Growth Pact: corrective arm

Following sections are based on analysis provided in:

• Report prepared in accordance with Article 126(3) of the Treaty (Commission report, 22/05)

• Assessment of the 2017 Stability Programme for Belgium (staff working document, 23/05)

https://ec.europa.eu/info/files/reportcommissionbelgium126-3-220517_en

https://ec.europa.eu/info/sites/info/files/01_be_sp_assessment.pdf

Macroeconomic projections

2019 2020

COM COM SP COM SP SP SP

Real GDP (% change) 1.2 1.5 1.4 1.7 1.5 1.5 1.6

Private consumption (% change) 0.7 1.4 1.4 1.4 1.5 1.5 1.5

Gross fixed capital formation (% change) 2.1 2.1 2.8 3.0 3.0 2.0 2.7

Exports of goods and services (% change) 6.1 3.8 4.5 3.7 3.4 3.9 3.9

Imports of goods and services (% change) 5.3 3.6 4.6 3.6 3.6 3.9 4.1

Contributions to real GDP growth:

- Final domestic demand 0.9 1.3 1.4 1.5 1.6 1.4 1.6

- Change in inventories -0.4 0.0 0.0 0.0 0.0 0.0 0.0

- Net exports 0.8 0.3 0.0 0.2 -0.1 0.1 0.0

Output gap1 -0.6 -0.4 -0.4 0.0 -0.1 0.0 0.2

Employment (% change) 1.3 0.9 1.1 0.9 0.9 0.7 1.0

Unemployment rate (%) 7.8 7.6 7.6 7.4 7.5 7.4 7.1

Labour productivity (% change) -0.1 0.6 0.3 0.8 0.7 0.7 0.5

HICP inflation (%)2 1.8 2.3 2.2 1.5 1.6 1.7 1.6

GDP deflator (% change) 1.6 1.8 1.7 1.6 1.6 1.5 1.3

Comp. of employees (per head, % change) 0.1 2.0 1.9 1.7 1.8 2.3 1.6

Net lending/borrowing vis-à-vis the rest of

the world (% of GDP)

1.3 1.7 0.9 1.8 1.3 1.6 1.5

2016 2017 2018

Evolution of the headline deficit (% of GDP)

2016 arrived at deficit of 2.6%

2017 difference reflects:

- different appreciation of fiscal measures Entity I: around 0.2%

- Entity II deviation from targets: around 0.1%

2018 Commission projection at unchanged policy vs. target in Stability Programme

Evolution of the structural deficit (% of GDP)

2016 small improvement in spite of higher nominal deficit due to lower one-off factors compared to 2015

2017 reflects different projection for the headline balance

2018 headline deterioration mirrored in structural balance + higher growth implies remaining deficit considered fully structural

Structural improvement (% of GDP)

Risk factors to trajectory

• 2017: not all measures sufficiently specified or impact assessed lower by COM; risk of reoccurring revenue shortfalls for financial income taxation; budgetary consequences of pending resolutions Arco Group/Holding Communal;

• Targets beyond 2017 mostly not underpinned by measures;

• Trends at unchanged policy push up efforts implied by targets;

• Risk of higher-than-anticipated inflation;

• Implementation risks towards end of legislative period;

• Absence of clear distribution of overall trajectory: sum of targets communicated by regions deviates from the Entity II target in 2017 Stability Programme;

• Planned effort bows on further decline in interest payments (0.8% of GDP between 2017 and 2020)

Primary structural improvement (% of GDP)

Costs linked to refugees and security situation

• BE has applied for flexibility regarding costs linked to 1. refugee crisis (2015 -2016, extended to 2017) 2. security measures and fight against terrorism (2016-2017)

• "Unusual event outside the control of the government"

• Temporary deviation from adjustment path towards MTO (i.e. required effort is

corrected ex-post) • 2016: 0.13% of GDP => requirement lowered from 0.6% to 0.47% of GDP • 2017: refugee costs expected to decline, security marginally higher

compared to 2016 => only very limited impact in 2017 according to current data

• 16

• Belgium has been in the Preventive arm of the SGP since 2014 Needs to ensure sufficient progress towards medium-term objective

• Medium-term objective (MTO)

o Structural target, set by member-states in their Stability Programmes o But: minimum MTO for each member-state in function of sustainability o Belgium: MTO of 0.0% of GDP since 2016 Stability Programme o 2017 Stability Programme set goal of reaching MTO in 2019

• Required progress towards MTO ('matrix')

o Belgium: at least 0.6% structural improvement each year (before flexibility) o Assessment based on two pillars:

1. expenditure benchmark 2. change in structural balance 17

Adjustment towards medium-term objective (MTO)

(1) Expenditure benchmark - 1

Expenditure aggregate (primary expenditure growth, net of a.o. cyclical unemployment benefits, discretionary revenue measures, one-off measures)

To be compared to

'Expenditure benchmark' = maximum expenditure growth rate given required improvement of structural balance

• 2016: 1.3% nominal terms (incl. flexibility granted ex-post)

• 2017: 1.5% nominal terms

• 2018: 1.6% nominal terms

(!) Expenditure benchmark has acquired more prominent role in surveillance process

(1) Expenditure benchmark - 2

(2) Structural improvement (% of GDP)

Significant deviation: gap < -0.5% vàv annual requirement (<-0.25% over 2y) Some deviation: 0 > gap ≥ -0.5% vàv annual requirement Compliant: positive gap Note: 2016 requirement was reduced to 0.47% of GDP as a result of flexibility 21

Adjustment towards the MTO in 2016 - 1

2016 COM

1. Expenditure benchmark

Significant deviation (-0.6)

2. Structural balance

Some deviation (-0.4)

'Overall assessment'

Overall assessment

Overall conclusion for 2016: "Some deviation from the required adjustment path towards the MTO."

2016 (1) starting

point (2) distorting factor (3) Conclusion when

taking into account (2)

-0.6 higher-than-

anticipated inflation -0.4

-0.4 / -0.4

Both 2017 and 2016/2017 are looked at. Evaluation is based on least positive of the two. Significant deviation: gap < -0.5% vàv annual requirement (<-0.25% over 2y) Some deviation: 0 > gap ≥ -0.5% vàv annual requirement Compliant: positive gap

A. 2017 SP COM

Compliant (+0.4) Compliant (+0.0)

Significant deviation: gap < -0.5% vàv annual requirement (<-0.25% over 2y) Some deviation: 0 > gap ≥ -0.5% vàv annual requirement Compliant: positive gap

B. 2016-2017 SP COM

Compliant (+0.0) Some deviation

(-0.2)

'Overall assessment'

Overall assessment (COM data)

Expenditure benchmark considered to correctly reflect underlying fiscal effort as it does not account for interest windfalls, contrary to structural balance.

Overall conclusion for 2017 (based on 2016-2017): "Risk of significant deviation from the required adjustment path towards the MTO." 25

2016-2017 (1) starting

point (2) distorting

factor (3) Conclusion when

taking into account (2)

-0.5 higher-than-anticipated

inflation in 2016 -0.4

-0.2 / -0.2

Significant deviation: gap < -0.5% vàv annual requirement (<-0.25% over 2y) Some deviation: 0 > gap ≥ -0.5% vàv annual requirement Compliant: positive gap

Adjustment towards the MTO in 2018

2018 SP COM

Compliant (+0.4) Significant

deviation (-0.9)

Compliant (+0.0) Significant

deviation (-0.9)

2016: Some deviation 2017: Some deviation 2016-2017: Risk of significant deviation Risk of non-compliance with the SGP Implications for evaluation of compliance with debt criterion

(corrective arm)

Adjustment towards the MTO

Countries in the preventive arm should ensure that

• the nominal deficit does not surpass 3% of GDP

• debt < 60% of GDP or sufficiently diminishing ('debt criterion')

requires annual reduction by 1/20th of gap between debt ratio and

60% benchmark

The non-respect of either of these criteria could trigger an excessive deficit procedure (EDP), with a country entering the preventive arm of the SGP

Corrective arm

The debt criterion

126(3) report - 1

Following non-compliance with debt criterion in 2016, Commission issued a new report under article 126(3) of the Treaty (22/05/2017). Previous reports: February 2015 & May 2016 Report revisits all 'relevant factors'

1. Economic conditions; 2. Structural reform agenda; 3. Progress towards medium-term objective.

126(3) report - 2

1. Economic conditions • low nominal growth complicated debt reduction in recent years; • partly because of protracted period of low domestic price growth; • drove up budgetary effort required to realise debt reduction to levels

that were neither feasible nor desirable • growth has been picking up though, making it less of a mitigating

factor regarding the projected gap towards the debt reduction benchmark

• Growth vs. interest rate differential ('snowball') matters for debt dynamics

126(3) report - 3

126(3) report - 4

2. Structural reform agenda • Reforms contribute to fiscal sustainability by enhancing growth

potential or by lowering budgetary costs in time • Important progress on several fronts over the course of several

years: pensions, taxation, competitiveness. • Pension reforms reduced projected ageing costs and allowed

revision of MTO to less stringent objective

126(3) report - 5

3. Progress towards medium-term objective (preventive arm) • MTO set in function of debt level and implicit liabilities • Convergence towards MTO ensures covergence of debt ratio towards

prudent levels

Recall: risk of signficant deviation in 2016-2017 given average deviation by 0.4% of GDP compared to maximum average deviation of 0.25%.

126(3) report - 6

CONCLUSION OF REPORT • previously unfavourable but improving macroeconomic conditions • implementation of growth-enhancing structural reforms • risk of some deviation in 2016 and 2017 individually, but risk of

significant deviation in 2016 and 2017 together, which can still be corrected in 2017

debt criterion considered as "currently complied with". At the same time, additional fiscal measures are to be taken in 2017 to further correct the deviation from the adjustment path towards the MTO.

no EDP opened at this point in time

recommendations

Semester

Main findings on competitiveness

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Nominal Unit Labour Costs - Difference with neighbouring countries (1996 = 100)

The sustained wage moderation efforts are bearing fruit

The cost-competitiveness of the services sector remains a concern

The (core-) inflation differential with the neighbouring countries has been rising

Regulatory restrictions hamper competition in professional services

UK NL CZ

RO SK LT

0.0% 0.1% 0.2% 0.3% 0.4% 0.5%

l priv

Government funding of business R&D (% of GDP, 2014 or latest available)

There is room to improve the efficiency and coherence of public support for R&I

Main findings on employment performance

Large performance differences persist…

People with a migrant background perform particularly badly

*2014 data for DE, IE, LT and UK

Transitions rates to employment are below average

Main findings on investment

Improving efficiency of public services and composition of spending can create room for more investment

Current spending vs. Gross fixed capital formation (% GDP)

Business Investment Government

Total Economy

Investment to GDP (2015)

Proposal for Country-Specific Recommendations to Belgium

The Commission proposes that the Council Recommends to Belgium to

1. Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which translates into a substantial fiscal effort for 2018. When taking policy action, consideration should be given to achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Belgium’s public finances. Agree on an enforceable distribution of fiscal targets among government levels and ensure independent fiscal monitoring. Remove distortive tax expenditures. Improve the composition of public spending in order to create room for infrastructure investment, including on transport infrastructure.

2. Ensure that the most disadvantaged groups, including people with migrant background, have equal access to quality education, vocational training, and the labour market.

3. Foster investment in knowledge-based capital, notably with measures to increase digital technologies adoption, and innovation diffusion. Increase competition in professional services markets and retail, and enhance market mechanisms in network industries.

recommendations

4. Next steps in the framework of the

European Semester

Next steps in the 2017 European Semester

The Spring Economic Governance Package: Country-Specific ... · The Spring 2017 economic governance...

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