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Financial perspectives system and the multiannual financial framework

Financial perspectives system and the multiannual financial framework

Outline of the Community (European Union) legislation about Financial perspectives system and the multiannual financial framework

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Budget

Financial perspectives system and the multiannual financial framework

 

The political and institutional balance of the Community’s system of finance gradually was marked by ever-increasing strains in the 1980s. The conflict between the two arms of the budgetary authority (the European Parliament and the Council) meant that the annual budgetary procedure became increasingly difficult to administer and resulted in budgetary imbalances and a growing mismatch between Community resources and requirements. This prompted the Community to introduce a system designed to improve the budgetary procedure.

Through an interinstitutional agreement (IIA), the European Parliament, the Council and the Commission agree in advance on the main budgetary priorities for a period covering a number of years. These budgetary priorities establish a framework for Community expenditure (the multiannual financial framework) in the shape of a financial perspective. The system of financial perspectives thus improves the budgetary procedure whilst ensuring budgetary discipline. The multiannual financial framework is not mentioned in the treaties.

Financial perspective and multiannual financial framework: a means of ensuring budgetary discipline

The multiannual financial framework indicates the maximum amount and the composition of foreseeable Community expenditure. The first Interinstitutional Agreement was concluded in 1988 for the application of the 1988-92 financial perspective (Delors I package), which was intended to provide the resources needed for the budgetary implementation of the Single European Act. Since then, the financial perspectives have been updated in 1992 for the period 1993-99 (Delors II package), in 1999 for the period 2000-06 (” Agenda 2000 “) and in 2006 for the period 2007-13.

The purpose of the financial perspective is therefore to strengthen budgetary discipline, to keep the total increase in expenditure under control and to ensure that the procedure runs smoothly. The multiannual financial framework imposes a dual ceiling on expenditure: one for total expenditure and one for each category of expenditure.

Structure of the mutiannual financial framework

For each programming period, the multiannual financial framework determines “ceilings” (the maximum amounts of commitment appropriations and payment appropriations) per “heading” (the categories of expenditure) for each year. The annual budgetary procedure determines the exact level of expenditure and the breakdown between the various budget lines for the year in question.

The expenditure allocated to each heading is based on the Union’s political priorities for the period in question. The structure of the multiannual financial framework for 2007-13 is as follows:

1. Sustainable growth
1 a. Competitiveness for growth and employment
1 b. Cohesion for growth and employment
2. Conservation and management of natural resources (including market expenditure and direct payments)
3. Citizenship, freedom, security and justice
3 a. Freedom, security and justice
3 b. Citizenship
4. EU as a world player
5. Administration
6. Compensation

The ring-fencing of expenditure headings means that a budget line is financed only from a given heading. Each heading should be well enough financed to allow redeployment of expenditure between operations under the same heading where necessary in order to tackle unforeseen issues.

The “margin for unforeseen expenditure” between the own resources ceiling and the ceiling for payment appropriations has a dual role:

  • to allow the multiannual financial framework to be revised if necessary so as to cover any expenditure which is unforeseen when the financial perspective is adopted;
  • to leave a safety margin should economic growth be lower than forecast; should this be the case, actual GNI will be lower than expected and the ceiling for payment appropriations, which is an absolute amount, can be financed from the own resources margin, within the limits of the own resources ceiling expressed as a percentage of GNP.

Link with the own resources system

The overall ceiling for commitment appropriations is obtained by adding together the various ceilings for individual expenditure headings. To check the compatibility of the financial perspective with the ceiling for own resources, which constitutes the absolute limit on the resources that the Member States can make available to the Union, an annual ceiling is also established for payment appropriations. This is an overall ceiling not broken down by expenditure heading. It is also expressed as a percentage of the Community’s estimated gross national product (GNP).

Rules for applying the financial framework

The rules for applying the financial framework are laid down in the Interinstitutional Agreement, which contains the rules and procedures for the annual management of the financial framework (e.g. technical adjustments, adjustments connected with the conditions of implementation or with enlargement of the Union, and revision of the financial perspective). This makes it possible to improve the annual budgetary procedure.

Each year the Commission, under its own responsibility, makes a technical adjustment to the multiannual financial frameworkfor the coming year. This adjustment concerns the following operations:

  • as the multiannual financial framework is drawn up at constant prices, it has to be adjusted each year to take account of inflation so as to ensure that each expenditure heading retains its initial purchasing power. The technical adjustment is generally made at the beginning of year n-2 for a given year n on the basis of the most recent economic data and forecasts available. No subsequent technical adjustment is made for the year in question;
  • the ceiling on own resources is expressed as a percentage of GNI. Translation of this ceiling into an absolute figure means that, for the purposes of the technical adjustment, the calculation has to be based on the most recent data on Community GNI. It is at this point that compatibility between the total payment appropriations and available own resources is verified.

The Commission can also propose changes to the multiannual financial framework to the two arms of the budgetary authority in two cases:

  • re-scheduling of the payment appropriations available for structural operations where delays have been identified in the programming of such operations;
  • re-evaluation of the needs relating to certain headings as a result of the accession of new Member States.

The two arms of the budgetary authority may, following a proposal from the Commission, decide to revise the multiannual financial framework. This will enable the Community, while respecting the own resources ceiling, to take necessary action not foreseen at the time the financial perspective was drawn up.

Public finances in Member States in 2004

Public finances in Member States in 2004

Outline of the Community (European Union) legislation about Public finances in Member States in 2004

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Public finances in Member States in 2004

Document or Iniciative

Communication from the Commission to the Council and the European Parliament: Public finances in EMU – 2004 [COM(2004)425 final – Not published in the Official Journal].

Summary

The Commission analyses public finances in European and Monetary Union (EMU) in 2004 and emphasises the need to strengthen the economic governance framework in the Union. It notes more frequent use of the excessive deficit procedure and refers to the strains that are a source of uncertainty in implementing the budgetary surveillance framework, notably because of the divergent interpretation of the provisions of the Treaty and the stability and growth pact by the Community institutions. It proposes an improved analysis of budgetary developments. It also stresses that budgetary discipline and economic growth are mutually compatible objectives. It analyses the link between long-term fiscal and growth policies with a view to improving the quality of public finances.

Review of the current situation

Slower growth is contributing to budget deficits throughout the European Union (EU). Enlargement of the Union in 2004 led to growing disparities in the budgetary performances of Member States. The most significant deficits are those of Germany and France. Given their size, both countries affect the overall outcome for the euro area. The Commission is concerned about the public finance situation in Italy given its high debt-to-GDP ratio but also about the deterioration in actual balances in several countries outside the euro area, including Poland and the United Kingdom. However, it notes the soundness of public finances in Belgium, Spain, Finland, Ireland and Luxembourg. Outside the euro area, Denmark, Estonia and Sweden maintained surpluses throughout the cyclical slowdown.

The last two years have seen frequent use of the excessive deficit procedure. In 2003 Germany, France and Portugal were in an excessive deficit position. In the case of Germany and France, the probability of bringing the deficits below 3 % of GDP in 2004 was very low in the light of the draft budgets submitted for 2003. The Commission therefore moved forward with the excessive deficit procedure with the aim of urging these two countries to correct their deficits at least by 2005. In 2004 the Commission also started the excessive deficit procedure for Greece, the Netherlands and the United Kingdom, which registered deficits above 3 % of GDP in 2003. On the basis of its forecasts, the Commission recommended that an “early warning” be sent to Italy given the risk that it would breach the 3 % reference value in 2004. The procedure was also started for several new Member States following their accession to the EU. Recommendations were addressed to them with a view to helping them pursue a credible mulitiannual adjustment path.

In the immediate future, in spite of an improving growth outlook, the Commission considers that budgetary prospects for 2004 and 2005 are not very promising and that achieving sound public finances will take time. The deficit in Germany and France is projected by the Commission to remain above 3 % of GDP in 2004. The two Member States are committed to bringing down the deficit to below 3 % of GDP in 2005. Greece, Italy, the Netherlands and Portugal could also see their deficits breach the 3 % threshold if no corrective measures are taken. The budgetary situation in most of the new Member States is expected to improve over the next two years.
Unfortunately, a close-to-balance position will not be reached by most Member States, including Germany, France, Portugal and the United Kingdom, by 2007 (0.7 % of GDP for the euro area). These countries do not have an adequate safety margin to prevent a breach of the 3 %- of-GDP reference value in the event of adverse economic conditions. The Commission considers that the medium-term objectives of some Member States are based on overly optimistic growth assumptions.

The poor implementation record for the stability and convergence programmes is hampering achievement of the Lisbon objectives for making the EU the most competitive and most dynamic economy in the world. It is vital that Member States reach budgetary positions which ensure that the automatic stabilisers work freely and mitigate the impact of population ageing on the sustainability of public finances. As economic conditions improve, efforts will be needed to improve the underlying budgetary positions: the difficulties experienced by certain Member States in complying with the Treaty requirements in 2002 and 2003 reflect the fact that they did not carry out enough fiscal adjustment during the good economic times in 1999 and 2000.

Overcoming current difficulties

The Commission notes tensions in the implementation of the procedures laid down in the Treaty and the stability and growth pact (SGP) as regards budgetary surveillance, notably on account of the divergent application of the SGP by the Community institutions. In February 2002, for instance, the Commission recommended that the Council address an “early warning” to Germany and Portugal. The Council did not follow the Commission’s proposals on account of the commitments made by those countries. Similarly, the Council did not follow in 2003 the Commission’s recommendations regarding Germany and France which extended by one year the deadline for correcting the excessive deficit situation and which entailed triggering the following stages in the procedure.

The Commission has announced a strategy aimed at seeking legal clarity on the provisions of the Treaty and the SGP, pursuing budgetary surveillance and strengthening economic governance. Accordingly, at the end of January 2004 it asked the European Court of Justice to annul the decisions taken by the Council and the conclusions adopted at its November meeting. The Commission is pursuing budgetary surveillance in accordance with the provisions of the Treaty and the SGP. This involves assessing the 2003 updates of the stability and convergence programmes and preparing draft opinions for the Council. It is updating the broad economic policy guidelines (BEPGs), including the country-specific recommendations for certain Member States.

The Commission considers that the temporary slippages affecting budgetary positions must be identified more quickly. The Report on Public Finances in EMU – 2004 highlights four areas where progress has been made in analysing budgetary developments:

  • the role of one-off measures. “One-off” measures taken by governments are becoming a frequent and sizeable feature of budgetary policies in the EU. In the Commission’s view, it is important to take account of such measures and the reasons behind them in the budgetary surveillance process. It would like to see greater transparency of budget measures and better reporting of them by Member States, including in the stability and growth programmes;
  • the use of cyclically adjusted budget balances. At present, a common methodology which provides figures for cyclically adjusted budget balances (CABs) is used to disentangle changes in the budget which reflect the economic cycle from those which do not, the latter reflecting measures decided by policymakers. The Commission proposes excluding the component of the change attributable to unexpected changes in potential growth in order to correct the fiscal adjustment measures made at the level of Member States;
  • the assessment of the long-term sustainability of public finances. Budgetary surveillance includes an assessment of the long-term sustainability of public finances on the basis of the updated stability and convergence programmes. The Commission is stepping up the quantitative analysis of the results obtained, thereby giving the assessment a higher information value. It notes that the risks to long-term sustainability are most serious in five countries (Germany, Belgium, France, Greece and Italy) and that two countries (Netherlands and United Kingdom) face medium-term difficulties. Spain and Portugal envisage difficulties over the long-term projections for pension expenditures. Six countries (Austria, Denmark, Finland, Italy, Luxembourg and Sweden) seem to be well placed to meet the costs of an ageing society on the basis of current policies;
  • the consideration of contingent liabilities. To obtain a comprehensive picture of the sustainability of public finances, liabilities other than those included in the Maastricht definition of gross debt should be considered. “Contingent liabilities” correspond to government obligations that materialise only when particular events occur, and the stock of such liabilities is relatively high in the new Member States. Given the differing national situations and trends in the EU, the Commission considers that improved disclosure and monitoring of contingent liabilities would help to strengthen budgetary discipline in the Union.

There have been criticisms that the EU budgetary surveillance framework focuses too much on disciplinary aspects and so is not growth-friendly. The Commission concludes that budgetary discipline does not rule out economic growth. Budgetary discipline and sound public finances contribute to a macroeconomic environment that fosters growth, and the fiscal framework prevents protracted deficits that may have an impact on future income. The Commission’s analysis suggests that the budgetary adjustment in the 1990s induced by the EU fiscal framework resulted in growth of limited duration and magnitude but laid the foundations for better growth prospects. In the absence of the framework, the budget deficits would have crowded out private investment and further reduced potential growth compared with current figures.

The Commission highlights the need to strengthen economic governance in the EU. The framework which applies to the conduct of national fiscal policies and the processes underlying the coordination of economic policies in the EU need to be reassessed. For instance, the Treaty rules on public finances contribute to growth and allow room for proper implementation of the Lisbon strategy. However, the BEPGs could assume a more prominent role in economic policy coordination by providing better fiscal guidance to Member States. The Commission again stresses the importance of improving the interpretation of the fiscal rules in order to take debt developments in Member States into account. Lastly, the Commission recalls the advantages of clarifying the respective roles of the Council and the Commission in implementing the Treaty instruments. It also emphasises the importance of an improved dialogue between all the actors concerned at both national and Community level.

Since 2000 the Commission has produced an annual report on public finances in the European Union. It also adopts communications on the subject.

Related Acts

Commission Communication to the Council and the European Parliament – Public finances in EMU – 2003 [COM(2003)283 final – Not published in the Official Journal]
The European Commission recommends establishing a coherent medium-term strategy to tackle the problem of growing budget imbalances and stimulate growth.

Commission Communication to the Council and the European Parliament – Public finances in EMU – 2002 [COM(2002)209 final – Not published in the Official Journal]
The Commission takes stock of the trend in budgetary policies. There are economic situations to be faced up to while the budgetary framework for the Economic and Monetary Union has to be improved. The Commission underscores the importance of the early warning procedure. To ensure that the stability and growth pact is credible, the Commission believes that its objectives must be attained, while the long-term viability of public finances must be secured. In addition, the quality of public expenditure must be guaranteed and enlargement must be prepared.

Commission Communication to the Council and the European Parliament – Public finances in EMU – 2001 [COM(2001)355 final – Not published in the Official Journal]
This communication analyses the budgetary results of the Member States in 2000 and considers the short- and medium-term prospects. The budgetary policy debate is influenced by a variety of factors, in particular the stability and growth pact objective of attaining a budget position close to balance or in surplus, The importance of a budgetary policy that ensures an appropriate mix of macro-economic policies, the enlargement of the debate to embrace the quality and viability of the public finances, and the need for coordination on budget issues. Lastly the Commission sets out in detail the path to be followed, that is to say closer coordination on budgetary matters.

Public finances in Member States in 2005

Public finances in Member States in 2005

Outline of the Community (European Union) legislation about Public finances in Member States in 2005

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Public finances in Member States in 2005

Document or Iniciative

Communication from the Commission to the Council and the European Parliament of 1 June 2005: “Public finances in EMU – 2005” [COM(2005) 231 final – Not published in the Official Journal].

Summary

The communication summarises the main policy messages of the report entitled ” Public finances in EMU – 2005 “, the latest of the reports the Commission has drawn up each year since 2000. The Commission notes that there are still budgetary imbalances in some countries (Germany, Cyprus, France, Greece, Hungary, Italy, Malta, Poland, Slovakia and United Kingdom), although the general government deficit in the euro area has improved marginally. According to forecasts, the euro-area and EU deficits should remain roughly stable in 2005 and 2006.

Ten Member States face excessive deficit procedures

The communication takes account of the reform of the stability and growth pact (SGP). Since the summer of 2004, ten EU countries have been subject to the excessive deficit procedure (EDP):

  • France and Germany. Following the Court of Justice ruling *, both countries have taken measures that could result in the excessive deficit being corrected in 2005. At this stage no further action under the EDP is necessary.
  • Netherlands. The Netherlands reduced their excessive deficit to 2.5 % of gross domestic product (GDP) in 2004. The Commission therefore proposed in May 2005 to abrogate the decision on the existence of an excessive deficit.
  • Cyprus, Hungary, Malta, Poland, Czech Republic and Slovakia. The Council decided that an excessive deficit existed in each of these countries outside the euro area. In order to remedy the situation, it issued recommendations to these countries. All of them, apart from Hungary, have taken effective measures in response to the recommendation.
  • Greece. The Council has issued a notice to Greece, the last step before sanctions. Greece has until 2006 to correct the excessive deficit, which is of an unprecedented magnitude (5.2 % and 6.1 % of GDP in 2003 and 2004 respectively).

The Commission is placing emphasis on improving statistical governance in the budgetary field following the revision in the Greek government accounts in 2004. In a communication on a European governance strategy for fiscal statistics [COM(2004) 832 final], the Commission put forward three lines of action:

  • building up the legislative framework;
  • developing the Commission’s operational capacity;
  • defining European standards on the independence of statistical institutes.

Reform of the stability and growth pact: analysing budgetary data

The communication describes the main stages of the reform of the stability and growth pact. The debate has led to changes in the basic regulations on the surveillance of budgetary positions and the implementation of the excessive deficit procedure.

The Commission notes that the report aims to improve the understanding of public finance issues in the EU and to upgrade budgetary surveillance. For 2005, the report presents an analysis of the discrepancy between budgetary plans presented in stability and convergence programmes and the actual results achieved, an analysis of the determinants of debt dynamics and an analysis of the long-term sustainability of public finances.

These analyses enable the Commission to:

  • achieve effective budgetary planning. The Commission has collected data enabling it to compare actual budgetary developments in the Member States with initial objectives. In this way it has been able to see how its assessment of stability and convergence programmes has evolved over the years. It highlights the importance of finding ways to avoid spending slippages and more effectively plan expenditure patterns in a manner that increases their quality – also to better match the new Lisbon priorities.
  • understand the determinants of debt dynamics. The Commission focuses on “stock-flow adjustment”, which captures the residual discrepancy between the change in the outstanding debt stock and the general government deficit, as defined in the Protocol to the Maastricht Treaty. The usual analysis focuses on deficits and nominal growth, while much less attention has been given to the stock-flow adjustment. However, this component conveys relevant information about the evolution of government assets and liabilities and about the discrepancy between deficits. The report shows that the stock-flow adjustment in past years has, on average, been positive (consequently adding to the build-up of debt) and that in some countries it is partly associated with cash deficits being systematically higher than “Maastricht deficits”.
  • increase focus on the long-term sustainability of public finances. Public finances must be sustainable, despite ageing populations and the costs involved in the European social model. The 2005 report shows that the Member States must consolidate their budgets in order to achieve a sustainable position. The reform of the stability and growth pact is helping to ensure the long-term sustainability of public finances. The exchange of information among Member States and with the Commission on national expenditure will increase transparency and lead to a better assessment of the long-term sustainability of public finances.

Structural reforms and budgetary objectives

The Commission gives high priority to economic reforms that increase growth and employment. The report reviews and discusses the link between the implementation of structural reforms and budgets in implementing the EU framework for fiscal policy. This important issue has been under-researched.

Reforms can contain the growth of certain types of government expenditure, such as reforms of pension or health care systems. Reforms aimed at improving potential output and growth may also have indirect positive effects. However, numerical rules to limit excessive deficits may discourage reforms. The trade-off between reforms and budgetary objectives can be explained by the short-term costs of reforms and by the fact that reforms can be costly to particular groups in society, so that tax cuts or other government transfers may be needed.

The report looks at labour and product market reforms and pension reforms. The analysis focuses on two issues: the short-term impact of reforms on budgets, and the possibility that fiscal consolidation measures prevent reforms. According to the data, there is no strong evidence to show that reforms are less frequent in times of budgetary consolidation. However, in the aftermath of reforms there is, in general, a slight deterioration in budget balances. The Commission believes that reforms should be considered with caution in the implementation of the stability and growth pact (SGP). The 2005 SGP reform package includes provisions aimed at ensuring that the budgetary objectives of the EU fiscal framework do not clash with structural reforms that may contribute to sound public finances and increased growth.

New Member States: fiscal challenges

The ten Member States that joined the EU in 2004 are continuing their economic integration by catching up in terms of their income levels and by looking forward to adopting the euro. Fiscal policy can make a key contribution in this process via efficient and sustainable tax and expenditure policies and by supporting stable development of the economy. In the short term, some of the new Member States may need to make difficult choices, for example on higher spending in certain areas such as infrastructure, training or R&D, which may make it even harder to contain budget deficits. The report discusses the main challenges facing the new Member States in conducting their fiscal policy, such as the problem of an ageing population.

The new Member States are in a position to finance some of their needs thanks to their high potential growth and, in some cases, their low public debt. However, the stock of contingent liabilities is relatively high in many of these countries, and this creates the risk of sudden upswings in debt levels if government payments related to guarantees materialise. The Commission highlights the importance of taking advantage of periods of strong growth to achieve budgetary improvements. In this way, Member States can ensure adequate headroom to stabilise the economy during a downturn.

The Commission believes that there is scope for policy-makers in the new Member States to pursue their growth and stability objectives while ensuring proper management of public finances. Efforts must be made to:

  • restructure existing expenditure programmes;
  • enhance tax bases in order to strengthen public finances and foster conditions conducive to growth;
  • enhance the transparency of budgetary procedures;
  • improve risk management in the private sector via well-designed surveillance.

Although the framework for economic and budgetary surveillance in EMU has provided positive results, analyses show that Member States need to do more if they are to deliver the expected results. The reform of the SGP and the Lisbon strategy have responded to the need to match procedural rules with the economic reality and needs of the Member States. They will be tested in the years to come. The way the new SGP framework will be implemented from the start will be crucial for its future credibility. The Commission encourages the Member States to pursue this ambitious strategy by enhancing the quality and ensuring the sustainability of their public finances.

Key terms used in the act
  • Case C-27/04: The debate surrounding the stability and growth pact gathered momentum following a ruling on 13 July 2004 by the Court of Justice of the European Communities (CJEC) concerning the excessive deficit procedures initiated against Germany and France. In November 2003 the Commission sent the Council recommendations for speeding up the excessive deficit procedure in both cases. However, the Council did not act on those recommendations and suspended the excessive deficit procedures. It argued that its conclusions were of a political nature. The Court ruled that the Commission’s complaint, namely that the Council had not adopted the formal instruments contained in the Commission recommendations, was inadmissible and that the Council conclusions of 25 November 2003 adopted in respect of France and Germany were annulled as regards suspension of the excessive deficit procedure.