BRITISH MANAGEMENT DATA FOUNDATION

The first Council Regulation under the Stability and Growth Pact entered into force on 1 July 1998 (1). It requires Member States to submit stability or convergence programmes which are at the basis of the Council's strengthened surveillance of budgetary positions and its surveillance and co-ordination of economic policies. The Commission's and the Council's role is considerably enhanced relative to the "old" convergence programmes (based on Article 109e). The Council, on a recommendation from the Commission, and after consulting the Monetary Committee (Economic and Financial Committee), inter alia, delivers an opinion on each programme and if it considers that its objectives and contents should be strengthened, it invites the Member State concerned to adjust its programme.

A fundamental element of the stability and convergence programmes is the medium-term objective for the budgetary position of close to balance or in surplus (see Articles 3(2) and 7(2) of the Regulation). The Amsterdam European Council declared in its Resolution of 17 June 1997: "adherence to the objective of sound budgetary positions close to balance or in surplus will allow all Member States to deal with normal cyclical fluctuations while keeping the government deficit within the reference value of 3% of GDP". It is therefore clear that the assessment of the appropriateness of Member States' medium-term objectives and the examination of their fulfilment has to take explicit account of the cyclical position and its effect on the budget. The time frame for interpreting the medium-term would be the length of the business cycle. In practice, one has to adopt an approximate approach when assessing how actual and expected budgetary developments compare with the requirement of medium-term budgetary positions close to balance or in surplus. In particular, one has to assess the likely impact of cyclical effects on current and future developments in budgets. This exercise requires some kind of method.

Obviously, each method has its strengths and weaknesses and therefore its results need to be interpreted with caution. Bearing this in mind, the Committee takes the present Commission services' cyclical adjustment method as a useful approach for assessing budgetary developments. Further analysis, taking into account other relevant factors including country-specific circumstances, would be needed to come to more firmly based judgements. In coming to such judgements, where appropriate, results from other methods may also be considered.

Based upon their cyclical adjustment method, Commission staff have examined for each Member State which underlying (cyclically-adjusted) budget balance would allow it to deal with adverse cyclical developments whilst respecting the government deficit reference value. Obviously, other considerations are also of major importance in setting the appropriate medium-term objective which respects the requirements of the Stability and Growth Pact, such as the need to take account of other sources of variability and uncertainty in budgets, the need to ensure a rapid decline in high debt ratios and the need to cater for the costs associated to population ageing. In line with this, Member States that would wish to make use of discretionary policy should create the necessary room for manoeuvre.

It is important to prevent the medium-term budgetary position of close to balance or in surplus from becoming a moving target. The Monetary Committee considers that the stability and convergence programmes to be submitted at the latest by the end of 1998 should show the medium-term objective of the Stability and Growth Pact as being achieved as quickly as possible. Furthermore, the Committee believes, on the basis of the Commission's analysis, that this objective should be achieved no later than by the end of 2002.

In view of the fundamental role of the stability and convergence programmes in the process of multilateral surveillance, it is important that their information content is suitable and allows for comparison across Member States. Whilst acknowledging that the programmes are the responsibility of national authorities and that the possibilities and practices differ across countries, Council Regulation (EC) No 1466/97 sets out the essential elements of these programmes.

The Monetary Committee considers that these essential requirements might usefully be complemented by a number of guidelines on the content and format of the programmes building upon the present "code of conduct" presented in the Monetary Committee's report of 14 February 1994. The experience gathered so far with the "old" convergence programmes shows that such guidelines not only assist the Member States in drawing up their programmes, but also facilitate their examination by the Commission, the Monetary Committee (Economic and Financial Committee) and the Council. Since Member States will shortly be drawing up their programmes following their commitment in the 1 May declaration to submit them before the end of this year, the Committee, drawing upon useful contributions by Commission staff, has discussed possible complementary guidelines and agreed upon the suggestions set out in the appendix to this Opinion. These are indicative and may be developed further over time, building upon the best practice emerging.

Appendix

Format and Content of Stability and Convergence Programmes

Status of guidelines
The Committee proposes that the guidelines set out in this report should be adopted as a code of good practice and check-list to be used by Member States in preparing stability or convergence programmes. This will facilitate the examination and discussion of the programmes.

The Committee does not suggest that the guidelines be made obligatory, but any departure would have to be justified by the Member States concerned.

Political commitment
In accordance with the provisions of Council Regulation 1466/97 (2), the Member States will submit stability or convergence programmes. It is therefore clear that the governments assume responsibility for them. Each programme might usefully indicate the extent to which it has received support at other levels, notably in the national parliament. In particular, the state of implementation of the measures presented in the programme should be indicated.

Status of data
The status of the quantitative information in the programmes should be clearly established. In order to facilitate assessment, the concepts used should be in line with the standards established at European level, notably in the context of the European System of Accounts. This information may be complemented by a presentation of specific accounting concepts that are of particular importance to the country concerned.

Content
Articles 3 and 7 set out the basic information to be covered by stability and convergence programmes.

Objectives
The programmes should present the medium-term objective for the budgetary position of close to balance or in surplus and, where appropriate, the adjustment path to it, as well as the projected path for the debt ratio (Articles 3(2a) and 7(2a)). The time frame for interpreting the medium-term would be the length of the business cycle. The medium-term budgetary position has to take account of the possibility to deal with adverse cyclical developments whilst respecting the government deficit reference value. Obviously, other considerations are also of major importance in setting the appropriate medium-term objective which respects the requirements of the Stability and Growth Pact, such as the need to take account of other sources of variability and uncertainty in budgets, the need to ensure a rapid decline in high debt ratios and the need to cater for the costs associated to population ageing. In line with this, Member States that would wish to make use of discretionary policy should make the necessary room for this.

Member States should specify and explain the factors underpinning their choice of the medium-term budgetary objectives. Where appropriate, government investment objectives might be specified. Convergence programmes shall also present the medium-term monetary policy objectives and their relationship to price and exchange rate stability.

To permit a fuller understanding of the paths of the government balance and the debt ratio and of the budgetary strategy in general, complementary information should be provided on expenditure and revenue ratios, with interest payments separately identified, and on privatisation receipts and other factors influencing the debt ratio. Obviously, the further forward the year considered, the less accurate the information will be.

The budget balances should be broken down by sub-sector of general government (central government, local authorities, social security) where this breakdown is significant.

Assumptions
The programmes should present the main assumptions about expected economic developments and important economic variables which are relevant to their realization such as government investment expenditure, real GDP growth, employment and inflation (Articles 3(2b) and 7(2b)). The assumptions on real GDP growth should be underpinned by an indication of the expected sources of growth. Furthermore, the programmes should provide sufficient information about GDP developments to allow an analysis of the cyclical position of the economy. Where these are particularly important to public finances, technical assumptions on interest rates should also be presented.

While there was considerable support in principle in the Committee for the use of a common set of macro-economic projections, the practical difficulty of arriving at an agreed set of projections was acknowledged. Accordingly, the use of a common set of macro-economic projections for all programmes is not recommended. However, the macro-economic projections, for the domestic and the world economy underlying the programmes should be clearly specified and the Commission should draw attention to any significant differences from their own projections, the Member State concerned standing ready to justify its assumptions.

Reflecting the general point made above on the standardisation of quantitative information presented, inflation assumptions should be presented in terms of the GDP deflator and, if a Member State considers it useful, the Harmonised Index of Consumer Prices (HICP).

Measures
The programmes should describe the budgetary and other economic policy measures being taken or proposed to achieve the objectives of the programme, and, in the case of the main budgetary measures, an assessment of their quantitative effects on the budget (Articles 3(2c) and 7(2c)). The measures should be consistent with the broad economic policy guidelines. Measures having significant "one-off" effects should be explicitly identified. Member States have committed themselves to take the corrective action they deem necessary to meet the objectives of their stability or convergence programmes, whenever they have information indicating actual or expected significant divergence from those objectives. Structural reforms should be covered where they could contribute to the achievement of objectives of the programmes. Spill-over effects on other Member States should be dealt with by the Commission in its analysis, which does not preclude the Member States from dealing with these effects in their programmes. The programmes could also usefully describe changes introduced to improve expenditure control, tax collection efficiency, and so on. Where appropriate, the programmes should also indicate other possible institutional reforms especially in the budget process.

Sensitivity analysis
The programmes shall provide an analysis of how changes in the main economic assumptions would affect the budgetary and debt position (Articles 3(2d) and 7(2d)). This analysis should be complemented by a sensitivity analysis of the impact of different interest-rate assumptions on the budgetary and debt position.

Time horizon
The information about paths for the general government surplus/deficit ratio and debt ratio and the main economic assumptions shall be on an annual basis and shall cover, as well as the current and preceding year, at least the three following years (Articles 3 (3) and Article 7 (3)); leaving it open to Member States to cover a longer period if they so wish.

Updating of programmes
Annual updates of stability and convergence programmes should show how developments have compared with the programme objectives. When substantial deviations occur, the update should include the steps to be taken to rectify the situation.

Notes

(1). Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies, published in Official Journal No L 209 of 2 August 1997.

(2). The articles referred to in this Appendix are the articles of Council Regulation (EC) 1466/97.

Last updated on 22 February 1999