Revised Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and Convergence Programmes (Code of Conduct of the Stability and Growth Pact) - Hoofdinhoud

Council of the European Union

Brussels, 18 May 2017 (OR. en)

9344/17

ECOFIN 423 UEM 170

COVER NOTE

From: General Secretariat of the Council

To: Permanent Representatives Committee/Council

Subject: Revised Specifications on the implementation of the Stability and Growth Pact and Guidelines on the format and content of Stability and

Convergence Programmes (Code of Conduct of the Stability and Growth Pact)

Delegations will find attached the document Specifications on the implementation of the Stability

and Growth Pact and Guidelines on the format and content of Stability and Convergence

Programmes (Code of Conduct of the Stability and Growth Pact) as agreed by the Economic and

Financial Committee on 15 May 2017. This document updates and replaces the previous version.

Specifications on the implementation of the Stability and Growth Pact

and

Guidelines on the format and content of Stability

and Convergence Programmes

15 May 2017

TABLE OF CONTENTS

SECTION I – SPECIFICATIONS ON THE IMPLEMENTATION OF THE STABILITY Page 5 AND GROWTH PACT

• A. 

  T HE PREVENTIVE ARM OF THE S TABILITY AND G ROWTH P ACT Page 5

• 1) 

  The Medium term budgetary objective (MTO) Page 5

  • 2) 

    The adjustment path toward the medium-term budgetary objective and deviations Page 6

  from it

  Page 11

  • 3) 

    A significant deviation from the appropriate adjustment path

• B. 

  T HE EXCESSIVE DEFICIT PROCEDURE Page 12

• 1) 

  Commission report under Article 126(3) TFEU Page 12

• 2) 

  The decision on the existence of an excessive deficit Page 14

• 3) 

  The correction of an excessive deficit Page 14

• 4) 

  Conditions of abrogation of Council decisions in the context of the EDP Page 18

  • 5) 

    Abrogation of Council decisions in the context of the EDP based on the deficit Page 18

  criterion for Member States having implemented multi-pillar pension reforms

SECTION II - GUIDELINES ON THE FORMAT AND CONTENT OF STABILITY AND Page 18 CONVERGENCE PROGRAMMES

• 1) 

  Status of the programme and of the measures Page 19

• 2) 

  Content of Stability and Convergence Programmes Page 19

ANNEX 1 - MODEL STRUCTURE FOR THE STABILITY AND CONVERGENCE Page 23 PROGRAMMES

ANNEX 2 - TABLES TO BE CONTAINED IN THE STABILITY AND CONVERGENCE Page 24 PROGRAMMES

ANNEX 3 – IMPROVING THE PREDICTABILITY AND TRANSPARENCY OF THE Page 32 SGP: A STRONGER FOCUS ON THE EXPENDITURE BENCHMARK IN THE

PREVENTIVE ARM

ANNEX 4 – IMPROVING THE ASSESSMENT OF EFFECTIVE ACTION IN THE Page 37 CONTEXT OF THE EXCESSIVE DEFICIT PROCEDURE – A SPECIFICATION OF

THE METHODOLOGY

ANNEX 5 – A COMMONLY AGREED POSITION ON FLEXIBILITY WITHIN THE Page 54 STABILITY AND GROWTH PACT: FLEXIBILITY FOR CYCLICAL CONDITIONS,

STRUCTURAL REFORMS AND INVESTMENT

INTRODUCTION On 27 November 2015, the EFC agreed on a “Commonly

agreed position on Flexibility within the Stability and

This Opinion updates and replaces the opinion of the Growth Pact” (see Annex 5), which was endorsed by the Economic and Financial Committee (EFC) of 5 July 2016 ECOFIN Council on 12 February 2016 1 . The common

on the content and format of the Stability and position on flexibility complements this Opinion by Convergence Programmes. This updated Opinion was providing comprehensive guidance on the best use of the adopted by the Economic and Financial Committee on 15 flexibility that is built into the existing rules of the

May 2017. preventive arm of the SGP, without changing or replacing

the existing rules.

The Stability and Growth Pact fully entered into force on

1 January 1999 and consists of a rules-based framework On 29 November 2016, the EFC agreed on two Opinions with both preventive and corrective elements. It initially on improving the predictability and transparency of the consisted of Council Regulation (EC) No 1466/97 i of 7 SGP through a greater focus on the expenditure

July 1997 on the strengthening of the surveillance of benchmark in the preventive and corrective arms of the

budgetary positions and the surveillance and coordination Pact (see Annexes 3 and 4) 2 . The ECOFIN Council of economic policies, Council Regulation (EC) No endorsed the two Opinions on 6 December 2016 3 .

1467/97 on speeding up and clarifying the Member States, the Commission and the Council are implementation of the excessive deficit procedure and the committed to deliver on their respective responsibilities,

Resolution of 17 June 1997 on the Stability and Growth applying the Treaty and the Stability and Growth Pact in Pact. On 20 March 2005 the Council adopted a report an effective and timely manner. In addition, since entitled “Improving the implementation of the Stability effectiveness of peer support and peer pressure is an and Growth Pact”. The report was endorsed by the integral part of the Stability and Growth Pact, the Council

European Council in its conclusions of 22 March 2005, and the Commission are expected to motivate and make which stated that the report updates and complements the public their positions and decisions at all relevant stages

Stability and Growth Pact, of which it is now an integral of the procedure of the Stability and Growth Pact, also by part. On 27 June 2005 the Pact was complemented by two means of economic dialogue with the European additional Regulations 1055/05 i and 1056/05, amending Parliament, where appropriate. The Council is expected the Regulations 1466/97 i and 1467/97. to, as a rule, follow the recommendations and proposals

of the Commission or explain its position publicly.

The Stability and Growth Pact is an essential part of the Member States are expected to take into account guidance macroeconomic framework of the Economic and and recommendation(s) from the Council in particular

Monetary Union, which contributes to achieving when preparing their budgets, and to appropriately macroeconomic stability in the EU and safeguarding the involve national Parliaments in the EU procedures, taking sustainability of public finances. A rules-based system is into account national parliamentary and budgetary the best guarantee for commitments to be enforced and procedures.

for all Member States to be treated equally. The two

nominal anchors of the Stability and Growth Pact - the In order to enhance ownership of the EU budgetary 3% of GDP reference value for the deficit ratio and the framework, national budgetary rules and procedures

60% of GDP reference value for the debt ratio - and the should ensure compliance with the Stability and Growth medium-term budgetary objectives are the centrepiece of Pact 4 . Without prejudice to the balance between national

multilateral surveillance. and Community competences, implementation of

provisions going beyond the minimum requirements

On 16 November 2011 and 8 November 2011, established by Directive 2011/85 i/EU, should be discussed Regulations 1466/97 i and 1467/97 were further amended at the European level in the context of the assessment of by Regulation (EU) No 1175/2011 i of the European Stability and Convergence Programmes. The

Parliament and of the Council and Council Regulation effectiveness of national budgetary frameworks is also a

(EU) No 1177/2011 and flanked by Regulation (EU) No

1173/2011 of the European Parliament and of the

Council, which endowed the Stability and Growth Pact 1 http://data.consilium.europa.eu/doc/document/ST-14345-2015-

with effective enforcement mechanisms for euro-area INIT/en/pdf

Member States and on 8 November 2011, the Council 2 In order to preserve Member States' legitimate expectations, adopted Directive 2011/85 i/EU on requirements for compliance with Council recommendations issued prior to the

budgetary frameworks of the Member States. While not a endorsement of these Opinions will continue to be assessed on the basis of the methodologies described in the version of this document

part of the Stability and Growth Pact, this Directive is of 5 July 2016. instrumental to the achievement of its objectives. 3 http://data.consilium.europa.eu/doc/document/ST-14813-2016-

INIT/en/pdf, http://data.consilium.europa.eu/doc/document/ST- 14814-2016-INIT/en/pdf

4 As a result of Protocol 15 and Article 7(bis) of the Council Directive on requirements for budgetary frameworks of the Member States, articles 5 to 7 (on country-specific numerical fiscal rules) of the Directive do not apply to the United Kingdom.

relevant factor to consider in the context of the Excessive

Deficit Procedure.

These Guidelines for the implementation of the Stability and Growth Pact consist of two sections. The first section elaborates on the implementation of the Stability and

Growth Pact. The second section consists of guidelines on the content and format of the Stability and Convergence programmes.

SECTION I prospective demographic changes. The country-specific

MTOs may diverge from the requirement of a close to

SPECIFICATIONS ON THE balance or in surplus position.

IMPLEMENTATION OF THE STABILITY Specifically, the country-specific MTOs should take into

AND GROWTH PACT account three components:

• i) 

  the debt-stabilising balance for a debt ratio equal to

• A. 

  T HE PREVENTIVE ARM OF THE S TABILITY the (60% of GDP) reference value (dependent on AND G ROWTH P ACT long-term potential growth), implying room for

  budgetary manoeuvre for Member States with

  relatively low debt;

• 1) 

  The Medium term budgetary objective (MTO)

  • ii) 

    a supplementary debt-reduction effort for Member States with a debt ratio in excess of the (60% of

Definition of the MTO GDP) reference value, implying rapid progress

towards it; and The MTO is defined in cyclically adjusted terms, net of one-off and other temporary measures. The reference iii) a fraction of the adjustment needed to cover the method for the estimation of potential output is the one present value of the future increase in age-related

adopted by the Council on 12 July 2002. 5 One-off and government expenditure.

temporary measures are measures having a transitory budgetary effect that does not lead to a sustained change according to the formula in the intertemporal budgetary position. 6

MTO = max( MTO ILD , MTO MB , MTO Euro / ERM 2 )

The MTO pursues a triple aim: where the components MTO MB and MTO Euro/ERM2 refer to

(i) providing a safety margin with respect to the 3% of the "minimum benchmark" as agreed by the EFC and to GDP deficit limit. This safety margin is assessed for the Pact obligation for euro area Member States and each Member State taking into account past output Member States participating in ERM II to have an MTO volatility and the budgetary sensitivity to output not lower than –1% of GDP, respectively, while the fluctuations. component MTO

ILD

  relates to implicit and explicit liabilities:

(ii) ensuring rapid progress towards sustainability. This MTO ILD = Balance

is assessed against the need to ensure the    debt  − stabilizin    g ( 60  % ofGDP

+   ) 

convergence of debt ratios towards prudent levels ( i ) taking into account the economic and budgetary + a *

impact of ageing populations. 

AgeingCost

   s    + Effort  debt −    reduction   

( ii ) ( iii )

(iii) taking (i) and (ii) into account, allowing room for The first term on the right hand-side is the budgetary budgetary manoeuvre, in particular taking into balance that would stabilise the debt ratio at 60% of GDP.

account the needs for public investment. The second term is the budgetary adjustment that would cover an agreed fraction of the present value of the

The MTOs are differentiated for individual Member increase in the age related expenditure. Alternatively, States to take into account the diversity of economic and Member States can choose a fraction of the cost of ageing budgetary positions and developments as well as of fiscal corresponding to the pre-financing of age-related

risk to the sustainability of public finances, also in face of expenditure up to an agreed number of years before the end of the AWG projections. The third term represents a

supplementary debt-reduction effort, specific to countries 5 Due to data problems, a different method may be used for the with gross debt above 60% of GDP. In order to estimation of potential output in the case of recently acceded member operationalize this formula, explicit parameters will be

states (RAMS). The method used should be agreed by the Economic

Policy Committee on the basis of a proposal of the Output Gap Working made public through a Commission services paper,

Group. On 25 October 2016, the EFC agreed to complement the endorsed by the EFC.

standard production function methodology for estimating potential

output with a constrained judgment method, including a plausibility tool, This methodology implies a partial frontloading of the

aimed at statistically testing the plausibility of the output gaps for

individual Member States. The constrained judgement method will be budgetary cost of ageing irrespective of the current level

applied for a test period of up to two years. of debt. In addition to these criteria, MTOs should 6 Examples of one-off and temporary measures are the sales of nonprovide a safety margin with respect to the 3% of GDP

financial assets; receipts of auctions of publicly owned licenses; shortdeficit reference value and, for euro area Member States term emergency costs emerging from natural disasters; tax amnesties; and Member States participating in ERM II, in any case

revenues resulting from the transfers of pension obligations and assets. not exceed a deficit of 1% of GDP. The examination of

the country-specific MTOs by the Commission and the remain frozen for three years, although the minimum Council in the context of the assessment of Stability and benchmarks are calculated yearly.

Convergence programmes should indicate whether they adequately reflect the objectives of the Stability and

Growth Pact on the basis of the above criteria. Potential 2) The adjustment path toward the medium-term

growth and the budgetary cost of ageing should be budgetary objective and deviations from it

assessed in a long-term perspective on the basis of the projections produced by the EPC.

Fiscal behaviour over the cycle and adjustment path

Member States may present more ambitious MTOs than toward the MTO

implied by the formula above if they feel their

circumstances call for it. Member States should achieve a more symmetrical

approach to fiscal policy over the cycle through enhanced

For Member States outside of the euro area and not budgetary discipline in periods of economic recovery, participating in ERM II, country-specific MTOs would be with the objective to avoid pro-cyclical policies and to defined with a view to ensuring the respect of the triple gradually reach their medium-term budgetary objective, aim mentioned above. thus creating the necessary room to accommodate

economic downturns and reduce government debt at a satisfactory pace, thereby contributing to the long-term

Art. 2a of Regulation (EC) No 1466/97 i states that the sustainability of public finances. respect of the MTO shall be included in the national budgetary framework in accordance with Chapter IV of Sufficient progress towards the MTO shall be evaluated Council Directive 2011/85 i/EU on requirements for on the basis of an overall assessment with the structural budgetary frameworks of the Member States. 7 balance as the reference, including an analysis of

expenditure net of discretionary revenue measures. The presumption is to use revenue windfalls, namely revenues

Procedure for defining and revising the MTOs in excess of what can normally be expected from economic growth, for deficit and debt reduction, while

In order to ensure a consistent application of the keeping expenditure on a stable sustainable path over the principles mentioned above for defining the countrycycle. For that purpose, the Commission and the Council specific MTOs, regular methodological discussions take will assess the growth path of government expenditure

place in the Economic and Financial Committee. against a reference medium-term rate of potential GDP growth.

Taking into account the results of these discussions,

Member States present their MTO in their Stability or Compliance with the preventive arm requirements is Convergence programme. The MTOs are examined by the evaluated notably on the basis of the structural balance Commission and the Council in the context of the and the expenditure benchmark, taking their respective assessment of the Stability and Convergence strengths into account. It is important that reliance on Programmes. In accordance with Article 121(3) of the either indicator ensures consistency with the required path Treaty and Articles 5(2) and 9(2) of Regulation 1466/97 i, of adjustment and therefore ensures the achievement of where the Council considers that the MTO presented in a the MTO. The country-specific adjustments requirements Stability or Convergence programme should be are set on an annual basis, as part of the Council’s strengthened, it shall, in its opinion, invite the Member country-specific recommendations under the European

State concerned to adjust its programme. Semester. Specifically, for Member States that have not yet attained their MTO, the recommendations indicate the

The MTO shall be revised every three years, preferably required fiscal effort formulated in terms of the change in following the publication of the “Ageing Report”. The the structural balance and the expenditure benchmark. For MTOs could be further revised in the event of the Member States that are at their MTO, the expenditure implementation of a structural reform with a major impact benchmark does not reflect any required improvement in on the sustainability of public finances. In particular, the the structural balance but indicates the maximum growth MTO should be revised in the special case of systemic rate of net expenditures compatible with the Member pension reforms with an impact on long term fiscal State remaining at the MTO. The EFC Opinion on sustainability in line with the provision foreseen in section "Improving the predictability and transparency of the

2 below for major structural reforms. Minimum MTOs SGP: A stronger focus on the expenditure benchmark in the preventive arm" endorsed by the ECOFIN Council on

6 December 2016 (see Annex 3) provides the commonly agreed guidelines for the assessment of compliance with

7 As a result of Protocol 15 and Article 7(bis) of the Council Directive the expenditure benchmark.

on requirements for budgetary frameworks of the Member States, articles 5 to 7 (on country-specific numerical fiscal rules) of the

Directive do not apply to the United Kingdom. The reference-medium-term rate of potential GDP growth

is updated annually and based on forward-looking projections and backward-looking estimates, taking into revenue windfalls, the MTO is respected throughout the account the relevant calculation method provided by the programme period.

EPC. The reference-medium-term rate of potential GDP growth will be the average of the estimates of the - The "Commonly agreed position on flexibility within previous 5 years, the estimate for the current year and the the SGP" endorsed by the ECOFIN Council of 12 projections for the following 4 years. February 2016 (see Annex 3) provides a modulation of

the required annual adjustment in the following matrix of A Member State may ask the Commission to provide for requirements: indicative purposes an update of its reference rate for the expenditure benchmark already in the winter of year t.

However, the Commission assessments and recommendations under the framework of the European

Semester will be based on the reference rate for the expenditure benchmark as calculated in the spring of year t. Should significant differences between the winter and spring computations of the reference rate materialise, these would be taken into account as appropriate in the ex post analysis under the preventive arm of the SGP.

The government expenditure aggregate to be assessed should exclude interest expenditure, expenditure on EU programmes fully matched by EU funds revenue, and non-discretionary changes in unemployment benefit expenditure. Due to the potentially very high variability of investment expenditure, especially in the case of small

Member States, the government expenditure aggregate should be adjusted by averaging nationally financed government gross fixed capital formation over 4 years.

• - 

  Member States that have already reached their MTO The matrix is symmetrical, differentiating between larger could let automatic stabilisers play freely over the cycle. fiscal effort to be undertaken during better times and a They should in particular avoid pro-cyclical fiscal policies smaller fiscal effort to be undertaken during difficult in ‘good times’. Avoidance should be expected to result in economic conditions. In addition, the required effort is annual expenditure growth not exceeding the reference also greater for Member States with unfavourable overall medium-term rate of potential GDP growth, unless the fiscal positions, i.e. where fiscal sustainability is at risk 8 excess is matched by discretionary revenue measures. or the debt-to-GDP ratio is above the 60% of GDP

  reference value of the Treaty. - Member States that have not yet reached their MTO should take steps to achieve it over the cycle. Their Member States that do not follow the appropriate adjustment effort should be higher in good times; it could adjustment path will explain the reasons for the deviation be more limited in bad times. In order to reach their in the annual update of their Stability/Convergence MTO, Member States of the euro area or of ERM-II Programme. should pursue an annual adjustment in cyclically adjusted terms, net of one-off and other temporary measures, of 0.5 Based on the principles mentioned above and on the of a percentage point of GDP as a benchmark. In parallel, explanations provided by Member States, the the growth rate of expenditure net of discretionary Commission and the Council, in their assessments of the revenue measures in relation to the reference medium Stability or Convergence Programmes, should examine term rate of potential GDP growth should be expected to whether the adjustment effort is consistent with the fiscal yield an annual improvement in the government balance adjustment requirements set out in the matrix above. in cyclically adjusted terms net of one-offs and other temporary measures of 0.5 of a percentage point of GDP. In case of an unusual event outside the control of the The reasons for differences between the results yielded by Member State concerned and which has a major impact the two benchmarks should be carefully assessed. When on the financial position of the general government or in assessing compliance with the expenditure benchmark, periods of severe economic downturn for the euro area or the impact of one-off measures is systematically corrected the Union as a whole, Member States may be allowed to for as part of the overall assessment. temporarily depart from the adjustment path towards the

• - 

  A Member State that has overachieved the MTO could 8

temporarily let annual expenditure growth exceed a The "sustainability risk" in the matrix specifying the annual

reference medium-term rate of potential GDP growth as fiscal adjustment refers to the medium-term overall debt

long as, taking into account the possibility of significant sustainability as measured by the S1 indicator, among other information.

medium-term objective implied by the benchmarks for the The direct impact of a pension reform that involves a structural balance and expenditure, on condition that this transfer of pension obligations to or from general does not endanger fiscal sustainability in the mediumgovernment is made up of two elements 11 : i) the social term. contributions or other revenue collected by the pension

scheme taking over the pension obligations and which is In case the Council considers that the adjustment path meant to cover for these obligations and ii) the pension towards the MTO should be strengthened, it shall, in and other social benefits paid by this pension scheme in accordance with Article 121(3) of the Treaty and Articles connection to the obligations transferred. The direct 5(2) and 9(2) of Regulation 1466/97 i, invite the Member impact of such pension reforms does not include interest State concerned to adjust its programme. expenditure that is linked to the higher accumulation of

debt due to forgone social contributions or other revenues. The reference for the estimation of potential output is the

methodology adopted by the Council on 12 July 2002. 9 Following such reforms, the MTO should be adjusted to

reflect the new situation, in line with the procedures for Differences between the adjustment implied by the defining and revising MTO in section 1 above. structural balance and the expenditure benchmarks should be duly taken into account in the assessment of the adjustment effort in different economic times. The reforms must be fully implemented. Only adopted

reforms should be considered, provided that sufficient, detailed information is provided. The reforms must be

Structural reforms adopted by the national authorities through provisions of

binding force, whether legislative or not, in accordance

In order to enhance the growth oriented nature of the Pact, with the applicable domestic laws and procedures. In case structural reforms will be taken into account when the structural reform is not yet fully implemented, the defining the adjustment path to the medium-term Member State should also submit a dedicated structural objective for countries that have not yet reached this reform plan – subsumed, as relevant, in the National objective and in allowing a temporary deviation from this Reform Programme (NRP) or Corrective Action Plan objective for countries that have already reached it. (CAP). A plan announcing upcoming reforms as a simple

manifestation of political intentions or of wishes would

Only major reforms (as defined in the commonly agreed not fulfil the requirements for the application of Article position on flexibility) that have direct long-term positive 5(1) of Regulation 1466/97 i. While it is understood that all budgetary effects, including by raising potential growth, the reforms should be adopted through provisions of and therefore a verifiable positive impact on the long-term binding force before being considered as eligible for the sustainability of public finances will be taken into clause, it is also true that the effective implementation of account. For instance, major health, pension and labour adopted reforms may take time and may be subject to market reforms may be considered. delays and setbacks. This raises the question of

introducing strong safeguards against the risk of

Special attention will be paid to pension reforms implementation failures. introducing a multi-pillar system that includes a The budgetary effects of the reforms over time are mandatory fully funded pillar, which have a direct assessed by the Commission and the Council in a prudent negative impact on the general government deficit (as way, making due allowance for the margin of defined in Article 1 of Regulation 3605/93 i). This impact uncertainties associated to such an exercise.

stems from the fact that revenue, which used to be

recorded as government revenue, is diverted to a pension The flexibility is granted in the context of the assessment fund, which is fully-funded and classified in a sector other of the SCPs, specifically in the relevant Country Specific than general government, and that some pensions and Recommendation. The Country Specific other social benefits, which used to be government Recommendation could make the granting of flexibility expenditure, will be, after the reform, paid by the pension conditional on the subsequent fulfilment of certain scheme. 10 In this specific case, the allowed deviation from eligibility criteria (e.g. the respect of the safety margin). the adjustment path to the MTO or the objective itself Euro area Member States may request to benefit from the should reflect the amount of the direct incremental impact Structural Reform Clause at the time of the Draft of the reform on the general government balance, Budgetary Plans to be submitted by 15 October. Non-euro provided that an appropriate safety margin with respect to area Member States may also apply for the structural

the deficit reference value is preserved.

11 Such transfer of pension obligations occurs when a mandatory fully

funded pillar is introduced, enhanced or scaled down with an equivalent

9 See footnote 4. change in the outstanding pension obligations of the public pension

scheme. Therefore, a transfer of pension obligation effectively takes

9 For more information on the classification of pension schemes, see place between a pension scheme classified outside general government

'Eurostat's Manual on Government Deficit and Debt'. and another scheme that is classified inside.

reform clause by 15 October through an ad hoc (iii) the cumulative temporary deviation granted for application 12 . The structural reform clause may be granted structural reforms and investments (see below) does provided it is endorsed by the Council in the autumn of not exceed 0.75 % of GDP; the same year as an updated Country Specific

Recommendation. The Commission and the Council will (iv) in case the structural reform is planned but not yet consider that the criterion related to the implementation of fully implemented, the Commission and the Council reforms is in part fulfilled ex ante when: - when setting via the CSR the required structural

effort for the year t+1 - will base themselves on the  The Member State presents a medium-term structural requirements as per the matrix of the preventive

reform plan which is comprehensive and detailed and arm, i.e. without any deviation from the adjustment

includes well-specified measures and credible path from the MTO or from the MTO itself.

timelines for their adoption and delivery. However, the CSR will also state that if the planned

The implementation of the reforms will be monitored reform is fully implemented, the ex post assessment

closely in the context of the European Semester. of compliance with the requirements of the

preventive arm will incorporate the allowed

 In the specific case of a Member State in the deviation, i.e. by subtracting it from the requirement

Excessive Imbalances Procedure (EIP), it has set by matrix of adjustment;

submitted a Corrective Action Plan (CAP) providing

the necessary information. The implementation of the (v) the MTO is reached within the four year horizon of

reforms will then be monitored through the EIP. the Stability or Convergence Programme of the year

in which the clause is activated. In order to ensure

In both cases, Member States will be expected to provide that, in the benchmark case of an annual adjustment

in-depth and transparent documentation, providing of 0.5% of GDP, the Member State can regain their

quantitative analysis of the short-term costs – if any – and MTO within the required four year timeframe, the

of both their medium-term budgetary and potential maximum initial distance which the structural

growth impact. The documentation must also include balance of a Member State applying for the

details on the timetable of implementation of the reforms. structural reform clause can be from the MTO is

Concurrently, Member States will provide an independent 1.5% of GDP in year t;

evaluation of the information provided to support their

application for a temporary deviation under the reform (vi) the application of the structural reform clause is

clause, including on the estimated short and medium-term restricted to one single time per period of

impact on the budgetary position and on the timetable for adjustment towards the MTO. In other words, once a

the implementation of the reforms. Alternatively, Member Member State has benefitted from the structural

States should provide comprehensive independent reform clause, it will not be allowed to benefit from

information to support the estimated impact and planned the clause again until it has attained its MTO;

timetable. The Commission will when possible also

provide to the Council its estimate of the quantitative (vii) an appropriate safety margin is continuously

impact of the reforms on the long-term positive budgetary preserved so that the deviation from the MTO or the

effects and on potential growth agreed fiscal adjustment path does not lead to an

excess over the 3 % of GDP reference value for the

Major structural reforms as identified above will be taken deficit. This safety margin will be assessed for each

into account when defining the adjustment path to the Member State taking into account past output

medium-term objective for countries that have not yet volatility and the budgetary sensitivity to output

reached this objective and in allowing a temporary fluctuations.

deviation from this objective for countries that have The Council shall grant the temporary deviation after the

already reached it, provided that: Commission assessment confirms the full implementation

of the agreed reforms. In case a Member State fails to

(i) the reforms meet the above criteria; implement or reverses the agreed reforms, the temporary

deviation from the MTO, or from the adjustment path

(ii) the temporary deviation for structural reforms does towards it, will be considered as not warranted.

not exceed 0.5 % of GDP;

Government investments aiming at, ancillary to, and

economically equivalent to the implementation of major

structural reforms

12 In order to ensure equal treatment of all Member States, the Under the preventive arm of the Pact, some investments

Commission and the Council shall have regard to the different aiming at, ancillary to, and economically equivalent to the

budgetary year of the United Kingdom, with a view to taking implementation of major structural reforms may, under

decisions with regards to the United Kingdom at a point in its certain conditions, justify a temporary deviation from the

budgetary year similar to that at which decisions have been or will be

taken in the case of other Member States. MTO of the concerned Member State or from the adjustment path towards it.

(ii.) the deviation from the MTO or the agreed fiscal Public investments cannot be assimilated "tout court" as adjustment path towards it does not lead to an structural reforms, unless it is duly shown that they are excess over the reference value of 3 % of GDP instrumental to the achievement and implementation of deficit and an appropriate safety margin is the said reforms. It is not legally feasible to establish ex preserved (this safety margin will be assessed for ante that all co-financing expenditure by Member States each Member State taking into account past output in investment projects amounts to structural reforms and volatility and the budgetary sensitivity to output that such expenditure qualifies for the application of fluctuations);

Article 5(1) of Regulation 1466/97 i.

(iii.) subject to a total maximum temporary deviation of Government investments that can be eligible for a 0.5% of GDP for an application for flexibility for temporary deviation must be national expenditures on investment by a Member State, the deviation is equal projects that are to a large extent financed by co-funding to the national expenditure on eligible projects that by the EU under the European Structural and Investment are to a large extent financed by co-funding by the Funds, Trans-European Networks and the Connecting EU under the European Structural and Investment

Europe Facility, as well as national co-financing of Funds 13 , Trans-European Networks and Connecting projects also co-financed by the European Fund for Europe Facility, and to national co-financing of Strategic Investments. eligible investment projects also co-financed by the

EFSI, which have direct long-term positive and The temporary deviation for such investments will be verifiable budgetary effects; subject to a plausibility assessment by the Commission and the Council, where consideration is given to whether (iv.) the cumulative temporary deviation granted under the priority or project in question aims at, is ancillary to, the structural reform clause and the investment and economically equivalent to the implementation of clause does not exceed 0.75 % of GDP; structural reforms. An investment can be considered economically equivalent to a major structural reform only (v.) co-financed expenditure should not substitute for if it can be shown that the investment has a major net nationally financed investments, so that total public positive impact on potential growth and on the investments are not decreased. In order to evaluate sustainability of public finances. the respect of this condition, the Commission will

assess the change in gross fixed capital formation The Commission's plausibility assessment will be based for the year of the application of the clause on the on the detailed information on the contribution of the basis of the Commission forecasts to check that investment projects to the implementation of structural there is no fall in overall investment; reforms and their economic equivalence to a structural reform, including on the positive, direct and verifiable (vi.) the Member State must compensate for any long-term budgetary effect of the expenditure covered by temporary deviations and the MTO must be reached the temporary deviation. This information is necessary to within the four-year horizon of its current Stability ensure compatibility with Article 5(1) and Article 9(1) of or Convergence Programme;

Regulation 1466/97 i, i.e. the SGP provisions which allow temporary deviations from the MTO or the adjustment path towards it to accommodate structural reforms with (vii.) the full temporary deviation (corresponding to the positive, direct and verifiable effect on fiscal total amount of the national part of eligible cosustainability, including via potential growth. Therefore financed expenditure but not exceeding 0.5% of the Member State should present information by main GDP) will be granted for one single time per period category of projects co-financed by the EU (including the of adjustment towards the MTO.

EFSI), the size of the expenditure involved, the key features and objectives of the investment project and Ex-ante, the potential deviation will depend on the specifying how it will contribute to boost potential growth commitments of the EU structural funds towards each and the long-term sustainability of public finances. Member State as well as on the level of planned cofinancing.

Ex-post, the allowed deviation will depend on For such investments, a Member State will benefit from a the effective payments of EU structural funds and on the temporary deviation of up to 0.5% of GDP from the correspondent effective co-financing. In case the actual structural adjustment path towards the MTO, or from the co-financing falls short of projected co-financing, a MTO for Member States that have reached it, if the correction will be added to the required change in the following conditions are met: structural balance, which could potentially lead to the

opening of a significant deviation procedure (i.) its GDP growth is negative or GDP remains well

below its potential (resulting in a negative output

gap greater than 1.5 % of GDP); 13 Including eligible projects co-financed through the Youth

Employment Initiative.

the information requested in Section 4.4 of the

The "investment clause" is activated ex-ante upon request " Commonly agreed position on Flexibility within the from Member States in their Stability or Convergence Stability and Growth Pact".

Programmes (SCPs). The flexibility is granted in the context of the assessment of the SCPs, specifically in the

relevant Country Specific Recommendation. The Country 3) A significant deviation from the appropriate Specific Recommendation could make the granting of adjustment path

flexibility conditional on the subsequent fulfilment of certain eligibility criteria (e.g. the respect of the safety margin). Euro area Member States may request to benefit The identification of a significant deviation from the from the "investment clause" also at the time of the Draft medium-term budgetary objective or the appropriate Budgetary Plans to be submitted by 15 October. adjustment path towards it should be based on outcomes

as opposed to plans. It should follow an overall Non-euro area Member States may also apply for the assessment, with the structural balance as a reference, "investment clause" by 15 October through an ad hoc including an analysis of expenditure net of discretionary

application 14 . The "investment clause" may be granted revenue measures.

provided it is endorsed by the Council in the autumn of that same year as an updated Country Specific For a Member State that has not reached its MTO, the Recommendation. The application should be submitted in deviation will be considered significant if: the year ahead of the application of the clause. That is, in the SCP or at the time of the DBP (or the ad hoc both application by a non-euro area MS) submitted in year t for an application of the clause in year t+1. (i) the deviation of the structural balance from the

appropriate adjustment path is at least 0.5% of GDP in Ex-ante, the Commission will assess the eligibility of one single year or at least 0.25% of GDP on average per such investments where on the basis of the detailed year in two consecutive years; and information provided by the Member States (as set out on

page 10 above), consideration is given to whether the (ii) an excess of the rate of growth of expenditure net of priority or project in question aims at, is ancillary to, and discretionary revenue measures over the appropriate economically equivalent to the implementation of adjustment path defined in relation to the reference structural reforms. The Commission will conclude that an medium-term rate of growth has had a negative impact on investment can be considered as being economically the government balance of at least 0.5 of a percentage equivalent to a major structural reform if it can be shown point of GDP in one single year, or cumulatively in two that the investment has a major net positive impact on consecutive years; potential growth and on the sustainability of public

finances. The Commission will also assess ex-ante or if one of the two conditions (i) and (ii) is verified and whether the projects satisfy the requirement that they are the overall assessment evidences limited compliance also to large extent financed by EU co-funding. with respect to the other condition.

Ex-ante, the Commission will also assess eligibility to the The government expenditure aggregate to be assessed investment clause with respect to the spring forecast of should exclude interest expenditure, expenditure on EU year t and will factor it in the ex-ante guidance it provides programmes fully matched by EU funds revenue, and at the occasion of the European Semester. Ex-post non-discretionary changes in unemployment benefit assessment will be based on outturn data available in year expenditure. Due to the potentially very high variability t+2, as it is usually the case. The temporary deviation will of investment expenditure, especially in the case of small be reviewed in order to reflect the effective co-financing Member States, the government expenditure aggregate of the Member States. The (downward) revision of this should be adjusted by averaging nationally financed temporary deviation shall not imply that a Member State government gross fixed capital formation over four years. implements an effort superior to the one necessary to The excess of expenditure growth over the medium-term reach its MTO. reference will not be counted as a breach of the

expenditure benchmark to the extent that it is fully offset When requesting the application for flexibility for by revenue increases mandated by law. investment, Member States should include in their SCPs

For a Member State that has overachieved the MTO, the

14 occurrence of condition (ii) is not considered in the In order to ensure equal treatment of all Member States, the

Commission and the Council shall have regard to the different assessment of the existence of a significant deviation,

budgetary year of the United Kingdom, with a view to taking unless significant revenue windfalls are assessed to

decisions with regards to the United Kingdom at a point in its jeopardise the MTO over the programme period.

budgetary year similar to that at which decisions have been or

will be taken in the case of other Member States. A deviation may not be considered significant in the case of severe economic downturn for the euro area or the EU

as a whole or when resulting from an unusual event to a common methodology to be published by the outside of the control of the Member State concerned Commission. which has a major impact on the financial position of the general government, provided that this does not endanger The Commission may, in accordance with Article 126(3), fiscal sustainability in the medium-term. also prepare a report notwithstanding the fulfilment of the

requirements under the criteria laid down in Article 126(2)(a) of the Treaty if it is of the opinion that there is a

• B. 

  T HE EXCESSIVE DEFICIT PROCEDURE risk of an excessive deficit in a Member State.

In line with the provisions of the Treaty, the Commission For a Member State that was subject to an excessive has to examine compliance with budgetary discipline on deficit procedure on 8 November 2011 and for a period of the basis of both the deficit and the debt criteria. three years from the correction of the excessive deficit,

occurrence of condition (b) above will not trigger the preparation of a report under Article 126(3) of the Treaty,

• 1) 

  Preparation of a Commission report under provided that the Member States concerned makes Article 126(3) sufficient progress towards compliance with the debt

  reduction benchmark as assessed in the Opinion adopted by the Council on its Stability and Convergence

The Commission will always prepare a report under Programmes. Specifically, the Member State concerned Article 126(3) of the Treaty when at least one of the should present in its Stability or Convergence Programme conditions (a) or (b) below holds: budgetary objectives consistent with the respect of the

debt reduction benchmark, including the forward-looking (a) a reported or planned government deficit exceeds the element, by the end of the three-year transitional period.

reference value of 3% of GDP; The assessment should in particular consider whether the budgetary plans are adequate to the task of avoiding

(b) a reported government debt ratio is above the breaching the benchmark by the end of the programme reference value of 60% of GDP and period.

(i) its differential with respect to the reference value

has not decreased over the past three years at an In order to define "sufficient progress towards

average rate of one-twentieth as a benchmark, which compliance" during the transition period, the Commission

is measured by an excess of the debt ratio reported will identify a minimum linear structural adjustment

for the year t over a backward-looking element of a ensuring that – if followed – Member States will comply

benchmark for debt reduction computed as follows 15 with the debt rule at the end of the transition period. This minimum linear structural adjustment path will be built

bb taking into account both the influence of the cycle and the t =60%+0.95/3(b t-1 -60%)

+0.95 2 /3(b 3 forward-looking nature of the debt benchmark. Also, in t-2 -60%)+0.95 /3(b t-3 -60%) order to ensure continuous and realistic progress towards

(ii) the budgetary forecasts as provided by the compliance during the transition period, Member States

Commission services indicate that, at unchanged should respect simultaneously the two below conditions:

policies, the required reduction in the differential will - First, the annual structural adjustment should not deviate not occur over the three-year period encompassing by more than ¼ % of GDP from the minimum linear the two years following the final year for which the structural adjustment ensuring that the debt rule is met by data is available, which is measured by an excess of the end of the transitional period. the debt ratio forecast by the Commission services

for the year t+2 over a forward-looking element of a - Second, at any time during the transition period, the

benchmark for debt reduction computed as follows remaining annual structural adjustment should not exceed ¾ % of GDP.

bb t+2 =60%+0.95/3(b t+1 -60%)

+0.95 2 /3(b When the deficit ratio exceeds the reference value, the t -60%)+0.95 3 /3(b t-1 -60%), where bb t stands

for the benchmark debt ratio in year t and b Commission shall examine in its report if one or more of t stands

for the debt-to-GDP ratio in year t the exceptions foreseen in Article 126(2)(a) apply. In particular, the Commission shall consider whether the

deficit ratio has declined substantially and continuously

(iii) the breach of the benchmark cannot be attributed and reached a level that comes close to the reference to the influence of the cycle, to be assessed according value.

The Commission shall also consider whether the excess of

15 the deficit ratio over the reference value is only bb

t stands for the benchmark debt ratio in year t and b t stands

for the debt-to-GDP ratio in year t exceptional and temporary and whether the ratio remains close to the reference value. In order to be considered as

exceptional, the excess has to result from an unusual assets, guarantees, notably linked to the financial sector, event outside the control of the Member State concerned and any implicit liabilities related to ageing and private and with a major impact on the financial position of the debt, to the extent that it may represent a contingent general government, or it has to result from a ‘severe implicit liability for the government); economic downturn’. The Commission and the Council may consider an excess over the reference value resulting Furthermore, due consideration will be given in the report from a ‘severe economic downturn’ as exceptional in the to any other factors which, in the opinion of the Member sense of the second indent of Article 126(2)(a) of the State concerned, are relevant in order to comprehensively Treaty if the excess over the reference value results from assess compliance with the deficit and debt criteria. To a negative annual GDP volume growth rate or from an this end, the Member State concerned may put forward to accumulated loss of output during a protracted period of the Council and to the Commission the specific factors very low annual GDP volume growth relative to its that it considers relevant, in due time for the preparation potential. The indicator for assessing accumulated loss of of the report under Article 126(3) and as a rule within one output is the output gap, as calculated according to the month of the reporting dates established in Article 3 (2) method agreed by the Council on 12 July 2002. 16 The and (3) of Regulation (EC) No 479/2009 i. The Member excess over the reference value shall be considered as State shall provide the information necessary for the temporary if the forecasts provided by the Commission Commission and the Council to make a comprehensive indicate that the deficit will fall below the reference value assessment of the budgetary impact of these factors. In following the end of the unusual event or the severe that context, special consideration will be given to: economic downturn. budgetary efforts towards increasing or maintaining at a

high level financial contributions to fostering international The Commission report under Article 126(3) shall also solidarity and to achieving Union policy goals; the debt take into account whether the government deficit exceeds incurred in the form of bilateral and multilateral support government investment expenditure and take into account between Member States in the context of safeguarding all other relevant factors. financial stability; the debt related to financial

stabilisation operations during major financial Before establishing that an excessive deficit exists on the disturbances. A balanced overall assessment has to basis of the debt criterion, the whole range of relevant encompass all these factors. factors covered by the Commission report under Article

126(3) should be taken into account. The Commission report will give due consideration to the implementation of pension reforms introducing a multi

The Commission report should appropriately reflect the pillar system that includes a mandatory fully funded pillar following relevant factors: and to the net cost of the publicly managed pillar. The net

cost of the reform is measured as its direct impact on the - the developments in the medium-term economic general government deficit (as defined in Article 1 of position (in particular potential growth, including the Regulation 479/2009 i). This impact stems from the fact different contributions provided by labour, capital that revenue, which used to be recorded as government accumulation and total factor productivity, cyclical revenue, is diverted to a pension fund, which is fullydevelopments and the private sector net savings position); funded and classified in a sector other than general

government, and that some pensions and other social - the developments in the medium-term budgetary benefits, which used to be government expenditure, will position (in particular, the record of adjustment towards be, after the reform, paid by the pension scheme. Thus, the medium-term budgetary objective, the level of the net costs do not include interest expenditure that is linked primary balance and developments in primary to the higher accumulation of debt due to forgone social expenditure, both current and capital, the implementation contributions or other revenues. This consideration should of policies in the context of the prevention and correction be part of a broader assessment of the overall features of of excessive macroeconomic imbalances, the the pension system created by the reform, namely whether implementation of policies in the context of the common it promotes long-term sustainability while not increasing growth strategy of the Union and the overall quality of risks for the medium-term budgetary position. public finances, in particular the effectiveness of national budgetary frameworks);

• - 

  the developments in the medium-term government debt 2) The decision on the existence of an excessive

position, its dynamics and sustainability (in particular, deficit

risk factors including the maturity structure and currency denomination of the debt, stock-flow adjustment and its When assessing compliance on the basis of the deficit composition, accumulated reserves and other financial criterion, if the debt ratio exceeds 60% of GDP, the

relevant factors assessed in the Commission report under Article 126(3) will also be taken into account in the steps

16 See footnote 4. leading to the decision on the existence of an excessive

deficit foreseen in paragraphs (4), (5) and (6) of Article 126 of the Treaty only if the double condition of the conducive to, the fulfilment of the targets for the headline overarching principle – that, before the relevant factors deficit and the underlying improvement in the structural mentioned in Article 2 (3) of Regulation 1467/97 i are balance. taken into account, the general government deficit remains close to the reference value and its excess over As a rule, the initial deadline for correcting an excessive the reference value is temporary – is fully met. However, deficit should be the year after its identification and thus, the relevant factors assessed in the Commission report normally, the second year after its occurrence unless there under Article 126(3) will be taken into account in the are special circumstances. This deadline should be set steps leading to a decision on the existence of an taking into account the effort that the Member State excessive deficit foreseen in paragraphs (4), (5) and (6) of concerned can undertake, with a minimum of 0.5% of Article 126 of the Treaty when assessing compliance on GDP, based on a balanced assessment of the relevant the basis of the debt criterion.. The balanced overall factors considered in the Commission report under Article assessment to be made by the Council in accordance with 126(3). If this effort seems sufficient to correct the Article 126(6) shall encompass all these factors. excessive deficit in the year following its identification,

the initial deadline should not be set beyond the year Where the excess of the deficit over the reference value following its identification. reflects the implementation of a pension reform introducing a multi-pillar system that includes a mandatory fully funded pillar, the Commission and the Longer deadlines could be set, in particular in the case of Council shall also consider the net cost of the reform to excessive deficit procedures based on the debt criterion, the publicly managed pillar when assessing developments when the government balance requested to comply with in EDP deficit figures as long as the general government the debt criterion is significantly higher than a 3% of GDP deficit does not significantly exceed a level that can be deficit. considered close to the 3% of GDP reference value and the debt ratio does not exceed the 60% of GDP reference value, on condition that overall fiscal sustainability is

maintained. Further steps in the excessive deficit procedure and

clarifying the conditions for abeyance

The Council shall decide on the existence of an excessive

deficit in accordance with Article 126 (6) of the Treaty, The Council recommendation made in accordance with on the basis of a Commission recommendation, as a rule Article 126(7) of the Treaty shall establish a deadline of within four months of the reporting dates established in no longer than six months for effective action to be taken Article 3 (2) and (3) of Regulation (EC) No 479/2009 i. by the Member State concerned. When warranted by the The Council may decide later on the cases in which the seriousness of the situation, the deadline to take effective budgetary statistical data have not been validated by the action to comply with a recommendation in accordance Commission (Eurostat) shortly after the reporting dates with Article 126(7) may be three months.

established in Regulation (EC) No 479/2009 i.

Following the expiry of the deadline established for taking effective action in a recommendation under Article

• 3) 

  The correction of an excessive deficit 126(7) or the four months period following the adoption

  of a notice under Article 126(9), the Commission shall assess whether the Member State concerned has acted in

Minimum fiscal effort for countries in excessive deficit compliance with the recommendation or notice. This and initial deadline for its correction assessment should consider whether the Member State

concerned has publicly announced or taken measures that

The Council recommendations under Article 126(7) and seem sufficient to ensure adequate progress towards the notices under Article 126(9), based on recommendations correction of the excessive deficit within the time limits of the Commission, will request that the Member State set by the Council.

concerned achieves annual budgetary targets that, on the

basis of the underlying forecast, are consistent with a The assessment should take into account the report on minimum annual improvement in its cyclically adjusted action taken in response to the Council recommendation balance net of one-off and temporary measures of at least or notice that, within the deadline provided for, the 0.5 of a percentage point of GDP as a benchmark, in order Member State concerned should submit to the to correct the excessive deficit within the deadline set in Commission and the Council. The report on action taken the recommendation. Specifically, the recommendations in response to the Council recommendation in accordance will set out annual targets for the headline deficit, with the with Article 126(7) should include the targets for the final year target at or below 3% of GDP, and for the government expenditure and revenue and for the improvement in the structural balance. They will also be discretionary measures, on both the expenditure and the formulated in terms of the expenditure benchmark, that is, revenue side, consistent with the Council the maximum allowable growth rate of expenditure net of recommendation as well as information on the measures discretionary revenue measures consistent with, and taken and the nature of those envisaged to achieve the

targets. The report on action taken in response to a notice On 29 November 2016, the Economic and Financial in accordance with Article 126(9), should include the Committee agreed on adopted its Opinion titled targets for the government expenditure and revenue and “Improving the assessment of effective action in the for the discretionary measures, on both the expenditure context of the excessive deficit procedure – a and the revenue side, as well as information on the actions specification of the methodology” (see Annex 4), which being taken in response to specific Council was endorsed by the ECOFIN Council on 6 December recommendations, so as to allow the Council to take, if 2016. necessary, a decision to impose sanctions in accordance with Article 126(11) of the Treaty. Any such decision If effective action has been taken in compliance with a shall be taken no later than four months after the Council recommendation under Article 126(7) (or notice under decision giving notice to the euro area Member State Article 126(9)) of the Treaty and unexpected adverse concerned to take measures in accordance with Article economic events with major unfavourable consequences 126 (9) TFEU. for government finances occur after the adoption of that

recommendation or notice, the Council may decide, on a In case it appears that the Member State concerned has recommendation from the Commission, to adopt a revised not acted in compliance with the recommendation or recommendation under Article 126(7) (or notice under notice, the following step of the procedure provided by Article 126(9)) of the Treaty. The revised Article 126 of the Treaty, as clarified by Regulation (EC) recommendation (or notice) may, taking into account the No 1467/97, shall be activated. relevant factors mentioned in Article 2 (3) of Regulation

1467/97, notably extend the deadline for the correction of If the Commission considers that the Member State has the excessive deficit by one year as a rule. The occurrence acted in compliance with the recommendation or notice, it of unexpected adverse economic events with major shall inform the Council accordingly, and the procedure unfavourable budgetary effects shall be assessed against shall be held in abeyance. If, thereafter, it appears that the economic forecast underlying the Council action by the Member State concerned is not being recommendation or notice. implemented or is proving to be inadequate and if the possibility of repeating the same step does not apply, the For the assessment of effective action, a decision-tree sets following step of the procedure provided by Article 126 out the order of logical and procedural steps (see below of the Treaty, as clarified by Regulation (EC) No for a schematic overview). First, the changes in the 1467/97, shall be immediately activated. When nominal and structural balances are assessed. When a considering whether the following step of the procedure Member State achieves both its headline deficit target and should be activated, the Commission and the Council the recommended improvement in the structural balance, should take into account whether the measures required in the Member State is considered to have delivered the recommendation or notice are fully implemented and effective action and the EDP is put into abeyance – whether other budgetary variables under the control of the meaning it is put on hold until the excessive deficit is government, in particular expenditure, are developing in eventually corrected, as long as it continues to comply line with what was assumed in the recommendation or with the headline and structural targets. When this is not notice. achieved, the Commission engages in a more detailed

examination, known as a careful analysis. The careful In the specific case of recommendations or notices which analysis first uses the expenditure benchmark to assess have set a deadline for the correction of the excessive fiscal effort. If the expenditure benchmark is met, deficit more than one year after its identification, the meaning that it shows an effort equal to or above what assessment of the action taken made by the Commission was recommended, there is a presumption that the after the expiry of the deadline established in the Member State concerned has delivered on its policy recommendation under Article 126(7) or the four month commitments. If the expenditure benchmark is not met, period following a notice under Article 126(9) should there is a presumption the Member State has not delivered mainly focus on the measures taken in order to ensure the on its policy commitments. achievement of the recommended budgetary targets in the year following the identification of the excessive deficit. When assessing compliance with the expenditure The Commission should, during the period of abeyance, benchmark, expenditure is measured excluding interest assess whether the measures already announced or taken expenditure, expenditure on Union programmes fully are being adequately implemented and whether additional matched by Union funds revenue and non-discretionary measures are announced and implemented in order to changes in unemployment benefit expenditure. Nationally ensure adequate progress toward the correction of the financed government gross fixed capital formation is excessive deficit within the time limits set by the Council. smoothed over a 4-year period. In addition, any

discretionary revenue measures are netted out from the expenditure aggregate. Any possible one-off measures,

Clarifying the concept of effective action and repetition whether on the expenditure or on the revenue side, are of steps in the excessive deficit procedure also excluded. Moreover, to enhance the quality of the

revenue measures' budgetary impact estimates, the National Fiscal Councils are invited to conduct and send

their estimates – when available – to the Commission. All relevant data, including data about the yields of discretionary fiscal measures, used by the Commission will be shared with the Member States in a timely manner, enabling them to replicate the calculation underlying the Commission's assessments and recommendations in the context of the EDP.

Any conclusion needs to take into consideration the quantitative information from the expenditure benchmark together with other considerations – mostly of qualitative nature – that do not emerge from the benchmark itself.

The Commission uses qualitative economic judgement in making its final assessment where relevant, in particular , as part of the “careful analysis” which the Commission uses to determine whether the Member State concerned has delivered or not on its policy commitments. In case the Commission concludes, on the basis of the careful analysis, that the policy commitments have not been delivered, then the procedure will be stepped-up.

For legal reasons, a deficit-based EDP cannot be stepped up if the Member State achieves its intermediate headline deficit target, even when the recommended change in the structural balance is not achieved. At the same time, though, a careful analysis should still be conducted to better understand the nature of the underlying budgetary developments. The decision tree is used to illustrate the procedural steps undertaken.

An effective action assessment based only on a forecast showing compliance with nominal targets in real-time should be considered as preliminary and needs to be reassessed based on actual outcomes. If ex-post the reassessment of effective action based on notified data points to non-compliance with the headline deficit target in addition to insufficient structural effort, the procedure could be stepped-up.

With respect to multi-annual EDPs it is considered more appropriate to assess the fiscal policy effort over the entire correction period. In this way, a Member State cannot be unduly punished for a front-loaded effort. At the same time, it ensures that a Member State meeting its nominal target in the first year without delivering the recommended annual fiscal policy effort would only be found compliant with the recommendation in the later years if it delivers the cumulative fiscal effort over the correction period concerned, in case the nominal deficit falls short of the targets later on.

Decision-Tree Used for Assessing Effective Action 4) Conditions of abrogation of Council decisions in the context of the EDP The submission and assessment of Stability and

Convergence Programmes is an important component of

When considering whether an excessive deficit procedure the "European Semester" of economic policy coordination should be abrogated, the Commission and the Council and surveillance. Under the European Semester, the should take a decision on the basis of notified data. Commission and the Council shall assess Stability and

Convergence Programmes before key decisions on the

Moreover, the excessive deficit procedure should only be national budgets for the following years are taken, to abrogated if the Commission forecasts indicate that: provide policy advice on fiscal policy intentions. Member

States shall align the timing of submissions and

• - 

  the deficit will not exceed the 3% of GDP threshold over assessments of Stability and Convergence Programmes the forecast horizon; and and National Reform Programmes. 17 For reasons of

  expediency, a copy of the programmes should be

• - 

  the debt ratio fulfils the forward-looking element of the submitted to a single electronic email addressed at the

debt benchmark. Commission. 18 Within the same timeframe, the tables

should be submitted to the Commission by means of the

dedicated web application.

• 5) 

  Abrogation of Council decisions in the context Under the European Semester the policy surveillance and of the EDP based on the deficit criterion for coordination cycle starts with a horizontal review under Member States having implemented multi-pillar which the European Council, based on input from the pension reforms Commission and the Council, identifies the main

economic challenges facing the EU and the euro area and give strategic guidance on policies. Member States are

When considering under Article 126 (12) whether some expected to take into account the horizontal guidance by or all of the Council decisions under Article 126(6) to (9) the European Council when preparing their Stability and and (11) related to excessive deficit procedures based on Convergence Programmes and justify any departure from the deficit criterion should be abrogated, the Commission it. Similarly, the Commission and Council are expected to and the Council, take into account the net cost of a take due account of the guidance from the European pension reform introducing a multi-pillar system that Council when assessing the individual programmes.

includes a mandatory fully-funded pillar only if the

general government deficit has declined substantially and In view of the strengthened role of the Stability and continuously and has reached a level that comes close to Convergence Programmes in the process of multilateral the reference value. surveillance under the European Semester, it is important

that their information content is suitable and allows for

SECTION II comparison across Member States. Whilst acknowledging that the programmes are the responsibility of national GUIDELINES ON THE FORMAT AND authorities and that the possibilities and practices differ across countries, Council Regulation (EC) No 1466/97 i, as

CONTENT OF STABILITY AND amended by Council Regulation (EC) No 1055/05 i and by CONVERGENCE PROGRAMMES Regulation (EU) Y of the European Parliament and of the

Council, sets out the essential elements of these

programmes. In particular, Stability and Convergence

The Stability and Growth Pact requires Member States to Programmes include the necessary information for a submit Stability or Convergence Programmes, which are meaningful discussion on fiscal policy for the short and at the basis of the Council’s surveillance of budgetary the medium term, including a fully-fledged multi-annual positions and its surveillance and co-ordination of macroeconomic scenario, projections for the main economic policies. The Council, on a recommendation government finances variables and the relevant from the Commission, and after consulting the Economic components, and a description and quantification of the and Financial Committee, will, if necessary, adopt an envisaged budgetary strategy.

opinion on the programmes. If it considers that its

objectives and contents should be strengthened, in The experience gathered during the first years of particular with regard to the adjustment path towards the implementation of the Pact with the Stability and MTO, the Council will, in its opinion, invite the Member Convergence Programmes shows that guidelines on the State concerned to adjust its programme. content and format of the programmes not only assist the

Member States are expected to take the policy measures 17 In the case of the UK, which has a different fiscal year, submission

they deem necessary to meet the objectives of their will follow the presentation of the Spring Budget and be as close as Stability or Convergence Programmes, whenever they possible to its publication.

divergence from those objectives.

Member States in drawing up their programmes, but also general government balance in relation to the MTO, and facilitate their examination by the Commission, the the projected path for the general government debt ratio. Economic and Financial Committee and the Council, thus Convergence programmes shall also present the mediumproviding for a consistent implementation of the Stability term monetary policy objectives and their relationship to and Growth Pact. price and exchange rate stability.

Member States, when preparing the first Stability or

The guidelines set out below should be considered as a Convergence Programme after a new government has code of good practice and checklist to be used by Member taken office, are invited to show continuity with respect to States in preparing Stability or Convergence Programmes. the budgetary targets endorsed by the Council on the basis Member States are expected to follow the guidelines, and of the previous Stability/Convergence Programme and - to justify any departure from them. Member States under with an outlook for the whole legislature - to provide financial programme assistance could submit only the information on the means and instruments envisaged to tables as in annex 2. reach these targets by setting out its budgetary strategy.

Member States will provide in their Stability or

• 1) 

  Status of the programme and of the measures Convergence Programme an update of the fiscal plans for the year of submission of the programme, based on the

Each programme mentions its status in the context of April notification, including a description and national procedures, notably whether the programme was quantification of the policies and measures. The Stability presented to the national Parliament and whether there has or Convergence Programme will explain revisions of been parliamentary approval of the programme. The general government balance and expenditure targets set in programme also indicates whether the national Parliament the programmes submitted in year t-1.

had the opportunity to discuss the Council opinion on the

previous programme To permit a comprehensive understanding of the path of and, if relevant, any

recommendation, decision, or warning. the government balance and of the budgetary strategy in general, information should be provided on expenditure

The state of implementation of the measures (enacted and revenue ratios and on their main components, as well versus planned) presented in the programme should be as on one-off and other temporary measures. Bearing in

specified. mind the conditions and criteria to establish the expenditure growth under Article 5(1) of Regulation

1466/97, the programmes should also present the planned

• 2) 

  Content of Stability and Convergence growth path of government expenditure, including the

Programmes corresponding allocation for gross fixed capital formation, the planned growth path of government revenue at

In order to facilitate comparison across countries, unchanged policy and a quantification of the planned Member States are expected, as far as possible, to follow discretionary revenue measures.

the model structure for the programmes in Annex 1. The

standardisation of the format and content of the To permit a comprehensive understanding of the path of programmes along the lines set below will substantially the debt ratio, information should be provided, to the

improve the conditions for equality of treatment. extent possible, on components of the stock-flow adjustment, planned privatisation receipts, and other

The quantitative information should be presented financial operations. In order to assess the extent of following a standardised set of tables (Annex 2). Member possible risks to the budgetary outlook, information States should endeavour to supply all the information in should also be provided on implicit liabilities related to these tables. The tables could be complemented by further ageing and private debt, to the extent that it may represent

information wherever deemed useful by Member States. a contingent implicit liability for the government, and other contingent liabilities, such as public guarantees,

In addition to the guidelines set out below, the with potentially large impact on the general government programmes should provide information on the accounts.

consistency with the broad economic policy guidelines

and the National Reforms Programmes of the budgetary The budget balances should be broken down by subobjectives and the measures to achieve them, as well as sector of general government (central government, state on the measures to enhance the quality of public finances government for Member States with federal or quasiand

to achieve long-term sustainability. federal institutional arrangements, local government and, social security).

Objectives and their implementation Assumptions and data

Member States will present in their Stability and

Convergence Programmes budgetary targets for the

Stability and Convergence programmes should be based on realistic and cautious macroeconomic forecasts. The

Commission forecasts can provide an important Measures, structural reforms and long-term contribution for the coordination of economic and fiscal sustainability

policies. Member States are free to base their

Stability/Convergence Programmes on their own The programmes should describe the budgetary and other projections. Budgetary planning shall be based on the economic policy measures being taken, envisaged or most likely macro-fiscal scenario or on a more prudent assumed to achieve the objectives of the programme, and, scenario. Particular caution should be used in including in the case of the main budgetary measures, an assessment the effects of recently implemented structural reforms. If of their quantitative effects on the general government such effects are included in the projections, these should balance. Measures having significant ‘one-off’ effects be explicitly quantified together with the underlying should be explicitly identified. The further forward the assumptions and/or model, including variables and year of the programme, the less detailed the information parameters. Significant divergences between the national could be, but could contain quantified examples of and the Commission services’ forecasts should be measures that would allow reaching the programme explained in some detail. This explanation will serve as a targets.

reference when forecast errors are assessed ex post.

However, in order to allow a meaningful discussion the

The programmes should present the main assumptions programmes should provide concrete indications on the about expected economic developments and important budgetary strategy for year t+1, including preliminary economic variables that are relevant to the realisation of projections under unchanged policy and targets for the their budgetary plans, such as government investment general government balance, expenditure and revenue and expenditure, real GDP growth, employment and inflation. their main components, and a description and The assumptions on real GDP growth should be quantification of the policies taken, envisaged or assumed underpinned by an indication of the expected demand to reach the fiscal targets. Should the Council consider contributions to growth. The possible upside and that the information provided in the programme is downside risks to the outlook should be brought out. insufficient, it shall, in its opinion, invite the Member

State concerned to submit a revised programme, in line

Furthermore, the programmes should provide sufficient with the provisions of Articles 5(2) and 9(2) of regulation information about GDP developments to allow an 1466/97.

analysis of the cyclical position of the economy and the sources of potential growth. The outlook for sectoral As implied by the Commission services for the purpose of balances and, especially for countries with a high external forecasting, the 'no-policy change' assumption involves deficit, the external balance should be analysed. the extrapolation of revenue and expenditure trends and

the inclusion of measures that are known in sufficient As regards external macroeconomic developments, euro detail. In particular, only measures that have been area Member States and Member States participating in specified and committed to by governments will be taken ERM II in particular should use the “common external into account. Each Member State should appropriately assumptions” on the main extra-EU variables used by the define a scenario at unchanged policies and make public Commission in its spring forecast, which shall be the involved assumptions, methodologies and relevant provided in due time by the Commission (on the basis of parameters. the final table in Annex 2), or, for comparability reasons, present sensitivity analysis based on the common Structural reforms should be specifically analysed when assumptions for these variables when the differences are they are envisaged to contribute to the achievement of the significant. objectives of the programme. In particular, given the

relevance of ‘major structural reforms’ in defining the Assumptions about interest rates and exchange rates, if adjustment path to the medium-term objective for not presented in the programme, should be provided to the Member States that have not yet reached it and allowing a Commission services to allow for the technical temporary deviation from the MTO for Member States assessment of the programmes. that have already reached it (see Section I), the

programmes should include comprehensive information In order to facilitate the assessment, the concepts used on the budgetary and economic effects of such reforms. shall be in line with the standards established at European Programmes should notably include a quantitative costlevel, notably in the context of the European system of benefit analysis of the short-term costs – if any – and of accounts (ESA). The programmes should ensure the the direct long-term benefits of the reforms from the formal and substantial consistency of the required budgetary point of view. They should also analyse the information on budgetary aggregates and economic projected impact of the reforms on economic growth over assumptions with ESA concepts. This information may be time while explaining the used methodology. complemented by a presentation of specific accounting concepts that are of particular importance to the country The programmes should also provide information on concerned. measures taken or envisaged to improve the quality of public finances on both the revenue and expenditure side assessment by the Commission and the Council of (e.g. tax reform, value-for-money initiatives, measures to sustainability of the Member States’ public finances improve tax collection efficiency and expenditure within the context of the SGP. control).

The programmes could further include information on Sensitivity analysis

existing and envisaged national budgetary rules

(expenditure rules, etc.) as well as on other institutional Given the inevitability of forecast errors, Stability and features of the public finances, in particular budgetary Convergence Programmes include comprehensive procedures and public finance statistical governance. sensitivity analyses and/or develop alternative scenarios,

in order to enable the Commission and the Council to

Finally, the programmes should outline the countries' consider the complete range of possible fiscal outcomes.

strategies to ensure the sustainability of public finances,

especially in light of the economic and budgetary impact In particular, the programmes shall provide an analysis of of ageing populations and the fiscal risks stemming from how changes in the main economic assumptions would contingent liabilities. affect the budgetary and debt position and indicate the

underlying assumptions about how revenues and

The Working Group on Ageing (AWG) of the Economic expenditures are projected to react to variations in Policy Committee (EPC) is responsible for producing economic variables. This should include the impact of common budgetary projections on: public spending on different interest rate assumptions and, for nonpensions; health-care; long-term care; education; participating Member States, of different exchange rate unemployment transfers; and where possible and relevant, assumptions, on the budgetary and debt position. age-related revenues, such as pension contributions. Countries that do not use the common external These common projections will provide the basis for the assumptions should endeavour to provide a sensitivity assessment by the Commission and the Council of analysis also on main extra-EU variables when the sustainability of the Member States’ public finances differences are significant.

within the context of the SGP. They should be included in

the programmes. In the case of ‘major structural reforms’ (see section I),

the programmes shall also provide an analysis of how

The programmes should include all the necessary changes in the assumptions would affect the effects on the additional information, both of qualitative and budget and potential growth.

quantitative nature, so as to enable the Commission and the Council to assess the sustainability of Member States' public finances based on current policies. To this end, information included in programmes should focus on new relevant information that is not fully reflected in the latest

common EPC projections. For example, Member States Time horizon

might want to include information on the latest

demographic trends and major policy changes in pension The information about paths for the general government and health-care systems. Programmes should clearly surplus/ deficit ratio, the expenditure and revenue ratios distinguish between measures that have been enacted and and their components, in particular the planned growth of

measures that are envisaged. government expenditure, the planned growth path of government revenue at unchanged policy and the planned

Given the uncertainty surrounding long-term projections, discretionary revenue measures, appropriately quantified, the assessment by the Commission and the Council as well as for debt ratio and the main economic should include stress tests that provide an indication of assumptions should be on an annual basis and should the risks to public finance sustainability in the event of cover, as well as the current and preceding year, at least adverse demographic, financial, economic or budgetary the three following years (Article 3(3) and Article 7(3)),

developments. leaving it open to Member States to cover a longer period if they so wish.

In addition to the requirements mentioned above, Member

States may present different projections, based on national The horizon for the long-term projections on the calculations. In such a case, Member States should budgetary implications of ageing should cover the same explain in detail the underlying assumptions of these period as the EPC projections.

projections, the used methodology, the policies implemented or planned to meet the assumptions, and the

divergences between the national projections and the Updating of programmes

common projections produced by the AWG. In order to ensure proper ex ante coordination and

These national projections and their assumptions, surveillance of economic policies, submissions of including their plausibility, will enter the basis for the Stability and Convergence Programmes should take place

each year preferably by mid–April, but in any case not later than the end of April.

The whole process should be completed with the adoption of Council Opinions on the programmes as a rule before the end of July each year.

Stability and Convergence Programmes should show how developments have compared with the budgetary targets in the previous programme or update, including the information on how the last year’s policy guidance in the

Council Opinions on the Stability and Convergence

Programmes and country-specific recommendations have been reflected in national budgets. When applicable, they should explain in detail the reasons for the deviations from the budgetary targets (with a special focus on developments in government expenditure). When significant deviations occur, the update should mention whether measures are taken to rectify the situation, and provide information on these measures. The Commission and the Council will assess the implementation of the commitments announced by the Member States in their previous Stability and Convergence programmes and of the policy guidance provided by the Council on the previous programme. The outcome of this assessment will be duly taken into account when addressing new policy guidance to Member States.

__________________

ANNEX 1

MODEL STRUCTURE FOR THE STABILITY AND CONVERGENCE PROGRAMMES

• 1. 

  Overall policy framework and objectives

• 2. 

  Economic outlook

(on the basis of Tables 1a-1d, 5 and 8)

 World economy/technical assumptions

 Cyclical developments and current prospects

 Medium-term scenario

 Sectoral balances

 Growth implications of “major structural reforms”

• 3. 

  General government balance and debt

(on the basis of Tables 2, 3, 4 and 5)

 Policy strategy

 Medium-term objectives

 Actual balances and updated budgetary plans for the current year

 Medium-term budgetary outlook, including description and quantification of fiscal strategy

 Structural balance (cyclical component of the balance, one-off and temporary measures), fiscal stance, including in terms of expenditure benchmark

 Debt levels and developments, analysis of below-the-line operations and stock-flow adjustments

 Budgetary implications of “major structural reforms”

• 4. 

  Sensitivity analysis and comparison with previous programme

(on the basis of Table 6)

 Alternative scenarios and risks

 Sensitivity of budgetary projections to different scenarios and assumptions

 Comparison with previous programme

• 5. 

  Sustainability of public finances

(on the basis of Table 7 and 7a)

 Policy strategy

 Long-term budgetary prospects, including the implications of ageing populations

 Contingent liabilities.

• 6. 

  Quality of public finances

(on the basis of Tables 2 and 3)

 Policy strategy

 Composition, efficiency and effectiveness of expenditure

 Structure and efficiency of revenue systems

• 7. 

  Institutional features of public finances

 National budgetary rules

 Budgetary procedures, incl. public finance statistical governance

 Other institutional developments in relation to public finances

ANNEX 2

TABLES TO BE CONTAINED IN THE STABILITY AND CONVERGENCE

PROGRAMMES

Provision of data on variables in bold characters is a requirement. Provision of data on other variables is optional but highly desirable.

The tables should be submitted to the Commission by means of the dedicated web application. Where data are to be reported in monetary terms, the amounts should preferably be provided in

billions of national currency. If not the case, the unit should be stated clearly.

Table 1a. Macroeconomic prospects

ESA Code Year Year Year Year Year Year X-1 X-1 X X+1 X+2 X+3

Level rate of rate of rate of rate of rate of change change change change change

• 1. 

  Real GDP B1*g

• 2. 

  Nominal GDP B1*g

Components of real GDP

• 3. 

  Private consumption P.3 expenditure

• 4. 

  Government consumption P.3 expenditure

• 5. 

  Gross fixed capital formation P.51

• 6. 

  Changes in inventories and net P.52 + P.53 acquisition of valuables (% of

GDP)

• 7. 

  Exports of goods and services P.6

• 8. 

  Imports of goods and services P.7

Contributions to real GDP growth

• 9. 

  Final domestic demand -

• 10. 

  Changes in inventories and P.52 + P.53 - net acquisition of valuables

• 11. 

  External balance of goods and B.11 - services

Table 1b. Price developments

ESA Code Year Year Year Year Year Year X-1 X-1 X X+1 X+2 X+3

Level rate of rate of rate of rate of rate of change change change change change

• 1. 

  GDP deflator

• 2. 

  Private consumption deflator

• 3. 

  HICP 1

• 4. 

  Public consumption deflator

• 5. 

  Investment deflator

• 6. 

  Export price deflator (goods and services)

• 7. 

  Import price deflator (goods and services)

1 Optional for stability programmes.

Table 1c. Labour market developments

ESA Code Year Year Year Year Year Year X-1 X-1 X X+1 X+2 X+3

Level rate of rate of rate of rate of rate of change change change change change

• 1. 

  Employment, persons 1

• 2. 

  Employment, hours worked 2

• 3. 

  Unemployment rate (%) 3 -

• 4. 

  Labour productivity per person 4

• 5. 

  Labour productivity per hour worked 5

• 6. 

  Compensation of employees D.1

• 7. 

  Compensation per employee optional optional optional

1 Occupied population, domestic concept national accounts definition.

2 National accounts definition.

3 Harmonised definition, Eurostat; levels.

4 Real GDP per person employed.

5 Real GDP per hour worked.

Table 1d. Sectoral balances

% of GDP ESA Code Year Year Year Year Year

X-1 X X+1 X+2 X+3

• 1. 

  Net lending/borrowing vis-à- B.9 vis the rest of the world

of which:

• - 

  Balance on goods and services

• - 

  Balance of primary incomes and transfers

• - 

  Capital account

• 2. 

  Net lending/borrowing of the B.9 private sector

• 3. 

  Net lending/borrowing of general EDP B.9 government

• 4. 

  Statistical discrepancy optional optional optional optional

Table 2a. General government budgetary prospects

ESA Code Year Year Year Year Year Year X-1 X-1 X X+1 X+2 X+3

Level % of % of % of % of % of GDP GDP GDP GDP GDP

Net lending (EDP B.9) by subsector

• 1. 

  General government S.13

• 2. 

  Central government S.1311

• 3. 

  State government S.1312

• 4. 

  Local government S.1313

• 5. 

  Social security funds S.1314

General government (S13) 6. Total revenue TR

• 7. 

  Total expenditure TE 1

• 8. 

  Net lending/borrowing EDP B.9

• 9. 

  Interest expenditure EDP D.41

• 10. 

  Primary balance 2

• 11. 

  One-off and other temporary measures 3

Selected components of revenue 12. Total taxes (12=12a+12b+12c)

12a. Taxes on production and D.2 optional optional imports

12b. Current taxes on income, D.5 optional optional wealth, etc

12c. Capital taxes D.91 optional optional

• 13. 

  Social contributions D.61 optional optional

• 14. 

  Property income D.4 optional optional

• 15. 

  Other 4 optional optional

16=6. Total revenue TR

p.m.: Tax burden

(D.2+D.5+D.61+D.91-D.995) 5

Selected components of expenditure

• 17. 

  Compensation of employees + D.1+P.2 intermediate consumption

17a. Compensation of employees D.1

17b. Intermediate consumption P.2

• 18. 

  Social payments (18=18a+18b)

of which Unemployment benefits 6

18a. Social transfers in kind D.6311, supplied via market producers D.63121,

D.63131 18b. Social transfers other than in D.62 kind

19=9. Interest expenditure EDP D.41

• 20. 

  Subsidies D.3

• 21. 

  Gross fixed capital formation P.51

• 22. 

  Capital transfers D.9

• 23. 

  Other 7

24=7. Total expenditure TE 1

p.m.: Government consumption P.3

(nominal)

1 Adjusted for the net flow of swap-related flows, so that TR-TE=EDP B.9.

2 The primary balance is calculated as (EDP B.9, item 8) plus (EDP D.41, item 9). 3 A plus sign means deficit-reducing one-off measures.

4 P.11+P.12+P.131+D.39+D.7+D.9 (other than

D.91).

5 Including those collected by the EU and including an adjustment for uncollected taxes and social contributions (D.995), if appropriate.

6 Includes cash benefits (D.621 and D.624) and in kind benefits (D.631) related to unemployment benefits.

7 D.29+D4 (other than D.41) + D.5+D.7+P.52+P.53+K.2+D.8.

Table 2b. No-policy change projections 1

Year Year Year Year Year Year X-1 X-1 X X+1 X+2 X+3

Level % of % of % of % of % of GDP GDP GDP GDP GDP

• 1. 

  Total revenue at unchanged policies

• 2. 

  Total expenditure at unchanged policies

1 : The projections shall start at the time when the Stability or Convergence Programme is drafted (please indicate the cut-off date) and show revenue and expenditure trends under a 'no-policy change' assumption. Therefore, figures for X-1 should correspond to actual data for revenue and expenditure.

Table 2c. Amounts to be excluded from the expenditure benchmark

Year Year Year Year Year Year X-1 X-1 X X+1 X+2 X+3

Level % of % of % of % of % of GDP GDP GDP GDP GDP

• 1. 

  Expenditure on EU programmes fully matched by EU funds revenue

        1.a of which investments (GFCF) fully matched by EU funds

revenue 2. Cyclical unemployment benefit

expenditure 1

• 3. 

  Effect of discretionary revenue measures 2

• 4. 

  Revenue increases mandated by law

1 : Please detail the methodology used to obtain the cyclical component of unemployment benefit expenditure. It should build on unemployment benefit expenditure as defined in COFOG under the code 10.5 2 : Revenue increases mandated by law should not be included in the effect of discretionary revenue measures: data reported in rows 3 and 4 should be mutually exclusive.

Table 3. General government expenditure by function

% of GDP COFOG Year Year Code X-2 X+3

• 1. 

  General public services 1

• 2. 

  Defence 2

• 3. 

  Public order and safety 3

• 4. 

  Economic affairs 4

• 5. 

  Environmental protection 5

• 6. 

  Housing and community 6 amenities

• 7. 

  Health 7

• 8. 

  Recreation, culture and religion 8

• 9. 

  Education 9

• 10. 

  Social protection 10

• 11. 

  Total expenditure (=item 7=24 TE 1 in Table 2a) 1 Adjusted for the net flow of swap-related flows, so that TR-TE=EDP B.9.

Table 4. General government debt developments

% of GDP ESA Code Year Year Year Year Year X-1 X X+1 X+2 X+3

1

• 1. 

  Gross debt

• 2. 

  Change in gross debt ratio

Contributions to changes in gross debt

• 3. 

  Primary balance 2

• 4. 

  Interest expenditure 3 EDP D.41

• 5. 

  Stock-flow adjustment

of which:

• - 

  Differences between cash and accruals

  4

• - 

  Net accumulation of financial assets 5 of which:

• - 

  privatisation proceeds

• - 

  Valuation effects and other 6

p.m.: Implicit interest rate on debt 7

Other relevant variables

• 6. 

  Liquid financial assets 8

• 7. 

  Net financial debt (7=1-6)

• 8. 

  Debt amortization (existing bonds) since the end of the previous year 9. Percentage of debt denominated in foreign currency

• 10. 

  Average maturity - - -

1 As defined in Regulation 3605/93 i (not an ESA concept).

2 Cf. item 10 in Table 2a.

3 Cf. item 9 in Table 2a.

4 The differences concerning interest expenditure, other expenditure and revenue could be distinguished when relevant or in case the debt-to-GDP ratio is above the reference value. 5 Liquid assets (currency), government securities, assets on third countries, government controlled enterprises and the difference between quoted and non-quoted assets could be distinguished when relevant or in case the debt-to-GDP ratio is above the reference value. 6 Changes due to exchange rate movements, and operation in secondary market could be distinguished when relevant or in case the debt-to-GDP ratio is above the reference value. 7 Proxied by interest expenditure divided by the debt level of the previous year.

8 AF1, AF2, AF3 (consolidated at market value), AF5 (if quoted in stock exchange; including mutual fund shares).

Table 5. Cyclical developments

% of GDP ESA Code Year Year Year Year Year X-1 X X+1 X+2 X+3

• 1. 

  Real GDP growth (%)

• 2. 

  Net lending of general EDP B.9 government 3. Interest expenditure EDP D.41

• 4. 

  One-off and other

  1

temporary measures Of which:

On the revenue side: general government On the expenditure side: general government

• 5. 

  Potential GDP growth (%)

contributions:

• - 

  labour

• - 

  capital

• - 

  total factor productivity

• 6. 

  Output gap

• 7. 

  Cyclical budgetary component 8. Cyclically-adjusted balance (2 - 7) 9. Cyclically-adjusted primary balance (8 + 3) 10. Structural balance (8 - 4)

1 A plus sign means deficit-reducing one-off measures.

Table 6. Divergence from previous update

ESA Code Year Year Year Year Year

X-1 X X+1 X+2 X+3

Real GDP growth (%)

Previous update

Current update

Difference

General government net EDP B.9 lending (% of GDP) Previous update

Current update

Difference

General government gross debt (% of GDP) Previous update

Current update

Difference

Table 7. Long-term sustainability of public finances

% of GDP 2007 2010 2020 2030 2040 2050 2060

Total expenditure

 Of which: age-related expenditures Pension expenditure

 Social security pension

 Old-age and early pensions

 Other pensions (disability, survivors) Occupational pensions (if in general government) Health care

 Long-term care (this was earlier included in the health care) Education expenditure

 Other age-related expenditures Interest expenditure

Total revenue

 Of which: property income

Of which: from pensions contributions (or social contributions if appropriate) Pension reserve fund assets

Of which: consolidated public pension fund assets (assets other than government liabilities)

Systemic pension reforms 1

Social contributions diverted to mandatory private scheme 2 Pension expenditure paid by mandatory private scheme

3

Assumptions

Labour productivity growth

Real GDP growth

Participation rate males (aged 20-64)

Participation rates females (aged 20-64) Total participation rates (aged 20-64)

Unemployment rate

Population aged 65+ over total population

1 Systemic pension reforms refer to pension reforms that introduce a multi-pillar system that includes a mandatory fully funded pillar. 2 Social contributions or other revenue received by the mandatory fully funded pillar to cover for the pension obligations it acquired in conjunction with the systemic reform 3 Pension expenditure or other social benefits paid by the mandatory fully funded pillar linked to the pension obligations it acquired in conjunction with the systemic pension reform

Table 7a. Contingent liabilities

% of GDP Year Year X-1 X

Public guarantees Optional

Of which: linked to the Optional financial sector

Table 8. Basic assumptions This table should preferably be included in the programme itself; if not, these assumptions should be transmitted to the Council and the Commission together with the programme.

Year Year Year Year Year X-1 X X+1 X+2 X+3

1

Short-term interest rate (annual average) Long-term interest rate (annual average) USD/€ exchange rate (annual average)

(euro area and ERM II countries)

Nominal effective exchange rate

(for countries not in euro area or ERM II) exchange rate vis-à-vis the € (annual average) World excluding EU, GDP growth

EU GDP growth

Growth of relevant foreign markets

World import volumes, excluding EU Oil prices (Brent, USD/barrel) 1 If necessary, purely technical assumptions.

ANNEX 3

I MPROVING THE PREDICTABILITY AND TRANSPARENCY OF THE SGP:

A STRONGER FOCUS ON THE EXPENDITURE BENCHMARK IN THE PREVENTIVE ARM

(Opinion adopted by the Economic and Financial Committee on 29 November 2016 and endorsed

by the ECOFIN Council on 6 December 2016)

I NTRODUCTION

The preventive arm of the SGP endeavours to ensure that fiscal policy is conducted so as to lead to healthy public

finances over the short and longer term. It requires that Member States attain a country-specific medium-term budgetary objective (MTO) for their budgetary position after adjusting for the cyclical position of the economy. For Member

States that are not at their MTO, an appropriate adjustment path towards it should be defined and adhered to. By setting

a budgetary target in cyclically-adjusted terms the preventive arm aims to ensure that the underlying fiscal position of

Member States is conducive to medium-term sustainability, while allowing for the free operation of automatic fiscal

stabilisers. The country-specific MTOs are set taking into account their respective debt levels, the country-specific

sustainability challenges posed by the costs of ageing population and the standard operation of automatic stabilisers. The adjustment paths are without prejudice to the requirement for Member States to reduce their government debt at a

satisfactory pace, thereby contributing to the long-term sustainability of their public finances, in accordance with Article

126.2 of the Treaty on the functioning of the European Union and Article 2 of Regulation 1467/97 i.

• 1. 

  THE ADJUSTMENT REQUIREMENTS

The working of the preventive arm is based on a two-pillar approach: the (change in the) structural balance and an

analysis of the growth rate of an expenditure aggregate net of discretionary revenue measures. The expenditure aggregate is comprised of overall government expenditure net of interest payments, spending on EU programmes paid

for by EU funds and the cyclical component of unemployment benefits, while investment spending (not matched by the

EU funds) is smoothed over four years. When estimating the budgetary impact of a discretionary revenue measure,

micro-level behavioural responses, including cautiously estimated tax compliance effects that are clearly attributable to

well specified measures directly aiming at improving tax compliance, should also be factored in.

To remain at, or make adequate progress towards, their MTO, Member States shall ensure that annual government expenditure growth does not exceed a maximum allowable rate, known as the ‘expenditure benchmark’. In particular,

Member States at their MTO shall ensure that government expenditure grows at most in line with a medium-term rate of potential GDP growth – which is the rate which ensures adherence to the MTO over time 19 – unless any excess

expenditure growth is matched by discretionary measures yielding additional revenues. Member States on the

adjustment path to the MTO shall ensure that their expenditure grows at a rate below that medium-term rate of potential

GDP growth – the difference in growth rates being the convergence margin – unless the excess growth in expenditure is matched by discretionary measures yielding additional revenues.

The expenditure benchmark, that is the maximum allowable growth rate of expenditure net of discretionary revenue

measures, is derived (as specified in Box 1) from the required improvement in the structural balance, so to be consistent

with, and conducive to, the fulfilment of the required adjustment towards the MTO.

The country-specific adjustments requirements are set on an annual basis, as part of the Council’s country-specific

recommendations under the European Semester. Specifically, for Member States that have not yet attained their MTO, the recommendations indicate the required fiscal effort formulated in terms of the change in the structural balance and

19 Under the implicit assumption that, in the medium term, revenues grow proportionally in line with potential GDP.

the expenditure benchmark. For Member States that are at their MTO, the expenditure benchmark does not reflect any required improvement in the structural balance but indicates the maximum growth rate of expenditure compatible with

the Member State remaining at the MTO.

Box 1: Derivation of the expenditure benchmark

The expenditure benchmark provides guidance on how net expenditure should be set to maintain the structural balance at the MTO once it is attained or to fulfil the adjustment path defined as per the matrix of requirements 20 when a

country is not at its MTO.

The expenditure benchmark is derived from a medium-term growth rate of potential output and a country-specific convergence margin.

Specifically, the expenditure benchmark 𝐿𝐿 𝑡𝑡 for year 𝑡𝑡 is derived from the medium-term growth rate 𝑅𝑅 𝑡𝑡 by the deduction of a convergence margin 𝐶𝐶 𝑡𝑡 (all expressed in percentage points), as follows:

𝐿𝐿 𝑡𝑡 = 𝑅𝑅 𝑡𝑡 − 𝐶𝐶 𝑡𝑡

The medium-term growth rate is calculated over a 10-year window, on the basis of forward-looking projections and

backward-looking estimates from the Commission’s spring forecast of the preceding year. It is expressed in nominal

terms using the increase in the GDP deflator for year 𝑡𝑡 projected in that forecast. The medium-term growth rate is recalculated every year.

For Member States that have not yet attained their MTO, the convergence margin is calibrated to be consistent with the

required improvement in the structural balance 𝑎𝑎𝑎𝑎𝑎𝑎

𝑡𝑡 (expressed in percentage points). Its size depends on the share of government primary expenditure in GDP in the preceding year (𝑃𝑃

𝑡𝑡−1 , expressed in percentage points). Thus, the

convergence margin is given by:

𝐶𝐶 𝑎𝑎𝑎𝑎𝑎𝑎 𝑡𝑡 𝑡𝑡 = 𝑃𝑃 × 100

𝑡𝑡−1

For Member States at their MTO, the convergence margin is by construction set to zero.

• 2. 

  T HE OVERALL ASSESSMENT

Sufficient progress towards the MTO shall be evaluated on the basis of an overall assessment with

the structural balance as the reference, including an analysis of expenditure net of discretionary

revenue measures, as per Article 5(1) of Council Regulation (EC) No 1466/97 i.

Compliance with the preventive arm requirements is evaluated notably on the basis of the structural

balance and the expenditure benchmark, taking their respective strengths into account. The indication provided by the structural balance and the expenditure benchmark is always qualified

through an overall assessment. This focuses on the possible sources of discrepancy between the two

indicators and, on that basis, reaches a conclusion. The overall assessment can conclude that there is

20 Possibly adjusted for allowed deviations under ‘flexibility’ clauses, and capped at the level of the initial distance from the MTO.

compliance with the requirements, or some deviation, 21 or a significant deviation, with the latter

triggering a ‘significant deviation procedure’ if the conclusion is based on outturn data.

Both the structural balance and the expenditure benchmark have their respective strengths. These

could be as follows.

The structural balance might dispense with the need to distinguish between discretionary and nondiscretionary

changes in revenues and quantifying individual measures. In addition, in some cases, the use of a single-year estimate of potential GDP growth, which underpins the calculation of the

structural balance, could lead to a measure that appears more meaningful than the one provided by

an estimate of medium-term potential GDP growth that includes some exceptionally high or low

yearly estimates of potential GDP growth, as conventionally foreseen by the methodology. 22

Finally, a possible advantage of the structural balance is that it might provide an incentive for effective revenue administration.

The expenditure benchmark as a rule is more predictable in the sense that expenditure rules, in

setting an upper limit for the growth rate of government expenditure, can serve as an operational

target for the preparation of annual budgets and help monitor their in-year execution. Compliance

with the expenditure benchmark is measurable ex post and, in general, is less affected by factors that lie outside government control, including abnormal responses of revenues to economic activity.

In order to ensure transparency, the Commission and the Member States will provide a

quantification of discretionary revenue measures incorporated in the estimation of the expenditure

benchmark.

It is important that reliance on either indicator ensures consistency with the required path of adjustment and therefore ensures the achievement of the MTO.

Because of their nature, one-off measures have only a temporary effect and thus cannot lead to a

sustained improvement in the government’s fiscal position. One-off measures are excluded from the

calculation of the structural balance. When assessing compliance with the expenditure benchmark,

the impact of one-off measures is systemically corrected for in the context of the overall assessment: in particular, the removal of one-off expenditure measures is systematically taken into

account in the overall assessment; similarly, any one-off revenue measures are systematically

removed from the amount of discretionary revenue measures. Taking systematically account of

such measures in the overall assessment ensures that the expenditure benchmark is consistent with

the required improvement in the structural balance, in line with the spirit of Council Regulation (EC) No 1466/97 i. This is also consistent with the approach retained when assessing ‘effective

action’ under the Excessive Deficit Procedure.

In addition, when assessing compliance with the expenditure benchmark, expenditure is measured

excluding, in particular, expenditure on Union programmes fully matched by Union funds revenue

21 ‘Some’ deviation refers to any deviation which is not significant – for the purposes of Articles 6(3) and 10(3) of Council Regulation (EC) No 1466/97 i.

22 For example, the large negative impact that the economic and financial crisis had on the estimates for potential GDP growth

implies that, for a number of countries, the averaging formula can lead to an estimated 10-year potential growth rate that is much lower than estimates made for more recent and future years

and non-discretionary changes in unemployment benefit expenditure (see Box 2). This is consistent with the methodology and assumptions underpinning the calculation of the structural balance, to the

extent that expenditure on Union programmes is budget neutral (precisely because matched by

Union funds revenue) and that non-discretionary changes in unemployment benefit expenditure are

filtered out when removing the ‘cyclical component’ of the budget balance.

Box 2: Assessing ex post compliance with the expenditure benchmark

When assessing compliance with the expenditure benchmark, expenditure is measured excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in

unemployment benefit expenditure. Nationally financed government gross fixed capital formation is smoothed over a 4-

year period. In addition, any possible fiscal policy measures on the revenue side (including also revenue increases

mandated by law) are netted out.

The net expenditure growth rate 𝑔𝑔 𝑡𝑡 for year 𝑡𝑡 is computed as follows:

𝑔𝑔 𝐺𝐺 𝑡𝑡 − ∆𝑅𝑅 𝑡𝑡 − 𝐺𝐺 𝑡𝑡−1 𝑡𝑡 = 𝐺𝐺

𝑡𝑡−1

where 𝐺𝐺

𝑡𝑡 and ∆𝑅𝑅 𝑡𝑡 are the expenditure aggregate and the estimated impact of revenue measures having an incremental (positive or negative) effect on revenues in year 𝑡𝑡.

In the context of the overall assessment, the net expenditure growth rate 𝑔𝑔

𝑡𝑡 is corrected for the effect of one-off measures 𝑂𝑂𝑂𝑂

𝑡𝑡 (both on the expenditure and on the revenue side):

𝑔𝑔 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑂𝑂𝑂𝑂 𝑡𝑡 𝑡𝑡 = 𝑔𝑔 𝑡𝑡 − 𝐺𝐺

𝑡𝑡−1

If the net expenditure growth rate corrected for one-off and measures 𝑔𝑔 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑡𝑡 is at or below the benchmark rate 𝐿𝐿 𝑡𝑡 , the country is compliant with the expenditure benchmark for year 𝑡𝑡. Otherwise it is not compliant with the expenditure benchmark. In the latter case, the excess growth over the benchmark is converted into a share of GDP, to judge whether

the excess (if positive) is significant or not. If the figure exceeds 0.5% of GDP over 1 year, it is judged to be significant.

If the figure exceeds 0.25% of GDP when averaged over 2 consecutive years, the deviation is judged significant over 2

years.

As defined in Articles 6(3) and 10(3) of Council Regulation (EC) No 1466/97 i, the assessment of whether a deviation from the requirements is significant includes, in particular, the following

criteria, for Member States that have not yet attained their MTO:

• i. 

  When assessing the change in the structural balance, whether the deviation is at least 0.5% of GDP in a single

  year or at least 0.25% of GDP on average per year in 2 consecutive years;

• ii. 

  When assessing expenditure developments net of discretionary revenue measures, whether the deviation has a

  total impact on the government balance of at least 0.5% of GDP in a single year or at least 0.25% of GDP on average per year in 2 consecutive years (see Box 2).

For a Member State that has not reached its MTO, the deviation will be considered significant if

both:

• i. 

  The deviation of the structural balance from the appropriate adjustment path is 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 the rate of growth of expenditure net of discretionary revenue measures over the appropriate

  adjustment path defined in relation to the reference medium-term rate of growth has had a negative impact on

  the government balance of at least 0.5 of a percentage point of GDP in one single year, or cumulatively in two

  consecutive years;

or if one of the two conditions (i) and (ii) is verified and the overall assessment evidences limited compliance also with respect to the other condition.

While the initial requirements for year t in terms of (the change in) the structural balance and the

expenditure benchmark, set in the spring of year t -1, are kept unchanged throughout the successive

assessments, the ex post assessment of compliance (in the spring of year t +1) shall take into

account a possible worsening of the economic situation such that the Member State is found to have been in ‘exceptionally bad’ or ‘very bad’ times, as well as the achievement of the MTO, which is

the cornerstone of the preventive arm.

In assessing compliance with the requirements and in line with Council Regulation (EC) No

1466/97, a deviation from the expenditure benchmark is in general left out of consideration if the

Member State is found to have exceeded its MTO on the basis of the structural balance pillar. However, in line with Council Regulation (EC) No 1466/97 i, an assessment of compliance with the

expenditure benchmark is performed in the specific situation where the Member State is found to

have exceeded the MTO solely thanks to significant revenue windfalls. An assessment of

compliance with the expenditure benchmark is also performed – over the 2-year average – when the

country, having exceeded its MTO, has deviated from it in the next year.

ANNEX 4

IMPROVING THE ASSESSMENT OF EFFECTIVE ACTION IN THE

CONTEXT OF THE EXCESSIVE DEFICIT PROCEDURE – A

SPECIFICATION OF THE METHODOLOGY

(adopted by the Economic and Financial Committee on 29 November 2016 and endorsed by the

ECOFIN Council on 6 December 2016)

I NTRODUCTION

Once a Member State is subject to an Excessive Deficit Procedure (EDP) – the corrective arm of the

Stability and Growth Pact (SGP) – the Commission regularly assesses whether it is acting in

compliance with the Council recommendation under Article 126(7) TFEU or notice under Article

126(9). 23 That is, it regularly assesses whether ‘effective action’ has been taken. In particular,

according to Council Regulation (EC) 1467/97 i, the Commission has to do so following the expiry

of the deadline set by the Council for the Member State to take effective action. 24 Thereafter, the

following assessments take place alongside the regular monitoring of budgetary developments.

The need to distinguish between fiscal consolidation actions and fiscal consolidation outcomes

implies that a Member State can be found to be compliant with the EDP recommendation even if

the headline deficit targets are not attained (consolidation outcome), provided that it is assessed to have taken sufficient measures (consolidation actions) to ensure adequate progress towards the

correction of the excessive deficit situation, in the face of unexpected events with a significant

impact on the public finances. 25 Accordingly, since the 2005 reform of the SGP, the change in the

structural balance plays a central role in the fiscal surveillance framework, by approximating the

extent of the consolidation actions implemented by the concerned Member State.

The use of the structural balance to assess fiscal effort is well known and widely used among

experts. However, it suffers from its own weaknesses, mainly related to its endogenous relation

with GDP which in turn may distort the estimations of governments’ fiscal actions. In other words,

the structural balance may be, and frequently is, affected by non-policy effects. The 2011 six-pack

reform and subsequent non-legislative changes to the fiscal surveillance framework have sought to address the shortcomings of the structural balance approach. Namely, in the corrective arm of the

Pact, the decision was made to take into account revisions affecting the estimates for potential

output and the response of revenues to economic developments at the time of assessments. This was

made through the so-called alpha and beta corrections. In addition, the structural balance approach

has been complemented by a quantification of individual fiscal policy measures (essentially on the revenue side), which is known as the ‘bottom-up approach’ to fiscal effort.

23 Hereinafter both referred to as ‘the EDP recommendation’.

24 Article 9(3) of Council Regulation (EC) 1467/97 i.

25 Article 3(5) of Council Regulation (EC) 1467/97 i.

These changes have allowed capturing better Member States’ fiscal actions but have also led to increased complexity. Acknowledging that, the Commission Communication of 21 October 2015

on “Steps towards Completing Economic and Monetary Union” 26 identified a number of pathways

towards improving the transparency and reducing the complexity of the current fiscal rules, among

which exploring “ways for increasing reliance on a single practical indicator of compliance” with

the SGP. For that matter, the Commission prepared a note 27 for the Alternates of the Economic and

Financial Committee outlining an approach whereby the expenditure benchmark currently used in

the preventive arm of the SGP, or a variant thereof, would gain greater prominence in the working

of the Pact. The April 2016 informal Economic and Financial Affairs Council agreed that more

work should be done on exploring the use of the expenditure benchmark in the EU’s fiscal

framework and to continue improving the common methodology for estimating the output gap. On

this basis, the Commission’s original note was complemented by an additional note 28 illustrating the

suggested changes to the working of the corrective arm of the Pact and clarifying a number of

issues that had been raised by Alternates. The Commission’s notes were extensively discussed by

the EFC between April and November 2016.

This document updates the Commission’s original note reflecting the outcome of the discussions with respect to the corrective arm of the Pact. It presents the commonly agreed methodology for

assessing effective action, as revised by the Economic and Financial Committee on 29 November

2016.

The document is structured as follows. Section 1 describes the terms in which the adjustment

requirements are expressed under the EDP. Section 2 sets out the order of logical and procedural steps for assessing effective action, commonly designated as the ‘EDP decision tree’. Section 3

focuses on the expenditure benchmark, which constitutes the main novelty in the assessment of

effective action. Section 4 recalls the need for economic judgement in interpreting the outcome of

the expenditure benchmark, which forms an integral part of the so-called ‘careful analysis’. Finally,

Section 5 addresses the specific case of multi-year EDP recommendations.

In order to increase transparency of the exercise, the Commission will supply EFC Alternates with

all data, as well as the underlying calculations, needed to replicate the Commission’s estimates of

the structural balance, the expenditure benchmark and the debt-reduction benchmark for all

concerned Member States for each vintage of the Commission’s forecasts. These data will be made

available on a dedicated website after the publication of the Commission’s forecast, with access restricted to the EFC Alternates. These commitments should be seen in the context of the continuing

efforts to develop further transparency on the sides of both the Commission and the Member States,

and at a later stage consideration could be given to make this data available to the broader public.

In order to ensure transparency, the Commission and the Member States will provide a

quantification of discretionary revenue measures incorporated in the estimation of the expenditure

26 COM(2015) 600 final i (available at: https://ec.europa.eu/transparency/regdoc/rep/1/2015/EN/1-2015-600-EN-F1-1.PDF ).

27 “Exploring ways for simplifying the assessment of compliance with the Stability and Growth Pact”, note for the Alternates of the

Economic and Financial Committee, ref. Ares(2016)1480115 – 29/03/2016.

28 “Exploring ways for simplifying the assessment of compliance with the Stability and Growth Pact: Numerical examples”, note for

the Alternates of the Economic and Financial Committee, ref. Ares(2016)2533344 – 01/06/2016.

benchmark. This list will be updated with every forecast.In order to reduce complexity further and in line with the Commission Communication of 21 October 2015 and the mandate by the Council,

the Commission services together with Alternates will in parallel examine the possibility of a

stronger role of the expenditure benchmark in the preventive arm without prejudice to the structural

budget balance indicator as established in Regulation (EC) No 1466/97 i.

• 1. 

  T HE EDP RECOMMENDATION

The EDP recommendation sets out annual targets for the headline deficit, with the final year target

at or below 3% of GDP, “consistent with a minimum annual improvement of at least 0.5% of GDP

as a benchmark” 29 in the structural balance. The EDP recommendation is also formulated in terms

of the expenditure benchmark, that is, the maximum allowable growth rate of expenditure net of

discretionary revenue measures consistent with, and conducive to, the fulfilment of the targets for the headline deficit and the underlying improvement in the structural balance. This ensures that, if

fully complied with, the expenditure benchmark effectively leads to a timely correction of the

excessive deficit (including compliance with the forward-looking component of the debt reduction

benchmark), as long as macroeconomic developments and events that are outside government

control remain in line with the ‘EDP scenario’, i.e. the set of assumptions underpinning the EDP recommendation. Therefore, the benchmark rates are simply those that come out from the EDP

scenario. Concretely, they are the limits to the annual changes in government expenditure consistent

with meeting the targets for the headline deficit and the change in the structural balance.

The expenditure benchmark is net of the possible fiscal policy (discretionary) measures assumed on

the revenue side in the EDP scenario. It excludes the projected amounts of interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary

changes in unemployment benefit expenditure. Nationally financed government gross fixed capital

formation is smoothed over a 4-year period. Any possible one-off measures, whether on the

expenditure or on the revenue side, are also excluded.

The expenditure benchmark set in the EDP recommendation is expressed in nominal terms for all the years covered by the EDP recommendation.

Annex 1 provides an example of how the EDP recommendation is formulated. Annex 2 provides a

simplified numerical example of how the expenditure benchmark is determined.

• 2. 

  T HE EDP DECISION TREE FOR ASSESSING EFFECTIVE ACTION

The EDP decision tree sets out the systematic sequencing for the implementation of the methodology for assessing effective action, which plays a central role in different phases of the

EDP. The process, which is described in Graph 1, reads as follows.

If the Member State concerned is compliant with the headline deficit target and the underlying improvement in the structural balance, the procedure is held in abeyance. If the Member States fails or is at risk of failing to meet the headline deficit target or the required improvement in the

29 Articles 3(4) and 5(1) of Council Regulation (EC) 1467/97 i.

structural balance, or both, a careful analysis of the reasons of the shortfall will be undertaken. 30

The careful analysis is, therefore, a centrepiece in the assessment of effective action.

The careful analysis first uses the expenditure benchmark to assess fiscal effort. All in all, the aim

of the careful analysis is to provide an adequate estimation of the extent of policy actions, to

evaluate whether the Member State concerned has delivered on its policy commitments as set in the EDP recommendation. If the expenditure benchmark is met, meaning that it shows an effort equal

to or above what was recommended, there is a presumption that the Member State concerned has

delivered on its policy commitments. If the expenditure benchmark is not met, there is a

presumption the Member State has not delivered on its policy commitments.

The Commission uses qualitative economic judgement in making its final assessment where relevant, in particular of the outcome of the expenditure benchmark, as part of the careful analysis

which the Commission uses to determine whether the Member State concerned has delivered or not

on its policy commitments. In other words, the careful analysis evaluates whether the Member State

concerned has put in place enough actions to comply with the EDP recommendation. In sum, any

conclusion needs to take into consideration the quantitative information from the expenditure benchmark together with other considerations – mostly of qualitative nature – that do not emerge

from the benchmark itself. These considerations are typically related to the reasons that have caused

the non-fulfilment of the expenditure benchmark and are directly linked to fiscal developments (see

section 4 for details).

If the careful analysis concludes that the Member State concerned has delivered on its policy commitments, the assessment will conclude that effective action has been taken, with a possibility

to extend the deadline, even if the headline deficit target has not been met. If the careful analysis

concludes that policy commitments have not been delivered and that the headline deficit target is

not met, the assessment will conclude on non-effective action and the procedure should be stepped

up including by setting a new correction path (and possibly deadline) as appropriate.

It must be emphasized that if the intermediate headline deficit target has been met, the procedure

will not be stepped up even if the policy commitments have not been delivered. However, it should

be stressed that where the absence of a stepping-up of the procedure is taken based on in-year data,

should the (notified) ex post data show that the intermediate headline deficit target was eventually

not been met, the EDP can still be stepped up.

30 The Code of Conduct on the SGP states in this respect that: “In case the observed budget balance proves to be lower than

recommended or if the improvement of the cyclically-adjusted balance net of one-off and other temporary measures falls significantly short of the adjustment underlying the target, a careful analysis of the reasons of the shortfall will be made”.

Graph 1: The EDP decision tree for assessing effective action

Examination of: B and ∆S

𝑩 ≥ 𝑩 𝑹 𝑩 < 𝑩 𝑹

and or/and

∆𝑺 ≥ ∆𝑺 𝑹 ∆𝑺 < ∆𝑺 𝑹

Abeyance CAREFUL ANALYSIS

𝒈 ≤ 𝒈 𝑹 𝒈 > 𝒈 𝑹

Presumption of Presumption of nondelivery

of policy

commitments Conclusion of the CAREFUL ANALYSIS

delivery of policy

Taking into account other consideration where commitments

relevant

Definitions:

Observed budget balance (deficit): B

Recommended budget balance: B R

Observed change in the structural

budget balance: ∆S

Required change in the structural Delivery Non-delivery budget balance: ∆S R If 𝑩 < 𝑩 𝑹 : Effective If 𝑩 < 𝑩 𝑹 : non-effective g R = Required growth rate/level of actionpossibility to actionstepping up the expenditure (net of discretionary extend the deadline in procedure (with the revenue measures) line with the SGP rules possibility to extend the

g= Observed growth rate/level of deadline)

expenditure (net of discretionary

revenue measures)

DGG 1A EN

• 3. 

  T HE CAREFUL ANALYSIS : THE EXPENDITURE BENCHMARK

As per the decision tree described in section 2, a careful analysis is warranted when the Member

State concerned fails or it is at risk of failing to meet the headline deficit target or the required

improvement in the structural balance, or both. In order to determine the reasons of the shortfall and

ultimately whether the country has delivered on the policy commitments laid down in the

recommendation, the careful analysis first and foremost builds on the outcome of the expenditure benchmark.

The expenditure benchmark approach takes into account “whether expenditure targets have been

met and the planned discretionary measures on the revenue side have been implemented”, as

indicated in the Code of Conduct on the SGP in that respect. Specifically, it focuses on aggregate

expenditure developments and revenue-increasing (or decreasing) fiscal policy measures, that is, on what is more directly under the control of the government.

3.1. Concept The expenditure benchmark approach aims at identifying the budgetary impact of individual fiscal

policy measures. However, the different nature of public expenditures and revenues requires a

separate treatment. While the total amount of revenues largely depends on exogenous factors, beyond the direct control of the government (e.g. changes in the tax bases – disposable income,

overall consumption, production, etc. – or tax compliance), expenditures can be considered largely

under the direct control of the government, except for a limited number of exogenously driven

expenditure changes. As such, with few exceptions, nominal changes in government expenditure

can be broadly considered as resulting from autonomous decisions by the government. This fundamental difference has obvious implications for the way the developments on the two sides of

the budget balance are to be treated when assessing effective action.

Expenditure trends are influenced by active or explicit governmental decisions as well as by indirect

ones, as governments can influence expenditures either through their action or their inaction. 31

Therefore, from the perspective of the expenditure benchmark approach, the required fiscal effort should be deemed achieved if annual expenditure growth has not exceeded the expenditure

benchmark, that is, the maximum allowable growth rate of spending compatible with the fulfilment

of the headline and structural deficit targets forecast at the time of adoption of the EDP

recommendation. Any excess in annual expenditure growth over the expenditure benchmark should

be funded by revenue-increasing fiscal policy measures.

3.2. Methodology

When assessing compliance with the expenditure benchmark, expenditure is measured excluding

interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and

non-discretionary changes in unemployment benefit expenditure. Nationally financed government

gross fixed capital formation is smoothed over a 4-year period. In addition, any possible fiscal policy measures on the revenue side are netted out from the expenditure aggregate. Any possible

one-off measures, whether on the expenditure or on the revenue side, are excluded from the

calculation, too. The net expenditure growth rate 𝑔𝑔 𝑡𝑡 for year 𝑡𝑡 is computed as follows:

31 For example, not acting on future age-related spending is a policy decision that carries with it inherent fiscal sustainability risks.

𝑔𝑔 𝑡𝑡 − ∆𝑅𝑅 𝑡𝑡 − 𝐺𝐺 𝑡𝑡−1

𝑡𝑡 =

𝐺𝐺

𝐺𝐺 𝑡𝑡−1

where 𝐺𝐺

𝑡𝑡 and ∆𝑅𝑅 𝑡𝑡 are the expenditure aggregate and the estimated impact of revenue measures

having an incremental effect on revenues in year 𝑡𝑡, both net of one-off measures.

On the expenditure side, the change from the previous year (𝐺𝐺 𝑡𝑡 − 𝐺𝐺 𝑡𝑡−1 ) is used as a proxy of the

measures – both explicit and implicit ones – that determined the expenditure outcome in year 𝑡𝑡. Therefore, expenditure slippages (or underspending) are taken into account along with the effects of

expenditure-increasing or decreasing measures clearly identified as such.

On the revenue side, estimating the overall incremental effect of fiscal policy measures ∆𝑅𝑅 𝑡𝑡 requires

that the measures are defined and their budgetary impacts are quantified. For a government action to

be considered as a discretionary revenue measure with a permanent effect, it should be: (i) an

autonomous intervention by the government; 32 (ii) enacted or credibly announced in sufficient

detail; and (iii) with a direct budgetary impact. On the contrary, commitments or targets (e.g. deficit

targets, deficit rules) which are not underpinned by specific measures to achieve them should not be

considered discretionary revenue measures. 33 When estimating the budgetary impact of a

discretionary revenue measure, micro-level behavioural responses, including cautiously estimated

tax compliance effects that are clearly attributable to well specified measures directly aiming at improving tax compliance, should also be factored in. By contrast, the macroeconomic feedback

loops, or ‘second-round’, effects that are material in relation to the whole economy should not be

taken into account. 34

Overall, if the net expenditure growth rate 𝑔𝑔

𝑡𝑡 is lower than, or equal to, the maximum allowable

growth rate 𝑔𝑔 𝑅𝑅

𝑡𝑡 calculated following the methodology outlined in section 1, the expenditure

benchmark is met and there is a presumption that the Member State has delivered on its policy commitments. If not, the expenditure benchmark is not met and there is a presumption that the

Member State has not delivered on its policy commitments.

• 4. 

  T HE CAREFUL ANALYSIS : OTHER CONSIDERATIONS

The Commission uses qualitative economic judgement in making its final assessment where

relevant, in particular of the outcome of the expenditure benchmark, as part of the careful analysis which the Commission uses to determine whether the Member State concerned has delivered or not

on its policy commitments. In other words, the careful analysis evaluates whether the Member State

concerned has put in place enough actions to comply with the EDP recommendation. The careful

analysis should, as indicated in the Code of Conduct on the SGP, provide a qualified economic

32 In some specific cases, a government action triggered by an event beyond the direct control of the government can be also

considered as a measure, e.g. exceptional events outside the control of government (like natural disasters), some court cases, rulings by international organisations, etc. However, often those events take the form of a one-off measure, in which case they would be excluded from the calculation of the expenditure benchmark.

33 By contrast, conditional measures such as ‘revenues mandated by law’ can be taken into account if the condition is sufficiently operational and if the measures are specified in sufficient detail and adopted or at least credibly announced.

34 These are the possible indirect, wider effect of a measure on the public finances that stem from its macroeconomic impact on the

economy (size and composition of economic activity, employment, inflation). Only large measures, or packages of measures, are expected to generate this kind of effects. This convention fully concurs with the principles of estimating the budgetary effects of discretionary measures underpinning the Commission’s economic and budgetary forecasts.

judgement of the outcome of the expenditure benchmark that will allow determining whether a Member State has put in place enough actions to comply with the EDP recommendation. It is,

therefore, the final step in the assessment of effective action that aims at capturing any factor that is

relevant to analyse fiscal effort beyond the expenditure benchmark indicator.

With the exclusion of interest expenditure, expenditure on Union programmes fully matched by

Union funds revenue and non-discretionary changes in unemployment benefit expenditure and nationally financed gross fixed capital formation smoothed over a 4-year period as well as the

exclusion of one-off measures, the expenditure benchmark leaves aside the effects of temporary

factors or factors that lie to a large extent beyond government control. Similarly, temporary

overreaction of (non-discretionary) revenues to economic fluctuations is left out of consideration,

since not affecting the expenditure benchmark. However, there might still be cases where the sole focus on the expenditure benchmark could lead to a biased conclusion.

In this sense, other considerations may be taken into account where relevant, including:

(i) Possible statistical revisions in data. National accounts are updated on a regular basis to take

account of improvements in methods, data sources and classification changes. These may result in,

sometimes significant, revisions to historical data. Large revisions most often lead to level shifts, with only small if any effects on annual changes. The expenditure benchmark is largely immune to

such level shifts to the extent that it is formulated in terms of the growth rate of expenditure net of

any revenue-increasing (or decreasing) fiscal policy measures. However, in the event of statistical

revisions affecting significantly expenditure growth in a particular year, the implied impact on the

fiscal effort as measured by the expenditure benchmark will be considered in the careful analysis. Eurostat closely monitors the list of public sector entities in the Member States and their calculation

basis in the accounts (use of actual accounts, trends, estimates, etc.). This safeguards against

strategic changes in the delimitation of the general government sector for the years under

assessment. Eurostat also pays close attention to the time and horizontal consistency of its guidance

in order to preserve the reliability of the expenditure benchmark.

(ii) Unexpected dynamics in certain expenditure items driven by unusual events out of government

control. In principle, any expenditure trend should be considered and internalized by governments

when deciding their fiscal policy mix. Fiscal authorities cannot, however, be held accountable for

unusual events with major unfavourable consequences for public finances that go beyond their

control. Under the expenditure benchmark approach, this will be considered as an expenditure slippage, given that the formula systematically corrects for some exogenous expenditure items but

not for other more specific ones. The careful analysis will allow differentiating such more specific

expenditure developments from discretionary actions and/or predictable trends.

(iii) Unforeseen inflation developments. Inflation surprises can affect compliance with the

expenditure benchmark, if they have a material impact on government spending. In such a case, a

country may find it ‘easier’, or instead ‘more difficult’, to keep net expenditure growth in line with the allowable rate. The issue may be mostly of relevance for multi-year EDPs and in such cases

should be considered in the assessment of the results.

(iv) Discretionary revenue measures. Any excess of spending growth over the allowable rate shall be funded by revenue-increasing fiscal policy measures in order to comply with the expenditure

benchmark. The quantitative assessment of the yields/costs of fiscal measures plays a crucial role in

assessing compliance with the benchmark. In some cases, however, it can be surrounded by a high

degree of uncertainty, for example due to a lack of data or linked to the inevitable need to make

assumptions. This is the case, for instance, of a wide package of measures, a tax shift, measures against tax avoidance or measures decided at sub-central levels or by state-owned enterprises.

All in all, the careful analysis will determine whether the Member State concerned has delivered or

not on its policy commitments.

The report on action taken 35 by the Member State concerned will be an important piece of

information for conducting the careful analysis. In particular, Member States are requested to include the targets for government revenues and expenditures as well as for the discretionary

measures consistent with those targets. These measures should be described in detail so as to

facilitate the assessment.

• 5. 

  T HE CUMULATIVE FISCAL EFFORT FOR MULTI - YEAR EDP S

A Member State is found compliant with the EDP recommendation if the annual headline target is

met. 36 As a result, the EDP procedure would be held in abeyance even if the required annual fiscal

effort is not delivered. This can generate an asymmetry in the way compliance with the EDP

recommendation is assessed, as explained below.

This poses a particular challenge for multi-year EDPs. For example, one could consider a two-year

EDP in which a Member State complies with the headline target without delivering the recommended annual fiscal effort in the first year, while it does not meet the headline target but

delivers the annual fiscal effort recommended for the second year. An assessment of effective

action that would take place in the second year would conclude that the Member State concerned

has taken effective action if it focuses only on the (second) year under consideration. Therefore, it

would pave the way for an extension of the deadline for correction without stepping up the procedure, in spite of the fact that the overall structural effort for both years as recommended in the

EDP would not have been met, jeopardizing a durable correction of the excessive deficit. By the

same token, a Member State that decides to frontload the necessary fiscal consolidation by

delivering a fiscal effort above the recommended one in the first year and somewhat below in the

following year, would be penalised in the assessment of effective action.

As it has been the case since 2014, the Commission will continue to examine whether the overall

fiscal effort over the EDP correction period is delivered in order to balance – at least partially – the

asymmetry in the assessment. This ensures that a Member State that meets its headline deficit target

in the first year without delivering the recommended annual effort would only be found compliant

with the recommendation in the second year if it delivers the cumulative fiscal effort of the first two

35 Articles 3(4a) and 5(1a) of Council Regulation (EC) 1467/97 i.

36 This is consistent with the Code of Conduct on the SGP, which specifies that the EDP procedure shall be abrogated when the

deficit is forecast to remain below 3% of GDP in a durable manner (irrespective of whether the fiscal effort has been delivered) and the forward-looking component of the debt reduction benchmark is respected. Recursively, if the intermediary headline deficit targets are fulfilled, the procedure should be held in abeyance.

years even if the headline target is not met. Analogously, by looking at the cumulative fiscal effort, Member States wishing to frontload the required adjustment would not be discouraged to do so.

All in all, Member States are thus better equipped to correct their excessive deficits in a lasting

manner, i.e. having a deficit forecast not to exceed the 3% of GDP threshold over the horizon of the

Commission’s forecast. If the deficit reaches 3% of GDP at maximum in the final year of the EDP,

but the durability of the correction is still not ensured, effective action will be assessed against the overall (cumulative) effort as a benchmark.

For Member States that do not meet the annual headline deficit target or the cumulative change in

the structural balance, or neither of them, the assessment of the ‘cumulative’ expenditure

benchmark will be considered in the careful analysis together with other considerations where

relevant as described in section 3 and 4.

From an operational perspective, this implies that compliance with the expenditure benchmark can

be assessed in cumulative terms. This can be achieved by calculating the excess (positive or

negative) of the growth rate of the net expenditure aggregate over the benchmark rate and

converting it into national currency using the figure for the expenditure aggregate in the preceding

year. Using the figure for nominal GDP, this difference of net expenditure growth relative to the benchmark rate can be expressed as a share of GDP and then easily calculated on a cumulative basis

since the start of the EDP (or the first year of a revised EDP recommendation or EDP notice).

Annex 1: Fiscal consolidation targets in the EDP recommendation

EDP recommendations up to MONTH/YEAR

% of GDP 20xx 20yy 20zz

Headline deficit X% Y% Z%

Annual improvement in the structural A% B% C%

balance

Cumulative improvement in the B"%=(A+B)% C"%= (A+B+C)%

structural balance

Additional consolidation measures

% of GDP 20xx 20yy 20zz

Additional consolidation measures E% F% G%

EDP recommendations from MONTH/YEAR

% of GDP 20xx 20yy 20zz

Headline deficit X% Y% Z%

Annual improvement in the structural A% B% C% balance

Cumulative improvement in the B"%=(A+B)% C"%=(A+B+C)%

structural balance

Expenditure benchmark

% change from previous year 20xx 20yy 20zz

Maximum allowable growth rate of K% L% M%

expenditure 37 net of discretionary

revenue measures (DRM)

37 Government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed government gross fixed capital formation is smoothed over a 4-year period.

[Option 2: Expenditure benchmark (updated)]

𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆 20𝑥𝑥𝑥𝑥 "

𝐿𝐿 % = (1 + 𝐿𝐿%) × (1 + 𝜋𝜋 20𝑦𝑦𝑦𝑦 %) (1 + 𝜋𝜋 𝐸𝐸𝐸𝐸𝐸𝐸 − 1

20𝑦𝑦𝑦𝑦 %)

𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆 20𝑦𝑦𝑦𝑦

𝑀𝑀 " % = (1 + 𝑀𝑀%) × (1 + 𝜋𝜋 20𝑧𝑧𝑧𝑧 %) (1 + 𝜋𝜋 𝐸𝐸𝐸𝐸𝐸𝐸

20𝑧𝑧𝑧𝑧 %)

− 1 Annex 2: Calculation of the expenditure benchmark: A simplified numerical example

• (1) 

  The EDP scenario

  T T+1

Government expenditure bn EUR (1) 50.0 52.0

Government revenue bn EUR (2) 46.0 48.8

Of which DRM bn EUR (2)’ 1

Government balance bn EUR (3) = (2) – (1) -4.0 -3.2

Nominal GDP bn EUR (4) 100.0 104.0

Government balance (*) % of GDP (5) = (3) / (4) x 100 -4.0 -3.0

Output gap % of pot. GDP (6) 0 0

Structural balance % of pot. GDP (7) = (5) – ε x (6) -4.0 -3.0

Change in structural balance (*) % of pot. GDP (7)’ = (7) T+1 – (7) T 1.0

% change (8) = 100 x [(1) T+1 – 4.0

Expenditure growth (1) T ] / (1) T

• (9) 

  = 100 x [((1) T+1 Expenditure growth net of % change – (2)’ T+1 ) – (1) T ] / 2.0

DRM** (1) T

  (*) Targets already mentioned in current EDPs. (**) Targets to be added in future EDPs.

In the example, a Member State is recommended to bring its headline deficit from 4.0% of GDP in

year T to 3.0% in year T+1. This is deemed consistent with the structural balance improving by

1.0% of GDP. 38 Government expenditure is forecast to increase by EUR 2 billion in year T+1, a 4%

change from year T. At the same time, the Member State is assumed to implement revenueincreasing measures worth EUR 1 billion. In net terms, this means that government expenditure is

assumed to increase by EUR 1 billion in year T+1, a 2% change from year T. In this example, the

expenditure benchmark for year T+1, that is, the maximum allowable growth rate of net

expenditure, is thus 2%. Note that the benchmark rate is the same if the adjustment is composed

differently, for example exclusively based on expenditure cuts. In this case, government expenditure is projected to increase by EUR 1 billion in year T+1, a 2% change from year T, both in

‘gross’ and in ‘net’ terms.

38 For the sake of simplicity we assume that the output gap is 0 in both years.

In the example, the EDP recommendation will thus call on the Member State to bring their deficit at 3.0% of GDP in year T+1 and state that this is deemed consistent with the structural balance

improving by 1.0% of GDP and government expenditure growing by no more than 2%, unless the

excess is funded by revenue-increasing measures.

Annex 3: Calculation of the ex post deviation from the expenditure benchmark in cumulative

terms

• (2) 

  The outcome

  T T+1 T+2

Government expenditure bn EUR (1) 50.0 52.5 55.1

Government revenue bn EUR (2) 46.0 48.8 51.8

Of which DRM bn EUR (2)’ 1.0 1.0

Government balance bn EUR (3) = (2) – (1) -4.0 -3.7 -3.3

Nominal GDP bn EUR (4) 100.0 104.0 108.2

Government balance % of GDP (5) = (3) / (4) x 100 -4.0 -3.5 -3.1

Output gap % of pot. GDP (6) 0 0 0

Structural balance % of pot. GDP (7) = (5) – ε x (6) -4.0 -3.5 -3.1

Change in structural balance % of pot. GDP (7)’ = (7) T+1 – (7) T 0.5 0.4

Expenditure growth % change (8) = 100 x [(1) T+1 – 5.0 5.0

• (1) 

  T ] / (1) T

Expenditure growth net of DRM % change (9) = 100 x [((1) T+1 3.0 3.1 – (2)’ T+1 ) – (1) T ] /

• (1) 

  T

Expenditure growth net of DRM % change (10) 2.0 2.0

as per EDP recommendation

Deviation, if negative in excess bn EUR (11) = [(10) - (9)] x -0.5 -0.6 over EDP target (1) T / 100

Deviation, if negative in excess % of GDP (12) = (11) / (4) x -0.5 -0.5

over EDP target 100

Cumulated deviation, if % of GDP (13) = (12) T+1 + -0.5 -1.0 negative in excess over EDP (12) T target

In the example, we consider a two-year EDP recommendation, with the Member State recommended to keep the growth rate of government expenditure net of discretionary revenue

measures at or below 2% both in year T+1 and in year T+2.

Here we assume that the actual growth rate of government expenditure net of discretionary revenue

measures is 3% in both years, that is, above the recommended growth rate of 2%. The excess over

the requirement amounts to 0.5% of GDP in each year. In cumulative terms, the deviation therefore amounts to 0.5% of GDP in year T+1 and 1.0% of GDP in year T+2.

ANNEX 5

A COMMONLY AGREED POSITION ON FLEXIBILITY WITHIN THE STABILITY AND GROWTH PACT: FLEXIBILITY FOR CYCLICAL CONDITIONS, STRUCTURAL

REFORMS AND INVESTMENT

(adopted by the Economic and Financial Committee on 27 November 2015 and endorsed by the

ECOFIN Council on 12 February 2016)

Preamble

On 13 January 2015 the Commission adopted its Communication on flexibility within the Stability and Growth Pact (SGP). This document presents a commonly agreed position on flexibility in the SGP, as agreed by the EFC on 27 November 2015 and endorsed by the ECOFIN Council on 12 February 2016. The concession of such flexibility is

without prejudice to the requirement for Member States to reduce their government debt at a satisfactory pace, thereby contributing to the long-term sustainability of their public finances, in accordance with Article 126.2 of the Treaty on the functioning of the European Union and Article 2 of Regulation 1467/97 i.

• 1. 

  Introduction

A commonly agreed position on flexibility in the SGP would provide guidance on the best possible use of the flexibility that is built into the existing rules of the preventive arm of the SGP, without changing or replacing the

existing rules. The preventive arm aims at guaranteeing a sound budgetary position in all Member States: its core is the attainment by each Member State of its medium-term sound budgetary position (so-called Medium-Term Objective or MTO), which is established according to the commonly agreed principles set out in Sub-section A(1) of Section I of the Specifications on the Implementation of the Stability and Growth Pact 39 (hereafter “the Code of Conductˮ).

The corrective arm of the Pact deals with situations in which the government deficit and/or the debt are above the reference values set in the Treaty: in these cases, Member States are then subject to an Excessive Deficit Procedure

(“EDP”), which entails stricter conditions and monitoring. The commonly agreed principles on the implementation of the corrective arm of the SGP remain those established in the Code of Conduct endorsed by the ECOFIN and complemented by the effective action methodology endorsed by the ECOFIN in June 2014.

Subject to the rules of the SGP and without modifying existing legislation, the commonly agreed position clarifies how three specific policy dimensions can best be taken into account in applying the rules. These relate to: (i) cyclical conditions; (ii.) structural reforms; and (iii.) government investments aiming at, ancillary to, and economically equivalent to major structural reforms.

• 2. 

  Flexibility for Cyclical Conditions

2.1 Matrix specifying the annual fiscal adjustment towards the Medium-Term Objective

Member States should achieve a more symmetrical approach to fiscal policy over the cycle through enhanced budgetary discipline in periods of economic recovery, with the objective to avoid pro-cyclical policies and to

gradually reach their medium-term budgetary objective, thus creating the necessary room to accommodate economic downturns and reduce government debt at a satisfactory pace, thereby contributing to the long-term sustainability of

public finances.

Member States that have not yet reached their MTO should take steps to achieve it over the cycle. Their adjustment effort should be higher in good times; it could be more limited in bad times. In order to reach their MTO, Member

States of the euro area or of ERM-II should pursue an annual adjustment in cyclically adjusted terms, net of one-off

39 http://ec.europa.eu/economy_finance/economIC_governance/sgp/pdf/coc/code_of_conduct_en.pdf and other temporary measures, of 0.5 of a percentage point of GDP as a benchmark. In parallel, the growth rate of expenditure net of discretionary revenue measures in relation to the reference medium-term rate of potential GDP growth should be expected to yield an annual improvement in the government balance in cyclically adjusted terms net of one-offs and other temporary measures of 0.5 of a percentage point of GDP.

The following matrix clarifies and specifies the fiscal adjustment requirements under the preventive arm of the Pact. This matrix is symmetrical, differentiating between larger fiscal effort to be undertaken during better times and a smaller fiscal effort to be undertaken during difficult economic conditions.

Matrix for specifying the annual fiscal adjustment towards the Medium-Term Objective (MTO) under the preventive arm of the Pact

Required annual fiscal adjustment*

Condition Debt below 60 and Debt above 60 or no sustainability risk sustainability risk

Exceptionally Real growth < 0

bad times or output gap < No adjustment needed -4

Very bad -4 ≤ output

times gap < -3 0 0.25

0 if growth below 0.25 if growth below

Bad times -3 ≤ output potential, 0.25 if potential, 0.5 if gap < -1.5 growth above growth above

potential potential

Normal times -1.5 ≤ output

gap < 1.5 0.5 > 0.5

> 0.5 if growth below ≥ 0.75 if growth

Good times output gap potential, ≥ 0.75 if below potential, ≥ 1 ≥ 1.5 growth above if growth above

potential potential

• * 

  all figures are in percentage points of GDP

Given the volatility of the output gap estimates and of the structural balance level, the requirements for annual fiscal adjustment will be frozen on the basis of the vintage data available at spring t-1.

In order to avoid unwarranted consequences in the event of worsened economic conditions or when it is not necessary anymore to progress towards the medium-term objective (MTO), the following shall apply: ‒ first, in case the actual data signal a worsening of the economic situation so that the country is considered to be in either exceptionally (OG <-4% or negative real growth) or very bad times (OG < -3%), the requirements based on the most recent data will prevail over the frozen requirements, allowing to consider exceptionally and very bad economic circumstances; ‒ second, in case the actual data are revised so that the country has already achieved its MTO in year t, the assessment of the country as being at or above its MTO will prevail over the frozen requirements.

The "sustainability risk" in the matrix specifying the annual fiscal adjustment refers to the medium-term overall debt sustainability as measured by the S1 indicator, among other information 40 .

40 S1 shows the adjustment effort required, in terms of a steady improvement in the structural primary balance to be introduced till 2020 and then sustained for a decade, to bring debt ratios to 60% of GDP in 2030, taking also into account the costs arising from an ageing population.

Progress towards the MTO is assessed on the basis of two pillars, with the structural balance being complemented by the expenditure benchmark. The expenditure benchmark establishes a maximum growth rate (i.e. the reference rate) for government spending net of discretionary revenue measures. The medium-term reference rate (as well as the share of government primary expenditure used in the convergence margin) will be updated on a yearly basis, as from spring 2015. In practice, this means that each spring of year t, when setting the required adjustment towards the MTO for the year to come t + 1, an updated medium-term reference rate is computed as the 10-year average potential GDP growth on the period [t-5, t+4]. The budgetary process in some MS requires identification of the reference rate for the expenditure benchmark before spring. A Member State may ask the Commission to provide for indicative purposes an update of its reference rate for the expenditure benchmark already in the winter of year t. However, the Commission assessments and recommendations under the framework of the European Semester will be based on the reference rate for the expenditure benchmark as calculated in the spring of year t. Should significant differences between the winter and spring computations of the reference rate materialise, these would be taken into account as appropriate in the ex post analysis under the preventive arm of the SGP.

2.2 Review of the flexibility clause for cyclical conditions

The Commission shall submit a review report to the Council before 30 June 2018 on the effectiveness of the matrix specifying the annual fiscal adjustment towards the Medium-Term budgetary Objective (MTO). In particular, the review will examine the success of the matrix in promoting counter-cyclical fiscal policies and the achievement by the Member States of their MTOs, thereby creating the necessary room to accommodate economic downturns. The review will also assess whether the new matrix has ensured a reduction in government debt at a satisfactory pace, thereby contributing to the long-term sustainability of public finances, in line with the requirements under the debt rule as specified in Sub-section B(1) of Section I of the Code of Conduct.

• 3. 

  Structural Reforms

In order to enhance the growth oriented nature of the Pact, structural reforms will be taken into account when defining the adjustment path to the medium-term objective for countries that have not yet reached this objective and in allowing a temporary deviation from this objective for countries that have already reached it.

3.1 Criteria for eligible reforms

To be fully operational, the “structural reform clause” has to rely on well-defined principles regarding the eligibility of such reforms. The Commission and the Council will base their assessment on the following criteria:

(i) The reforms must be major. While there are some individual reforms with a major positive impact on growth and the long-term sustainability of public finances, such as pension reforms, well-designed and comprehensive packages of reforms addressing structural weaknesses may also have a major positive impact. This is notably the case when the reforms reinforce each other's impact through an appropriate choice of policy mix and sequencing of implementation. The assessments by the Commission and the Council on whether a reform or set of reforms can be considered as major will take into account available Commission quantitative estimates on the long-term positive budgetary effects of those reforms. In any case the Commission will provide an explanation of its judgement that the reforms are to be considered as major.

(ii) The reforms must have direct long-term positive budgetary effects, including by raising potential sustainable growth, and therefore a verifiable impact on the long-term sustainability of public finances. The sustainability effects can stem either from direct budgetary savings from the reforms (such as in pensions or healthcare), or from the increased revenues drawn in the medium to long-run from a more efficient economy with a higher potential output (e.g. due to lower structural unemployment or an increased labour force), or from a combination of both kinds of effects. The long-term positive budgetary effects could be measured as the improvement in the primary budget balance in net present value equivalent terms. The budgetary effects of the reforms over time are assessed by the Commission and the Council in a prudent way, making due allowance for the margin of uncertainties associated to such an exercise.

(iii) The reforms must be fully implemented. The reforms must be adopted by the national authorities through provisions of binding force, whether legislative or not, in accordance with the applicable domestic laws and procedures. In case the structural reform is not yet fully implemented, the Member State should also submit a dedicated structural reform plan – subsumed, as relevant, in the National Reform Programme (NRP) or Corrective Action Plan (CAP). A plan announcing upcoming reforms as a simple manifestation of political intentions or of wishes would not fulfil the requirements for the application of Article 5(1) of Regulation 1466/97 i. While it is understood that all the reforms should be adopted through provisions of binding force before being considered as eligible for the clause, it is also true that the effective implementation of adopted reforms may take time and may be subject to delays and setbacks. This raises the question of introducing strong safeguards against the risk of implementation failures.

3.2 Activation of the structural reform clause

Member States that want to benefit from the structural reform clause should apply for it in their Stability or

Convergence Programmes (SCPs). The flexibility is granted in the context of the assessment of the SCPs, specifically

in the relevant Country Specific Recommendation. This Country Specific Recommendation could make the granting

of flexibility conditional on the subsequent fulfilment of certain eligibility criteria (e.g. the respect of the safety

margin). Euro area Member States may request to benefit from the Structural Reform Clause at the time of the Draft

Budgetary Plans to be submitted by 15 October. Non-euro area Member States may also apply for the structural

reform clause by 15 October through an ad hoc application 41 . The structural reform clause may be granted provided it

is endorsed by the Council in the autumn of the same year as an updated Country Specific Recommendation. The

Commission and the Council will consider that the criterion related to the implementation of reforms is in part

fulfilled ex ante when:

 The Member State presents a medium-term structural reform plan which is comprehensive and detailed and

includes well-specified measures and credible timelines for their adoption and delivery. The implementation of

the reforms will be monitored closely in the context of the European Semester.

 In the specific case of a Member State in the Excessive Imbalances Procedure (EIP), it has submitted a Corrective Action Plan (CAP) providing the necessary information. The implementation of the reforms will then be monitored through the EIP.

In both cases, Member States will be expected to provide in-depth and transparent documentation, providing quantitative analysis of the short-term costs – if any – and of both their medium-term budgetary and potential growth impact. The documentation must also include details on the timetable of implementation of the reforms. Concurrently, Member States will provide an independent evaluation of the information provided to support their application for a temporary deviation under the reform clause, including on the estimated short and medium-term impact on the budgetary position and on the timetable for the implementation of the reforms. Alternatively, Member States should provide comprehensive independent information to support the estimated impact and planned timetable. The Commission will when possible also provide to the Council its estimate of the quantitative impact of the reforms on the long-term positive budgetary effects and on potential growth.

3.3 Operationalisation of the structural reform clause

In the specific case of pension reforms consisting in introducing a multi-pillar system that includes a mandatory, fullyfunded pillar, the methodology to allow them to be taken into account in the preventive arm of the Pact is outlined in Article 5 of Regulation (EC) No 1466/97 i. For other structural reforms, the Commission and the Council will base themselves on the information contained in the dedicated structural reform plan (or Corrective Action Plan). In this case, the Council will grant eligible Member States additional time to reach the MTO, hence allowing temporary deviations from the structural adjustment path towards it, or to deviate temporarily from the MTO for Member States that have reached it, provided that:

(i) the reforms meet the above criteria;

(ii) the temporary deviation does not exceed 0.5 % of GDP;

(iii.) the cumulative temporary deviation granted under the structural reform clause and the investment clause (see Section 4) does not exceed 0.75 % of GDP;

(iv.) In case the structural reform is planned but not yet fully implemented, the Commission and the Council - when setting via the CSR the required structural effort for the year t+1 - will base themselves on the requirements as per the matrix of the preventive arm, i.e. without any deviation from the adjustment path from the MTO or from the MTO itself. However, the CSR will also state that if the planned reform is fully implemented, the ex post assessment of compliance with the requirements of the preventive arm will incorporate the allowed deviation, i.e. by subtracting it from the requirement set by matrix of adjustment;

41 In order to ensure equal treatment of all Member States, the Commission and the Council shall have regard to the different budgetary year of the United Kingdom, with a view to taking decisions with regards to the United Kingdom at a point in its budgetary year similar to that at which decisions have been or will be taken in the case of other Member States.

 (v.) the MTO is reached within the four year horizon of the Stability or Convergence Programme of the year in which the clause is activated. In order to ensure that, in the benchmark case of an annual adjustment of 0.5% of GDP, the Member State can regain their MTO within the required four year timeframe, the maximum initial distance which the structural balance of a Member State applying for the structural reform clause can be from the MTO is 1.5% of GDP in year t;

(vi.) the application of the structural reform clause is restricted to one single time per period of adjustment towards the MTO. In other words, once a Member State has benefitted from the structural reform clause, it will not be allowed to benefit from the clause again until it has attained its MTO. This restriction maintains the integrity of the MTO as the central target of the Preventive Arm of the Pact, as to allow multiple or concurrent applications of the clauses could effectively negate the requirement for Member States to achieve their MTO in the medium-term. This conclusion is supported by the record of Member States since the inception of the SGP evidencing in several cases a 100% failure rate in terms of achieving the MTO;

(vii.) an appropriate safety margin is continuously preserved so that the deviation from the MTO or the agreed fiscal adjustment path does not lead to an excess over the 3 % of GDP reference value for the deficit.

While the Pact does not provide the tools for monitoring the enforcement of structural reforms, the legal framework in which the Pact operates – notably the European Semester process and the new Excessive Imbalances Procedure (EIP) – allows the Commission and the Council to assess challenges and imbalances requiring structural reforms, and for monitoring action taken by the Member States. When a Member State is granted a temporary deviation under the reform clause, the Commission shall prepare an assessment of the progress or full adoption and delivery of the reforms in line with the agreed timetable of implementation.

The Council shall grant the temporary deviation after the Commission assessment confirms the full implementation of the agreed reforms. In case a Member State fails to implement or reverses the agreed reforms, the temporary deviation from the MTO, or from the adjustment path towards it, will be considered as not warranted. If such a failure results in a significant deviation from the MTO or the path towards it, the Commission will apply the procedure envisaged in Article 6(2) and Article 10(2) of Regulation (EC) No 1466/97 i. This means that the Commission will issue a warning to that Member State, followed by a proposal for a Council recommendation, to ensure that the Member State takes the appropriate policy measures within five months to address that deviation. For euro area Member States, continued

failure to comply can ultimately lead to a requirement to lodge an interest-bearing deposit 42 .

3.4 Trajectory of the temporary deviation Member States qualifying of the structural reform clause will be granted a temporary deviation of up to 0.5% of GDP in year t+1 which permits their structural balance to worsen by this amount from the balance that would have prevailed in the absence of the structural reform clause. In order to provide equality of treatment among Member States that are both at and on a path towards the MTO, it is necessary to require the Member States to adjust on a trajectory that is parallel to their original path, but to halt that adjustment if, while being entitled to the deviation, they reach the point where they are within 0.5% of GDP of their MTO (i.e. their MTO minus the temporary deviation). In the fourth year of the adjustment period covered by the structural reform clause, the deviation is no longer applied and the Member State is then required to adjust according to the matrix. In the benchmark case, this will return the Member State to its MTO. Therefore, a Member State which is at the MTO will be allowed to depart from the MTO for three years. A Member State that starts out at 1.0% of GDP from the MTO in the year the clause is applied for, will not be required to adjust in year t+1, implement an adjustment in year t+2, apply no adjustment in year t+3 and finally adjust again in year t+4. A Member State that starts out at 1.5% of GDP from the MTO in the year the clause is applied for will not be required to adjust in year t+1 and will implement the adjustment in years t+2, t+3, and t+4.

• 4. 

  Government investments aiming at, ancillary to, and economically equivalent to the implementation of major structural reforms

Under the preventive arm of the Pact, some investments aiming at, ancillary to, and economically equivalent to the implementation of major structural reforms may, under certain conditions, justify a temporary deviation from the MTO of the concerned Member State or from the adjustment path towards it.

42 Article 4 of Regulation (EU) No 1173/2011 i.

4.1 Legal framework

Regulation (EC) No 1466/97 i, in Article 5(1) and Article 2a of the Regulation, recognises "major structural reforms" and "public investment" as two different concepts.

Article 5(1) of Regulation 1466/97 i (also known as the "flexibility clause") provides that “When defining the adjustment path to the medium-term budgetary objective for Member States that have not yet reached this objective, and in allowing a temporary deviation from this objective for Member States that have already reached it, provided that an appropriate safety margin with respect to the deficit reference value is preserved and that the budgetary position is expected to return to the medium-term budgetary objective within the programme period, the Council and the Commission shall take into account the implementation of major structural reforms which have direct long-term positive budgetary effects, including by raising potential sustainable growth, and therefore a verifiable impact on the long-term sustainability of public finances."

Article 2a of Regulation (EC) 1466/97 i states that "The medium-term budgetary objectives shall ensure the sustainability of public finances or a rapid progress towards such sustainability while allowing room for budgetary manoeuvre, considering in particular the need for public investment." Such a room of manoeuvre is however limited by the Code of Conduct to Member States with relatively low debt.

Public investments cannot be assimilated "tout court" as structural reforms, unless it is duly shown that they are instrumental to the achievement and implementation of the said reforms. It is not legally feasible to establish ex ante that all co-financing expenditure by Member States in investment projects amounts to structural reforms and that such expenditure qualifies for the application of Article 5(1) of Regulation 1466/97 i. Government investments that can be eligible for a temporary deviation must be national expenditures on projects that

are to a large extent financed by co-funding by the EU under the European Structural and Investment Funds 43 , Trans

European Networks and the Connecting Europe Facility, as well as national co-financing of projects also co-financed by the European Fund for Strategic Investments. The temporary deviation for such investments will be subject to a plausibility assessment by the Commission and the Council, where consideration is given to whether the priority or project in question aims at, is ancillary to, and economically equivalent to the implementation of structural reforms. An investment can be considered economically equivalent to a major structural reform only if it can be shown that the investment has a major net positive impact on potential growth and on the sustainability of public finances.

The Commission's plausibility assessment will be based on the detailed information on the contribution of the investment projects to the implementation of structural reforms and their economic equivalence to a structural reform, including on the positive, direct and verifiable long-term budgetary effect of the expenditure covered by the temporary deviation. This information is necessary to ensure compatibility with Article 5(1) and Article 9(1) of Regulation 1466/97 i, i.e. the SGP provisions which allow temporary deviations from the MTO or the adjustment path towards it to accommodate structural reforms with positive, direct and verifiable effect on fiscal sustainability, including via potential growth. Therefore the Member State should present information by main category of projects co-financed by the EU (including the EFSI), the size of the expenditure involved, the key features and objectives of the investment project and specifying how it will contribute to boost potential growth and the long-term sustainability of public finances.

4.2 European Fund for Strategic Investments (EFSI)

On 25 June 2015, the Council adopted a regulation on a European Fund for Strategic Investments (EFSI) aimed at stimulating the economy. The Fund will offer a new risk-bearing capacity which will allow the EIB to invest in equity, subordinated debt and higher risk tranches of senior debt, and to provide credit enhancements to eligible projects. An initial contribution to this risk-bearing capacity will be made from the EU budget, in the form of a new guarantee fund, and from the EIB's own resources. The use of this EU guarantee and of EIB funds has no impact on the deficit or debt levels of Member States.

43 See Regulation (EU) No 1303/2013 i of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 i.

The capacity of the EFSI can be further increased through additional financial contributions from Member States. In addition to contributing to the EFSI, Member States will have the possibility to co-finance individual projects also cofinanced by it.

4.2.1 Financial contributions from Member States to the EFSI

In their assessment of the necessary fiscal adjustment under the preventive and corrective arms, the Council and the Commission will consider that:  Initial deficit increasing contributions into the EFSI can be considered as one-off expenditures. Under the preventive arm of the Pact, one-off expenditures will not affect the MTO or the required fiscal adjustment towards it, as these are set in structural terms.  Under the corrective arm of the Pact (the EDP), compliance with the fiscal adjustment effort recommended by the Council would not be affected, since this is also measured in structural terms. A contribution to the EFSI should therefore not lead to a Member State being found non-compliant with its EDP recommendation.  In case of a non-respect of the deficit reference value, when preparing the report envisaged under Articles 126(3) and 126(4) TFEU, the Commission and the Council will consider the contribution to the EFSI to be a “relevant factor” in line with Article 2(3) of Regulation (EC) No 1467/97 i. This means that an EDP will not be launched if this non-respect is due to the contribution, and if the excess over the reference value is small and is expected to be temporary.  In case of a non-respect of the debt reference value, when preparing the report envisaged under Articles 126(3) and 126(4) TFEU, the Commission and the Council will consider the contribution to the EFSI to be a “relevant factor” in line with Article 2(3) of Regulation (EC) No 1467/97 i. This means that an EDP will not be launched if the non-respect is due to the contribution.

4.2.2 Co-financing by Member States of investment projects also co-financed by the EFSI

From the point of view of the implementation of the Pact, the Commission and the Council will take into account national co-financing of investment projects that are to a large extent financed by co-financing by the EFSI in the application of a temporary deviation under the conditions set out in Section 4.3 below.

4.3 Criteria for eligible investments under the EFSI and other investment under the preventive arm of the Pact

Under the preventive arm of the Pact, some other investments aiming at, ancillary to, and economically equivalent to the implementation of major structural reforms may, under certain conditions, justify a temporary deviation from the MTO of the concerned Member State or from the adjustment path towards it. An investment can be considered economically equivalent to a major structural reform only if it can be shown that the investment has a major net positive impact on potential growth and on the sustainability of public finances.

For such investments, a Member State will benefit from a temporary deviation of up to 0.5% of GDP from the structural adjustment path towards the MTO, or from the MTO for Member States that have reached it, if the

following conditions are met:

(i.) its GDP growth is negative or GDP remains well below its potential (resulting in a negative output gap greater than 1.5 % of GDP);

(ii.) the deviation from the MTO or the agreed fiscal adjustment path towards it does not lead to an excess over the reference value of 3 % of GDP deficit and an appropriate safety margin is preserved;

(iii.) subject to a total maximum temporary deviation of 0.5% of GDP for an application for flexibility for

investment by a Member State, the deviation is equal to the national expenditure on eligible projects that are to a large

extent financed by co-funding by the EU under the European Structural and Investment Funds 44 , Trans-European

Networks and Connecting Europe Facility, and to national co-financing of eligible investment projects also cofinanced by the EFSI, which have direct long-term positive and verifiable budgetary effects;

(iv.) the cumulative temporary deviation granted under the structural reform clause and the investment clause does not exceed 0.75 % of GDP;

44 Including eligible projects co-financed through the Youth Employment Initiative.

(v.) co-financed expenditure should not substitute for nationally financed investments, so that total public investments are not decreased. In order to evaluate the respect of this condition, the Commission will assess the

change in gross fixed capital formation for the year of the application of the clause on the basis of the Commission forecasts to check that there is no fall in overall investment;

(vi.) the Member State must compensate for any temporary deviations and the MTO must be reached within the four-year horizon of its current Stability or Convergence Programme.

(vii.) As with the Structural Reform Clause, in order to preserve the integrity of the MTO, the full temporary deviation (corresponding to the total amount of the national part of eligible co-financed expenditure but not exceeding 0.5% of GDP) will be granted for one single time per period of adjustment towards the MTO. For the following years, only positive incremental changes would be added to the initial temporary deviation. In other words, once a Member State has benefitted from a total temporary deviation of 0.5% of GDP under the "investment clause", it will not be allowed to benefit from the clause again until it has attained its MTO.

The trajectory of the temporary deviation stemming from the application of the "investment clause" should be established in line with the "structural reform clause".

The country-specific temporary deviation will depend on several factors. Ex-ante, the potential deviation will depend on the commitments of the EU structural funds towards each Member State as well as on the level of planned cofinancing. Ex-post, the allowed deviation will depend on the effective payments of EU structural funds and on the correspondent effective co-financing. In case the actual co-financing falls short of projected co-financing, a correction will be added to the required change in the structural balance, which could potentially lead to the opening of a significant deviation procedure.

4.4 Activation of a temporary deviation for eligible investments

The "investment clause" (IC) is activated ex-ante upon request from Member States in their Stability or Convergence Programmes (SCPs). The flexibility is granted in the context of the assessment of the SCPs, specifically in the relevant Country Specific Recommendation. This Country Specific Recommendation could make the granting of flexibility conditional on the subsequent fulfilment of certain eligibility criteria (e.g. the respect of the safety margin). Euro area Member States may request to benefit from the "investment clause" also at the time of the Draft Budgetary Plans to be submitted by 15 October. Non-euro area Member States may also apply for the "investment clause" by 15

October through an ad hoc application 45 . The "investment clause" may be granted provided it is endorsed by the

Council in the autumn of that same year as an updated Country Specific Recommendation. The application should be submitted in the year ahead of the application of the clause. That is, in the SCP or at the time of the DBP (or the ad hoc application by a non-euro area MS) submitted in year t for an application of the clause in year t+1.

Ex-ante, the Commission will assess the eligibility of such investments where on the basis of the detailed information provided by the Member States (see Section 4.1 above), consideration is given to whether the priority or project in question aims at, is ancillary to, and economically equivalent to the implementation of structural reforms. The Commission will conclude that an investment can be considered as being economically equivalent to a major structural reform if it can be shown that the investment has a major net positive impact on potential growth and on the sustainability of public finances. The Commission will also assess ex-ante whether the projects satisfy the requirement that they are to large extent financed by EU co-funding.

Ex-ante, the Commission will also assess eligibility to the IC with respect to the spring forecast of year t and will factor it in the ex-ante guidance it provides at the occasion of the European Semester. Ex-post assessment will be

based on outturn data available in year t+2, as it is usually the case. The temporary deviation will be reviewed in order to reflect the effective co-financing of the Member States. The (downward) revision of this temporary deviation shall not imply that a Member State implements an effort superior to the one necessary to reach its MTO.

When requesting the application of the IC, Member States should include in their SCPs the following information (for the years t to t+4):

45 In order to ensure equal treatment of all Member States, the Commission and the Council shall have regard to the different budgetary year of the United Kingdom, with a view to taking decisions with regards to the United Kingdom at a point in its budgetary year similar to that at which decisions have been or will be taken in the case of other Member States.

• The forecast path of co-financing expenditure, including for EFSI projects (as a % of GDP). • The corrected path of its structural balance resulting from the application of the IC, while planning to reach the MTO within the timeframe of the SCP. Member States shall also take due consideration of the annual fiscal adjustment requirements towards the MTO as defined in Section 2.1 given their projections for GDP and the output gap in their SCPs. • As specified in Section 4.1, detailed information on the contribution of the investment projects to the implementation of structural reforms and their economic equivalence to a structural reform, including the positive, direct and verifiable long-term budgetary effect of the expenditure covered by the temporary deviation. This information is necessary to ensure compatibility with Article 5(1) and Article 9(1) of Regulation 1466/97 i, i.e. the SGP provisions which allow temporary deviations from the MTO or the adjustment path towards it to accommodate structural reforms with positive, direct and verifiable effect on fiscal sustainability, including via potential growth. • Member States will provide an independent evaluation of the information provided to support their application for a temporary deviation under the investment clause, including on the estimated long-term impact on the budgetary position. Alternatively, Member States should provide comprehensive independent information to support the estimated impact. • The Member State should demonstrate that the eligible co-financed investment does not substitute for nationally funded investments, so that the total share of public capital expenditure is not decreased. • Member States who have benefitted from the IC will also report in the SCPs on the actual level of cofinancing, including for EFSI projects, following the year of application.

• 5. 

  Review of the structural reform clause and the investment clause

By the end of June 2018, the Commission will carry out a review on the application of the structural reform and investment clauses, taking full account of the economic situation at that time and the achievement of its objectives. The review will examine the achievement by the Member States of their MTOs, thereby creating the necessary room to accommodate economic downturns. The review will examine to what extent the projects eligible for the investment clause were co-funded by the EU and whether the investment clause led to new investments. The review will also examine the implications of the continuation of the investment clause. The review may, as appropriate, be accompanied by proposals to the Economic and Financial Committee for a possible modification of the commonly agreed position on flexibility in the SGP.

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