Petentes
...the point of view of other policy goals, such as, for instance, its impact on the sustainability of a country’s external position, the achievement of price stability or the adoption of the euro. 4 Unless otherwise specified, all fiscal aggregates refer to the general government. Fiscal (or budget) deficit/balance/position are all terms used interchangeably to indicate general government net lending according to ESA 95 standards. 5 It is worth pointing out that, despite envisaging an almost generalised improvement in 2004, the Commission Spring 2003 forecast still projects five ACs to run larger deficits than in 2001.to gauge the magnitude of the required budgetary adjustment. Primary gaps to either stabilise the debt ratio at its 2002 level or reach a 60% level by 2015 are calculated with reference to both notified outcomes in 2002 and planned balances in 2003. Secondly, debt projections are extrapolated up to 2015 under four alternative fiscal policy scenarios given common assumptions on the underlying variables.6 Scenarios are differentiated according to the path for net lending from 2005 onwards. In particular: (1) PEP scenario: assumes the fiscal balance targeted in 2005 to remain unchanged from then onwards. Its purpose is to assess if the full implementation, and maintenance, of the fiscal plans announced in the 2002 PEPs would set the debt ratio on an acceptable path. (2) Balanced budget scenario: assumes annual adjustments in the fiscal balance of 0.5% of GDP from 2005 onwards until a balanced budget is achieved and maintained thereafter. Its purpose is to project the path that the debt ratio would follow under the rules of the stability and growth pact (SGP). (3) Small deficit scenario: assumes annual adjustments in the fiscal balance of 0.5% of GDP from 2005 onwards until a deficit of 1% of GDP is achieved and maintained thereafter. This scenario shows the path that the debt ratio would follow under the hypothesis that a small deviation from "close to balance or in surplus" would be deemed acceptable, for example to cater for large structural reforms that have a cost in the short to medium term and/or to maintain a high level of public investment in order to facilitate the catching-up process.7 Projections under this scenario are developed on a purely illustrative basis for all CCs regardless of the actual appropriateness of a deficit-financed increase in expenditures. This, in fact, cannot be taken for granted.8 In addition, at nearly 4% of GDP on average over the 1999 to 2002 period, ACs' general government gross fixed capital formation was already close to the level recorded in the poorest Member States. With the expected increase due to higher EU transfers, countries might be close to the absorption capacity for public investment. Finally, increasing public investment does not necessarily have to be financed by borrowing, as 6 The sources for debt and net borrowing figures are the 2003 fiscal notifications for budgetary data up to 2003 and the 2002 PEPs for 2004 and 2005. For other variables up to 2005, actual values or 2002 PEPs projections are used depending on their availability. For 2006-2015, real GDP growth is set equal to the 2005 PEP growth rate. Inflation is added to obtain the nominal GDP growth rate. Inflation is set equal to 3.5%, a level supposed to allow for convergence to the EU rate (assumed to be 2%) and the Balassa-Samuelson effect (assumed to account for 1.5%). Relative to the PEP projections for 2005, this assumption implies a very small change in 2006 for the inflation rate of all countries except Slovenia (-1.1%), Slovakia (-1.0%), Lithuania (-0.6%), and Cyprus (+0.5%). The average nominal interest rate on public debt slowly converges from the 2005 implicit interest rate given in the PEPs to the EU level in 2015. The EU level is set equal to 6%. 7 See the Commission Communication of 27 November 2002 on “Strengthening the co-ordination of budgetary policies” 8 Research or evidence on the budgetary impacts of accession and continued transition is still relatively scarce and contradictory. While there is agreement on negative budgetary impacts stemming mainly from investment in public infrastructure and the implementation of the EU acquis in the field of environment, only partly compensated by net EU transfers and positive budgetary effects of tax harmonisation, more recent estimates seem to suggest that the needs and impact in these areas are fairly considerable in the short run, but more limited over the medium term. See for example: Backé, Peter: “Fiscal effects of EU Membership for Central European and Baltic EU Accession Countries”; December 2002, in: OENB, Focus on Transition 2/2002.this may neither be required, thanks to rising EU transfers, nor advisable from a macroeconomic point of view. (4) 2002 position scenario: assumes the fiscal balance to remain unchanged from its 2002 notified level. The purpose of this scenario is to explore the evolution of the debt ratio in case the retrenchment planned under the large majority of PEPs completely failed to materialise. 4. ASSESSING DEBT SUSTAINABILITY: PRIMARY GAPS CALCULATIONS The first two annexed sets of country tables estimate the difference between the actual (or planned) primary balance and the primary balance required to either stabilise the debt ratio at its 2002 level (annex 1) or target ...