Council Opinion

of 12 February 2001

on the updated stability programme of Italy, 2002-2004

(2001/C 77/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 February 2001 the Council examined Italy's updated stability programme, which covers the period 2000-2004. The Council welcomes the revision of the objectives for the general government budget balance in 2000 and beyond, as recommended in the broad economic policy guidelines (BEPG). The Council notes favourably that the reduction of the debt ratio to below 100 % of GDP in 2003 is confirmed in spite of the higher target in 2000 compared to the first update of the stability programme. However, considering the still high debt ratio and the future challenges to the long-term sustainability of public finances from an ageing population, the Council considers that Italy's revised fiscal targets could have been more ambitious.

The Council notes Italy's intention to continue the budgetary strategy outlined in the initial programme, which aims at keeping the primary surplus at a high level and reducing current expenditure as a percentage of GDP, in parallel with some easing of the tax burden. Higher than expected tax receipts are assumed to have provided backing for the tax and social security contribution cuts outlined in the programme. The primary surplus is expected to increase as a percentage of GDP, averaging 5,5 % of GDP over the period. The underlying budgetary position over the programme period provides a safety margin against breaching the three percent of GDP deficit threshold in normal cyclical fluctuations, implying that Italy would continue to satisfy the requirements of the stability and growth pact up to 2004.

The Council observes that there are risks that the budgetary framework outlined in the updated stability programme may not materialise as planned. The macroeconomic projections, which assume a significant acceleration in GDP growth from an annual rate of 1,4 % in 1999 to over 3 % in 2002-2004, may be optimistic also in the light of recent developments in the external environment; on the other hand, the assumptions on interest rates are rather conservative in the light of recent developments in financial markets.

The available data do not allow at present a conclusive appraisal of the implementation of the budget in 2000. However, if the general government deficit were higher than the new objective of 1,3 % of GDP, Italy would not have fully complied with last year's Council opinion and with the recommendations of the June 2000 BEPG. As for 2001 and beyond, there are concerns that the increase in planned revenues, which has provided backing for the tax and social security contribution cuts, may not turn out to be fully structural and that the expenditure-reducing measures introduced with the Financial Law for 2001 could not be fully effective.

In the light of the considerations made above, the Council urges Italy firmly to commit itself to respect the programme's objectives. Primary surpluses should remain at the high levels projected in the programme. Any deviation from the planned deficit and primary surplus outcomes should be promptly addressed and corrective measures taken. This should be ensured through a tight control of current primary expenditure. The Council encourages Italy to accompany the reduction in the ratio of current primary expenditure to GDP with a more effective and more comprehensive rationalisation of public spending, aimed at improving the supply-side conditions of the economy.

Moreover, even though Italy fulfils the requirements of the stability and growth pact, it should take every opportunity to improve future budgetary targets and speed up the consolidation process, in order to accelerate the reduction of the government debt ratio. The Council recommends that future decisions to reduce the tax and social security contributions burden should be matched by offsetting expenditure cuts.

In line with both its Opinion(2) on the original stability programme and its Opinion on the first updated programme(3), the Council notes that Italy has not taken further steps to address the medium-term structural challenges to public finances from pension and other age-related budgetary expenditures. The reassessment of the parameters of the pension system scheduled to take place later this year should not be postponed. The Council urges Italy to address this issue with determination. Although the Financial Law for 2001 includes a few isolated measures on pensions, the Council advocates a more comprehensive approach. The reassessment of the pension system should take place within the framework of a broader overhaul of the Italian welfare system.

(1) OJ L 209, 2.8.1997, p. 1.

(2) OJ C 68, 11.3.1999, p. 1.

(3) OJ C 98, 6.4.2000, p. 2