The European Commission has given a favourable assessment of Cyprus’ attempts to correct its “excessive deficit” identified in July 2004, saying that it “seems have corrected its excessive deficit in 2005”.
“The European Commission finds that Cyprus, Malta and the United Kingdom, which are subject to the excessive deficit procedure, present strategies that should enable them to correct their excessive deficits,” said the Commission, while adding that the UK may have to introduce additional measures in 2006.
“Cyprus and Malta have set themselves a budgetary adjustment path for the present decade that is in line with the Stability and Growth Pact”, it said, but said that they are “invited to improve the long-term sustainability of their public finances.”
The Commission said that it was “encouraging” that Cyprus, Lithuania and Malta would be close to reaching the targets for the Lisbon strategy by the end of their respective programme periods.
The Lisbon strategy aims to make the EU the most competitive economy in the world by 2010, primarily through emphasis on lifelong learning and investment in research and development.
“Budgetary strategies in line with the Pact not only produce sound fiscal policies over the economic cycle but are also a necessary precondition for stronger growth in Europe,” said Economic and Monetary Affairs Commissioner Joaquin Almunia.
The Cyprus Convergence Programme
Cyprus submitted a new update of its convergence programme, covering the period 2005-2009, on December 14, 2005.
Based on what the Commission calls “a plausible macroeconomic scenario (which is slightly favourable towards the end of the programme period)”, the programme plans to reduce the budget deficit gradually, from an expected 2.5% of GDP in in 2005 to 0.6% by 2009, through structural expenditure cuts and a combination of structural and one-off revenue measures.
The medium-term objective (MTO) for the budgetary position set in the programme is a deficit of around 0.5% of GDP in structural terms (i.e. in cyclically-adjusted terms and net of one-off and temporary measures), which the Commission says is in line with the Pact.
“Seems to have” corrected its deficit
“Based on the estimated outturn for 2005 and given that the risks attached to the budgetary targets are broadly balanced, Cyprus seems have corrected its excessive deficit in 2005, as recommended by the Council in July 2004.”
The budgetary strategy also ensures that the MTO is almost reached by 2009 through an average structural adjustment that is in line with the Pact’s benchmark of 0.5% of GDP per year.
From 2008, a safety margin against breaching the 3% of GDP deficit threshold with normal macroeconomic fluctuations would also be provided.
The debt ratio, currently estimated at 70.5% of GDP, is planned to decline significantly over the programme period, to some 53.5% in 2009.
The Commission says this “is to be welcome [sic] given the high risk that the projected budgetary costs of ageing population put on the sustainability of public finances.”
Further structural adjustment recommended.
“Overall, the structural adjustment planned over the programme period after bringing the deficit below 3% of GDP in 2005 is the right one. However, it would be appropriate for Cyprus to ensure further structural adjustment towards the MTO after the correction of the excessive deficit and to control public pension expenditure by implementing further reforms in the areas of pensions and health in order to improve long-term sustainability,” said the Commission.
Euro evaluation in October
Each year Member States notify to the Commission their medium-term macroeconomic and budgetary projections that must provide a safety margin against breaching the Treaty deficit ceiling of 3%.
According to the revised Stability and Growth Pact, euro area and ERM II Member States are recommended to set their respective medium-term budgetary objective at either a deficit of 1% of GDP for low debt / high potential growth countries, or balance or surplus for high debt / low potential growth countries.
If they have not yet reached their target, they should pursue “an annual adjustment in cyclically adjusted terms, net of one-offs and other temporary measures, of 0.5% of GDP as a benchmark.”
The assessment of the multi-annual budgetary programmes is separate from the assessment of whether a country that has not yet adopted the euro is ready to do so or not.
This latter evaluation will be carried out in October in the so-called Convergence Report unless there are individual requests before.
