The provisions of the preventive arm of the SGP should provide the main guidelines for budget
(45) The structural balance is defined as the cyclically adjusted balance net of one-off and temporary measures
requirements of an EDP. Countries currently in this situation are Bulgaria, Estonia, Germany, Finland, Luxembourg and Sweden. The preventive arm is implemented through 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.
The expenditure benchmark
Under the preventive arm of the SGP, Member States aim at a specific fiscal target – the so-called medium-term budgetary objective (MTO) – to ensure the sustainability of their public finances.
The new rules define an "expenditure benchmark"
for judging progress towards the MTO, to complement the assessment based on the structural balance. The aim is to improve the planning and the fiscal record of the Member States by
guaranteeing the financing of expenditure
programmes by permanent revenues of an equivalent level. This should help avoid the repetition of mistakes made ahead of the crisis, when unsustainable expenditure trends were temporarily funded through windfall revenues or additional borrowing. The expenditure benchmark does not constrain governments in terms of their level of government expenditure – it simply requires that all changes to expenditure are financed through additional revenues. The actual size of the spending to GDP ratio is not constrained.
For Member States that have achieved their MTO, the expenditure benchmark is complied with when the annual growth of government expenditure, net of discretionary measures taken on the revenue side, does not exceed a reference medium-term rate of potential GDP growth.
For Member States that have not yet reached their MTO, the expenditure benchmark is complied with
when the annual growth of government
expenditure, net of discretionary measures taken on the revenue side, does not exceed a rate below reference medium-term rate of potential GDP growth.
Table II.2.1: Expenditure benchmark in relation to MTO achievement
Member State at its MTO Member State not at its MTO
Net expenditure growth in line with the reference rate Net expenditure growth in line with a rate below the reference rate
% government expenditure in GDP constant % government expenditure in GDP decreases Structural balance constant over time Structural balance strengthens
Remains at MTO Gap with the MTO closes over time
Source: Commission services.
The difference between the reference rate and the rate below the reference rate – referred to as "the convergence margin" – is country-specific, depending on the size of government spending in
the economy(46), in order to ensure that complying
with this lower rate yields an annual improvement of the government balance. Applying a lower reference rate for Member States not at their MTO means letting revenues grow more rapidly than spending: this should help the Member State to meet the required structural adjustment of 0.5pp of GDP. Table II.2.1 summarises the different requirements and their effects for Member States both at and not yet at their MTOs.
The reference medium-term rate of potential GDP growth is based on regularly updated forward-
looking projections and backward-looking
estimates, taking into account the relevant calculation method provided by the Economic Policy Committee (EPC). The reference medium- term rate of potential GDP growth will be the average of the estimates of the previous 5 years, the estimate for the current year and the projections for the following 4 years. The aim is to have a measure which is sufficiently stable over time to provide a reference, but is also regularly updated so as to avoid that the reference provided to guide policy is out of touch with the economic situation.
The government expenditure aggregate to be assessed excludes interest expenditure, since it is
(46) The convergence margin is set so that the lower increase in net expenditure relative to GDP is consistent with a tightening of the budget balance of 0.5pp of GDP, when GDP grows at its potential rate. It is calculated based on the assumption that any decrease in the share of public expenditure in the economy (which would occur if expenditure grows slower than potential GDP) would be translated into an exactly proportional improvement of the structural balance (the coefficient being equal to the base value of the share of public expenditure in GDP times the convergence margin of expenditure growth).
to a large extent not under the control of the government, and non-discretionary changes in unemployment benefit expenditure, so as to allow for these to vary counter-cyclically. It also excludes expenditure on EU programmes fully matched by EU fund revenue and increases in revenue mandated by law. Due to the potentially very high variability of investment expenditure, especially in the case of small Member States, the government expenditure aggregate is to be adjusted by averaging investment expenditure over 4 years.
The notion of “significant deviation” and the enforcement provisions
In the preventive arm, the enhanced Stability and Growth Pact allows a stronger action in the event of “significant deviation” of a Member State from the MTO or from the appropriate adjustment path towards it.
To enforce this rule, the concept of “significant
deviation” has been defined in the amended Regulation 1466/97 and has been detailed in the
Code of Conduct (47). The identification of a
significant deviation from the MTO or the appropriate adjustment path towards it is to be
based on outcomes (i.e., ex-post data) as opposed
to plans. In substance, the analysis of the
'significant deviation' consists of an assessment of both the deviation of the structural balance from the appropriate adjustment path towards the MTO and of the impact of an excess of expenditure growth over the expenditure benchmark.
(47) Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of Stability and Convergence Programmes:
http://ec.europa.eu/economy_finance/economic_governanc e/sgp/pdf/coc/code_of_conduct_en.pdf
For a Member State that has not reached the MTO, the deviation will be considered significant if both: (i) the deviation of the structural balance from the appropriate adjustment path corresponds to at least 0.5% of GDP in one single year or at least 0.25% of GDP on average per year in two consecutive years ; and (ii) an excess of expenditure growth has had a negative impact on the government balance of at least or 0.5% of GDP in one single year or cumulatively over two years. In case only one of the two conditions above is verified, the deviation will be considered significant if the overall assessment evidence limited compliance also with respect to the other condition.
In the event of a significant observed deviation a warning under Article 121(4) is issued by the Commission. Within one month from the date of adoption of this warning, the Council will examine the situation and, on the basis of a Commission recommendation, adopt a recommendation under Article 121(4) for the necessary policy measures within the established deadline, normally of five
months (48). The recommendation under Article
121(4) is adopted by the Council by qualified majority.
The Member State concerned has to report to the Council on action taken in response to the recommendation within the deadline established by the Council. It the Member State fails to take appropriate action in response to the Council
recommendation under Article 121(4), the
Commission recommends immediately to adopt a decision establishing that no effective action has been taken. Also this decision is adopted by the Council by qualified majority. At the same time, the Commission may recommend to the Council to adopt a revised recommendation under Article 121(4) on necessary policy measures.
However, if the Council does not take the decision that no effective action has been taken and failure to comply with the recommendation under Article 121(4) persists, after one month from its previous recommendation, the Commission adopts a new recommendation to the Council to take a decision that no effective action has been taken. In this case, the decision is adopted by the Council by
(48) The deadline is reduced to three months if the Commission, in its warning, considered the situation to be particularly serious and warranting urgent action.
“reversed simple majority”(49). Also in this case, at the same time the Commission may recommend to the Council to adopt a revised recommendation under Article 121(4) on necessary policy measures.
In the case of euro area Member States, a financial sanction (an interest-bearing deposit of 0.2% of GDP as a rule) may be imposed if the Council decides that no action has been taken to address the Council recommendation under Article 121(4). This sanction is recommended by the Commission and adopted by the Council according to the “reversed qualified majority” vote (50).
In order to deal with exceptional circumstances, an escape clause has been inserted. This foresees that the deviation may be left out of consideration when it results from an unusual event outside of the control of the Member State concerned which has a major impact on the financial position of the general government or in case of severe economic downturn for the euro area or the EU as a whole, provided that this does not endanger fiscal sustainability in the medium-term.
The operational entry into force
The new provisions of the preventive arm are immediately operational, in particular with regard to the content of the Stability or Convergence Programmes (SCP). If a Member State submits an
SCP which presents plans that do not comply ex-
ante with the provisions of the preventive arm, the Council should invite the Member State to submit a new programme.
Programmes of Member States which are still subject to an EDP need to demonstrate that they meet the obligations deriving from the preventive arm after correcting their excessive deficit.
(49) This means that the Commission’s recommendation is adopted unless a simple majority within the Council decides to reject it, within ten days or its adoption by the Commission.
(50) This means that the Commission’s recommendation is adopted unless a qualified majority within the Council decides to reject it.
Graph II.2.1: Legal steps under the preventive arm of the SGP as of 13 December 2011
Member States concerned: Member States not already bound by the more stringent requirements of the corrective arm. For all Council decisions: no account of the vote of the MS concerned.
Qualified majority voting (QMV) rules (Lisbon Treaty): 55% of MS participating in the decisions (i.e., in the context of the SGP, 16 countries if EA, 26 otherwise, as the concerned country does not vote), comprising at least 65% of population of these States.
Until the end of the Lisbon Treaty transitional period (as defined by the Protocol 36 to the Treaty): 2/3 of EA MS (excepted concerned country), with weights computed according to that Protocol, are needed to reach a QM.
Reversed voting rules (RQMV/RSMV): the qualified/simple majority rules need to be fulfilled to reject the Council decision.
While the ex-ante compliance with the expenditure benchmark in the SCPs has already been examined
in Spring 2012 (see Section I.3), the ex-post
compliance with the expenditure benchmark and possible existence of a significant deviation will be evaluated for the first time in Spring 2013, when the outturn of 2012 budget formulated under the new rules will be assessed.
2.2. THE REFORM OF THE CORRECTIVE ARM OF