Surveillance of budgetary policies

Outline of the Community (European Union) legislation about Surveillance of budgetary policies

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

Surveillance of budgetary policies

Document or Iniciative

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 [See amending acts].

Summary

This Regulation constitutes the preventive arm of the stability and growth pact. It aims to monitor and coordinate Member States’ budgetary policies, by way of a preventive measure to ensure budgetary discipline within the European Union.

To this end, the Regulation provides for a European Semester at the start of each year to assist Member States in putting in place healthy budgetary policies. Member States submit to the Commission stability programmes (for Member States in the euro zone) and convergence programmes (for Member States outside the euro zone) in which they adopt medium-term budgetary objectives. These programmes are assessed by the Commission and are the subject of specific Council recommendations for each State.

European Semester for economic policy coordination

The European Semester comprises a six-month period during which Member States’ budgetary policies are examined.

At the start of the Semester, the Council shall identify the key economic challenges for the European Union (EU) and provide Member States with strategic policy guidelines to be followed.

Subsequently, and on the basis of these guidelines, Member States shall establish:

• their stability or convergence programmes under this Regulation;
• their national reform programmes, in line with broad guidelines for economic policy and guidelines for employment policies.

At the end of the European Semester and following an assessment of the programmes, the Council sends recommendations to each Member State. Based on the Commission’s Opinion, the Council thus makes known its assessments before Member States draw up their final budgets for the following year.

Medium-term budgetary objectives

Each Member State has a medium-term deficit objective for its budgetary position, defined in structural terms. The medium-term objectives differ between Member States: they are more stringent where the level of debt and estimated costs of an ageing population are higher.

For the Member States that have adopted the euro and for those participating in the ERM 2 at over – 1 % of GDP, the medium-term objectives may be revised when a major structural reform is undertaken or every three years, when forecasts are published enabling the estimated costs of ageing populations to be updated.

Multilateral surveillance: stability and convergence programmes

The stability and convergence programmes serve as a basis for multilateral surveillance by the Council of the EU. This surveillance, provided for in Article 121 of the Treaty on the Functioning of the EU should prevent, at an early stage, the occurrence of excessive public deficits and promote the coordination of economic policies.

Each Member State must present the Council of the EU and the Commission with a stability programme (for Member States in the euro zone) or a convergence programme (for Member States outside the euro zone).

Stability or convergence programmes must include the following information:

• the medium-term budgetary objective, an adjustment path for achieving the objective, government balance as a percentage of GDP, the foreseeable trend for the government debt ratio, the growth rate planned for government expenditure, the growth path of government revenue at unchanged policy, and quantified discretionary revenue measures. In addition, convergence programmes have to state the relationship between these objectives and price and exchange rate stability, as well as the medium-term objectives of monetary policy;
• information on implicit liabilities related to ageing, and contingent liabilities (such as public guarantees) with a potentially large impact on government accounts;
• information on the consistency of the programmes with the broad economic policy guidelines and the national reform programmes;
• the main assumptions underlying the economic outlook, which are likely to influence the realisation of the stability and convergence programmes (growth, employment, inflation and other important variables);
• an assessment and a detailed analysis of the budgetary measures and other economic policy measures – taken or envisaged – of relevance in achieving the programme’s aims;
• an analysis of how changes in the main economic assumptions would affect the budgetary and debt positions;
• where applicable, the reasons for a deviation from the adjustment path needed to achieve the medium-term budgetary objective.

Stability and convergence programmes must be submitted every year during the month of April. They are published by the Member States.

Examination of the stability and convergence programmes

On the basis of assessments by the Commission and the Economic and Financial Committee, the Council examines the medium-term budgetary objectives presented by Member States in their programmes. It checks in particular:

• whether the medium-term budgetary objective is based on plausible economic assumptions;
• whether the measures taken or envisaged are sufficient to achieve the budgetary objective;
• whether an assessment of the adjustment path shows that the Member State concerned is seeking to improve its (cyclically adjusted) budgetary balance year-on-year;
• whether annual growth in government expenditure by the Member State concerned is not too high – i.e. does not exceed a benchmark rate in the medium term.

When making its assessments, the Council must take account of the implementation of major structural reforms, especially pension reforms.

The Council is to examine the programme within three months of its submission. On a recommendation from the Commission and after consulting the Economic and Financial Committee, the Council delivers an opinion on the programme. Where it considers that the objectives and content of a programme should be strengthened, the Council can invite the Member State concerned to adjust it.

Avoiding the occurrence of an excessive deficit: the early warning mechanism

As part of multilateral surveillance, the Council monitors the implementation of stability and convergence programmes on the basis of information provided by the Member States and assessments carried out by the Commission and the Economic and Financial Committee.

Thus, if the Commission identifies a significant divergence from the medium-term budgetary objective or from the adjustment path that should lead to that objective being achieved, it will address recommendations to the Member State concerned to prevent the occurrence of an excessive deficit (early warning mechanism, Article 121(4) of the Treaty on the Functioning of the EU).

Furthermore, recommendations adopted in the Council may be made public.

Context

The stability and growth pact is a set of rules putting in place economic and budgetary surveillance at European level. The objective is to guarantee the economic and financial stability of the EU.

Member States must therefore apply healthy budgetary policies in order to avoid the occurrence of excessive government deficits which might endanger the economic and financial stability of the EU.

In 2011, the stability and growth pact was the subject of extensive reforms. The new measures adopted are an important step in guaranteeing budgetary discipline, promoting the stability of the European economy and preventing another crisis within the Union.

The stability and growth pact now includes six legislative acts which entered into force on 13 December 2011:

• Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area;
• Regulation (EU) No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area;
• Regulation (EU) No 1175/2011 amending this Regulation on surveillance procedures for budgetary positions;
• Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances;
• Regulation (EU) No 1177/2011 amending the procedure on excessive deficits;
• Directive No 2011/85/EU on requirements for budgetary frameworks of the Member States.

References

Act	Entry into force	Deadline for transposition in the Member States	Official Journal
Regulation (EC) No 1466/97	1.7.1998	–	OJ L 209 of 2.8.1997

Amending act(s)	Entry into force	Deadline for transposition in the Member States	Official Journal
Regulation (EC) No 1055/2005	27.7.2005	–	OJ L 174 of 7.7.2005
Regulation (EU) No 1175/2011	13.12.2011	–	OJ L 306 of 23.11.2011