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
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
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
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
2.1 Overview of fiscal developments
2.2 Compliance with the provisions of the
Stability and Growth Pact: preventive arm
2.3 Compliance with the provisions of the
Stability and Growth Pact: corrective arm
•
7
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
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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
10
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
11
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
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Structural improvement (% of GDP)
13
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)
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Primary structural improvement (% of GDP)
15
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
2.1 Overview of fiscal developments
2.2 Compliance with the provisions of the
Stability and Growth Pact: preventive arm
2.3 Compliance with the provisions of the
Stability and Growth Pact: corrective arm
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• 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)
18
(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
19
(1) Expenditure benchmark - 2
20
(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."
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Adjustment towards the MTO in 2016 - 2
2016 (1) starting
point (2) distorting factor (3) Conclusion when
taking into account (2)
1. Expenditure benchmark
-0.6 higher-than-
anticipated inflation -0.4
2. Structural balance
-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
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Adjustment towards the MTO in 2017 - 1
A. 2017 SP COM
1. Expenditure benchmark
Some deviation (-0.2)
Some deviation (-0.4)
2. Structural balance
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
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Adjustment towards the MTO in 2017 - 2
B. 2016-2017 SP COM
1. Expenditure benchmark
Significant deviation (-0.4)
Significant deviation (-0.5)
2. Structural balance
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
Adjustment towards the MTO in 2017 - 3
2016-2017 (1) starting
point (2) distorting
factor (3) Conclusion when
taking into account (2)
1. Expenditure benchmark
-0.5 higher-than-anticipated
inflation in 2016 -0.4
2. Structural balance
-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
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Adjustment towards the MTO in 2018
2018 SP COM
1. Expenditure benchmark
Compliant (+0.4) Significant
deviation (-0.9)
2. Structural balance
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)
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Adjustment towards the MTO
2.1 Overview of fiscal developments
2.2 Compliance with the provisions of the
Stability and Growth Pact: preventive arm
2.3 Compliance with the provisions of the
Stability and Growth Pact: corrective arm
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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
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Corrective arm
30
The debt criterion
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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.
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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
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126(3) report - 3
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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
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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%.
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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
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
Main findings on competitiveness
-2
-1
0
1
2
3
4
5
6
7
8
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
Main findings on competitiveness
The cost-competitiveness of the services sector remains a concern
Main findings on competitiveness
The (core-) inflation differential with the neighbouring countries has been rising
Main findings on competitiveness
Regulatory restrictions hamper competition in professional services
Main findings on competitiveness
BE
FR
IE HU
AT
SI
UK NL CZ
PT
SE
DK
EL
ES
DE FI
EE IT
PL
RO SK LT
LV
BG
CY
HR MT
EU
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0.0% 0.1% 0.2% 0.3% 0.4% 0.5%
Tota
l priv
ate
R&
D e
xpen
ditu
re
(% o
f G
DP,
201
5)
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…
Main findings on employment performance
Large performance differences persist…
Main findings on employment performance
Large performance differences persist…
Main findings on employment performance
People with a migrant background perform particularly badly
Main findings on employment performance
*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)
0
5
10
15
20
25
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.
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
Next steps in the 2017 European Semester