Annexes to COM(2024)598 - - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2024)598 - . |
|---|---|
| document | COM(2024)598 |
| date | June 19, 2024 |
Increase in government investment in defence. Based on COFOG data published by Eurostat, total general government expenditure in defence amounted to 1.3% of GDP in 2022. Of this, government investment in defence represented 0.3% of GDP in 2022, which was 0.1 percentage point higher than in 2019. According to preliminary estimates provided by Finland, defence-related investment would increase by about 0.5% of GDP in 2024, reflecting substantial defence-related investment as well as replacement investment into defence materiel due to the assistane to Ukraine; however, according to Finland, part of these investments, while comparable to defence, is likely to be included in another COFOG division (notably “Public order and safety”).
Other factors put forward by the Member State. The analysis presented in the previous sections already covers the relevant factors put forward by Finland on 17 May 2024.
2. Member States for which relevant factors cannot be taken into account
Belgium
Medium-term macroeconomic position. Real GDP decreased by 5.3% in 2020. After an expansion of 6.9% in 2021, real GDP grew by 3.0% in 2022 and 1.4% in 2023. The economy is expected to grow by 1.3% in 2024 and 1.4% in 2025. Growth in 2024 is set to be mainly driven by private consumption and investment.
Medium-term budgetary position, including investment. The government deficit has been above 3% of GDP since 2020; it decreased from 5.4% of GDP in 2021 to 3.6% of GDP in 2022, before rising again up to 4.4% of GDP in 2023. It is projected to remain at 4.4% of GDP in 2024 and to increase to 4.7% of GDP in 2025. Government investment amounted to 2.8% of GDP in 2021 before decreasing to 2.7% in 2022 and rising to 2.9% in 2023. It is projected to further increase to 3.1% of GDP in 2024 and then to marginally reduce to 2.9% in 2025.
In 2023, according to the Commission estimates, the fiscal stance was expansionary, by 0.7% of GDP, in a context of high inflation. The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 provided an expansionary contribution to the fiscal stance of 0.4% of GDP. This includes the reduced cost of the targeted emergency support measures to households and firms most vulnerable to energy price hikes by 0.1% of GDP. The growth of nationally financed primary current expenditure in excess of medium-term potential output growth was therefore not due to the targeted support to households and firms most vulnerable to energy price hikes. The expansionary growth in nationally financed primary current expenditure (net of discretionary revenue measures) was driven by permanent increases in public sector wages and social benefits resulting from the mechanism of automatic indexation, a temporary reduction in employers’ social contributions in 2023, and rising budgetary costs related to demographic ageing. In sum, the growth of nationally financed primary current expenditure in 2023 was not in line with the Council recommendation. Expenditure financed by Recovery and Resilience Facility grants and other EU funds amounted to 0.3% of GDP in 2023. Nationally financed investment amounted to 2.8% of GDP in 2023, representing an increase of 0.1 percentage points as compared to 2022. Belgium financed additional investment through the Recovery and Resilience Facility and other EU funds, including public investment for the green and digital transitions, and for energy security, such as investment in rail and cycling infrastructures, renovation of public buildings, and hydrogen infrastructure, which are partly funded by the Recovery and Resilience Facility and other EU funds.
Based on the Commission’s estimates, the fiscal stance is projected to be contractionary by 0.1% of GDP in 2024. According to the Commission Spring 2024 Forecast, Belgium’s net nationally financed primary expenditure is projected to increase by 4% in 2024, which is above the recommended maximum growth rate. This risks being not in line with what was recommended by the Council. According to the Commission Spring 2024 Forecast, the net budgetary cost40 of emergency energy support measures is estimated at 0.4% of GDP in 2023 and projected at 0% of GDP in 2024 and 2025. If the related savings were used to reduce the government deficit, as recommended by the Council, these projections would imply a fiscal adjustment of 0.4% of GDP in 2024, whereas net nationally financed primary expenditure provides a contractionary contribution to the fiscal stance of 0.1% of GDP in that year. The emergency energy support measures are projected to be wound down as soon as possible in 2023 and 2024. This is in line with what was recommended by the Council. However, the related savings are not projected to be fully used to reduce the government deficit. This risks being not in line with the Council recommendation. According to the Commission Spring 2024 Forecast, nationally financed public investment is projected to increase to 2.9% of GDP in 2024 from 2.8% of GDP in 2023. This is in line with what was recommended by the Council. In turn, public expenditure financed from revenues from EU funds, including Recovery and Resilience Facility grants, is expected to remain stable at 0.3% of GDP in 2024.
Debt challenges and medium-term debt position. Government debt decreased from 111.9% of GDP at the end of 2020 to 107.9% at the end of 2021 and even further to 104.3% in 2022 before increasing to 105.2% at the end of 2023. It is projected at 105.0% and 106.6% at the end of 2024 and 2025, respectively.
Overall, the debt sustainability analysis indicates high risks over the medium term. According to the baseline 10-year projection, the general government debt ratio would rise to around 119% of GDP in 2034. The baseline debt trajectory is sensitive to macroeconomic shocks. According to the stochastic projections, which simulate a large range of possible temporary shocks to macroeconomic variables, there is a high likelihood that the debt ratio in 2028 will be higher than in 2023.
Other factors need to be taken into account for an overall assessment of debt sustainability. On the one hand, risk-increasing factors relate to the recent increase in interest rates, the share of short-term debt, high gross financing needs, the large share of government debt held by non-residents and the lack of fiscal coordination among the different government levels, with several of the federated entities displaying specific vulnerabilities. On the other hand, risk-mitigating factors include the lengthening of debt maturity in recent years, which allows for a more gradual transmission of rising interest rates to the debt burden, relatively stable financing sources, with a diversified and large investor base, and government debt being fully denominated in euro.
In addition, structural reforms and investments under the NextGenerationEU (NGEU)/Recovery and Resilience Facility (RRF), if fully implemented, could have a positive impact on GDP growth in the coming years. However, the implementation of reforms and investments included in the Recovery and Resilience Plan of Belgium is significantly delayed.
National budgetary framework. The effectiveness of medium-term planning in Belgium remains weak and the coordination across government levels is limited. The High Council of Finance (HCF) is not yet fully operational. The effective implementation of the 2013 cooperation agreement between all government levels on the definition of multiannual fiscal paths and assigning the HCF the compliance monitoring task remains incomplete. This hampers the monitoring of compliance and increases the risk of deviating from the medium-term fiscal trajectory. Fiscal rules in Belgium include healthcare spending targets at federal level and strict rules set for local authorities. Despite the federal level and the regions accounting for a high share of general government spending, there are few formal rules governing these levels, with the main exception being Flanders’ recent spendings target. At the same time, Belgium has committed in its Recovery and Resilience Plan to conduct spending reviews.
Increase in government investment in defence. Based on COFOG41 data published by Eurostat, total government spending in defence amounted to 1% of GDP in 2022. Of this, government investment in defence represented 0.1% of GDP in 2022, remaining unchanged compared to 2019.
Other factors put forward by the Member State. On 17 May 2024, Belgium provided additional relevant factors not already mentioned above, namely recent efforts to increase public investment to accelerate the green and digital transition (including through the implementation of the RRP) and to step up spending on defence; the impact of exceptionally high inflation on public finances, in particular given automatic indexation mechanisms; and steps aiming to improve the sustainability of the pension system and to reform the taxation system.
Spain
Medium-term macroeconomic position. Real GDP decreased by 11.2% in 2020. After an expansion of 6.4% in 2021, real GDP grew by 5.8% in 2022 and by 2.5% in 2023. It is expected to grow by 2.1% in 2024 and 1.9% in 2025. Growth in 2024 is mainly driven by private consumption and, to a lesser extent, investment.
Medium-term budgetary position, including investment. The government deficit has been above 3% of GDP since 2020; it decreased from 6.7% in 2021 to 4.7% of GDP in 2022 and 3.6% in 2023. It is projected to further reduce to 3.0% and 2.8% of GDP in 2024 and 2025, respectively. Government investment slightly increased from 2.7% of GDP in 2021 to 2.8% and 3.0% in 2022 and 2023 respectively. It is projected to stand at 3.1% in both 2024 and 2025, being larger than the government deficit in the same years.
In 2023, according to the Commission estimates, the fiscal stance was broadly neutral, at -0.2% of GDP. The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 provided a contractionary contribution to the fiscal stance of 0.3% of GDP and was in line with the Council recommendation. The contractionary contribution of nationally financed primary current expenditure was due to the reduced costs of the emergency support measures (targeted and untargeted) to households and firms in response to energy price hikes (by 0.6 percentage points of GDP). The main drivers of growth in nationally financed primary current expenditure (net of revenue measures) were social benefits other than in kind, driven by the revaluation of pensions, and intermediate consumption, driven by spending in defence. Expenditure financed by Recovery and Resilience Facility grants and other EU funds amounted to 1.3% of GDP in 2023. Nationally financed investment amounted to 2.3% of GDP in 2023, with an annual increase of 0.1 percentage points. Spain financed additional investment through the Recovery and Resilience Facility and other EU funds, including public investment for the green and digital transitions, and for energy security, such as the digital toolkit, the PERTE for electric and connected vehicles, new vocation education and training places and investments in the area of green hydrogen, which are funded by the Recovery and Resilience Facility and other EU funds.
Based on the Commission’s estimates, the fiscal stance is projected to be neutral at 0.0% of GDP in 2024. According to the Commission Spring 2024 Forecast, Spain’s net nationally financed primary expenditure is projected to increase by 3.8% in 2024 , which is above the recommended maximum growth rate. This risks being not in line with what was recommended by the Council. According to the Commission Spring 2024 Forecast, the net budgetary cost of emergency energy support measures is estimated at 0.9% of GDP in 2023 and projected at 0.2% in 2024, and -0.1% in 2025. If the related savings were used to reduce the government deficit, as recommended by the Council, these projections would imply a fiscal adjustment of 0.7% of GDP in 2024, whereas net nationally financed primary expenditure provides a contractionary contribution to the fiscal stance of 0.3% of GDP in that year. The emergency energy support measures are projected to be wound down as soon as possible in 2023 and 2024. This is in line with what was recommended by the Council. However, the related savings are not projected to be fully used to reduce the government deficit. This risks being not in line with the Council recommendation. According to the Commission Spring 2024 Forecast, nationally financed public investment is projected to increase to 2.4% of GDP in 2024 from 2.3% of GDP in 2023. This is in line with what was recommended by the Council. In turn, public expenditure financed from revenues from EU funds, including Recovery and Resilience Facility grants, is expected to increase to 1.6% of GDP in 2024 (from 1.3% of GDP in 2023).
Debt challenges and medium-term debt position. Government debt decreased from 120.3% of GDP at the end of 2020 to 116.8% at the end of 2021 and to 111.6% in 2022. It further decreased at the end of 2023 to 107.7% and it is projected to decline even more at the end of 2024 and 2025 (amounting to 105.5% and 104.8% of GDP respectively).
Overall, the debt sustainability analysis indicates high risks over the medium term. According to the baseline 10-year projection, the general government debt ratio would slightly decline before increasing again to 113% of GDP in 2034. The debt trajectory is sensitive to macroeconomic shocks. According to the stochastic projections, which simulate a large range of possible temporary shocks to macroeconomic variables, there is a high likelihood that the debt ratio in 2028 will be higher than in 2023.
Other factors need to be taken into account for an overall assessment of debt sustainability. On the one hand, risk-increasing factors relate to the context of higher interest rates given the elevated level of public debt. On the other hand, risk-mitigating factors include the lengthening of debt maturity in recent years, relatively stable financing sources featuring a well-diversified and large investor base and the very large share of debt denominated in euro. In addition, the ‘closure clause’ introduced by the 2023 pension reform, if fully implemented, would contribute to addressing emerging fiscal sustainability gaps related to public pension expenditure.
In addition, structural reforms and investments under the NextGenerationEU (NGEU)/Recovery and Resilience Facility (RRF), if fully implemented, could have a positive impact on GDP growth in the coming years. The implementation of reforms and investments included in the Recovery and Resilience Plan of Spain is underway, however timely completion requires increased efforts.
Assessment under the macroeconomic imbalances procedure. Spain is no longer experiencing macroeconomic imbalances.
National budgetary framework. The Spanish Fiscal Council (AIReF) has a broad mandate and has quickly established itself as a trusted independent institution. National fiscal rules in Spain include the budget balance rule, the debt rule and the national expenditure rule. With the deactivation of the General Escape Clause at the end of 2023 and the recent adoption of new rules at EU level, Spain is currently in a transition phase with its national fiscal rules again being applied. In its national Recovery and Resilience Plan, Spain has committed to carry out spending reviews prepared by AIReF and to integrate them into the annual budgetary process.
Increase in government investment in defence. Based on COFOG data published by Eurostat, total general government expenditure in defence amounted to 1.1% of GDP in 2022. Of this, government investment in defence represented 0.4% of GDP in 2022, which was 0.2 percentage points higher than in 2019.
Other factors put forward by the Member State. The analysis presented in the previous sections already covers the relevant factors put forward by Spain on 20 May 2024.
France
Medium-term macroeconomic position. Real GDP decreased by 7.5% in 2020. After an expansion of 6.4% in 2021, real GDP grew by 2.5% in 2022 and by 0.7% in 2023. It is expected to grow by 0.7% in 2024 and 1.3% in 2025. Growth in 2024 is set to be mainly driven by both private and public consumption.
Medium-term budgetary position, including investment. The government deficit has been above 3% of GDP since 2020; it decreased from 6.6% of GDP in 2021 to 4.8% of GDP in 2022, before increasing to 5.5% in 2023. It is projected to decline to 5.3% in 2024 and 5.0% of GDP in 2025. Government investment remained quite stable (slightly above 4% of GDP) between 2020 to 2023. It is projected to amount to 4.3% of GDP in 2024 and to decline to 4.2% in 2025.
In 2023, according to the Commission estimates, the fiscal stance was contractionary, by 0.5% of GDP, in a context of high inflation. The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 provided a contractionary contribution to the fiscal stance of 0.3% of GDP and was in line with the Council recommendation. Expenditure financed by Recovery and Resilience Facility grants and other EU funds amounted to 0.4% of GDP in 2023. Nationally financed investment amounted to 4.1% of GDP in 2023, representing an increase of 0.1 percentage points as compared to 2022. France financed additional investment through the Recovery and Resilience Facility and other EU funds, including public investment for the green and digital transitions, and for energy security, such as for the development and industrial deployment of renewable and low-carbon hydrogen solutions, innovation projects in sustainable agricultural systems, recycled materials, innovative buildings, digitalisation and decarbonisation of mobility as well as investments for the thermal renovation of buildings, which are partly funded by the Recovery and Resilience Facility and other EU funds.
Based on the Commission’s estimates, the fiscal stance is projected to be contractionary by 1.1% of GDP in 2024. According to the Commission Spring 2024 Forecast, France’s net nationally financed primary expenditure is projected to increase by 1.8% in 2024, which is below the recommended maximum growth rate. This is in line with what was recommended by the Council. According to the Commission Spring 2024 Forecast, the net budgetary cost of emergency energy support measures is estimated at 0.9% of GDP in 2023 and projected at 0.2% in 2024, and 0.0% in 2025. If the related savings were used to reduce the government deficit, as recommended by the Council, these projections would imply a fiscal adjustment of 0.6% of GDP in 2024, whereas net nationally financed primary expenditure provides a contractionary contribution to the fiscal stance of 1.0% of GDP in that year. The emergency energy support measures are projected to be wound down as soon as possible in 2023 and 2024. This is in line with what was recommended by the Council. Moreover, the related savings are projected to be fully used to reduce the government deficit. This is also in line with the Council recommendation. According to the Commission Spring 2024 Forecast, nationally financed public investment is projected to remain stable at 4.1% of GDP in 2024. This is in line with what was recommended by the Council. In turn, public expenditure financed from revenues from EU funds, including Recovery and Resilience Facility grants, is expected to remain stable at 0.4% of GDP in 2024.
Debt challenges and medium-term debt position. Government debt decreased from 113.0% of GDP at the end of 2021 to 111.9% at the end of 2022 and further to 110.6% at the end of 2023. It is projected to increase to 112.4% and to 113.8% at the end of 2024 and 2025, respectively.
Overall, the debt sustainability analysis indicates high risks over the medium term. According to the baseline 10-year projection, the general government debt ratio would rise continuously to about 139% of GDP in 2034. The debt trajectory is sensitive to macroeconomic shocks. According to the stochastic projections, which simulate a large range of possible temporary shocks to macroeconomic variables, there is a high likelihood that the debt ratio in 2028 will be higher than in 2023.
Other factors need to be taken into account for an overall assessment of debt sustainability. On the one hand, risk-increasing factors relate to the recent increase in interest rates, the share of short-term government debt, the expected increase in gross financing needs over the medium term and the contingent liability risks stemming from the private sector, including via the possible materialisation of state guarantees granted to firms and self-employed during the COVID-19 crisis. On the other hand, risk-mitigating factors include the lengthening of debt maturity in recent years and relatively stable financing sources (with a diversified and large investor base).
In addition, structural reforms and investments under the NextGenerationEU (NGEU)/Recovery and Resilience Facility (RRF), if fully implemented, could have a positive impact on GDP growth in the coming years. The implementation of reforms and investments included in the Recovery and Resilience Plan of France is well underway. It It includes ansive
Assessment under the macroeconomic imbalances procedure. France is no longer experiencing macroeconomic imbalances. In particular, policy action has helped in reducing vulnerabilities, which had cross-border relevance, related to competitiveness in a context of low productivity growth, but efforts need to continue, while vulnerabilities related to high public debt remain.
National budgetary framework. The High Council for Public Finance (HCPF) has a relatively narrow mandate, limited to issuing opinions on the plausibility of the macroeconomic and budget forecasts underlying the annual and multiannual budgetary documents and their consistency with the structural balance objectives. The French Constitution and accompanying laws introduced a balanced budget-rule in structural terms covering the general government and the balanced-budget rule for local governments. A medium-term budgetary strategy outlining the government’s fiscal objectives and medium-term priorities over three to five years is also in place. In the past, the national budgetary objectives set over the medium-term have been revised or not met and the fiscal adjustment backloaded, weakening the link with annual budgets. At the same time, in its Recovery and Resilience Plan, France has committed to conduct spending reviews in connection to the annual budget.
Increase in government investment in defence. Based on COFOG data published by Eurostat, total general government expenditure in defence amounted to 1.8% of GDP in 2022. Of this, government investment in defence represented 0.3% of GDP in 2022, remaining unchanged compared to 2019.
Other factors put forward by the Member State. On 22 May 2024, France provided additional relevant factors not already mentioned above, namely the low GDP elasticity of tax revenue and, to a lesser extent, the impact of the revision of the statistical base made by the French statistical institute.
Italy
Medium-term macroeconomic position. After a contraction of 9.0% in 2020, real GDP grew by 8.3% in 2021, 4.0% in 2022 and 0.9% in 2023. Growth is expected to stand at 0.9% also in 2024 and to slightly increase to 1.1% in 2025. Growth in 2024 is set to be mainly driven by net exports and investment.
Medium-term budgetary position, including investment. The government deficit has been above 3% of GDP since 2020; it decreased from 8.7% in 2021 to 8.6% of GDP in 2022 and 7.4% in 2023. The 2020-2023 deficit figures include the deficit-increasing impact of housing renovation tax credits.42 The government deficit is projected to decline to 4.4% of GDP in 2024 before slightly increasing to 4.7% of GDP in 2025. After increasing to 2.9% of GDP in 2021, government investment marginally decreased to 2.7% of GDP in 2022, before increasing to 3.2% in 2023, where it is projected to stay also in 2024. In 2025, it is expected to amount to 3.5% of GDP.
In 2023, according to the Commission estimates, the fiscal stance was slightly expansionary, by 0.3% of GDP, in a context of high inflation. The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 provided a contractionary contribution to the fiscal stance of 1.0% of GDP and was in line with the Council recommendation. The contractionary contribution of nationally financed primary current expenditure was due to the reduced costs of the emergency support measures (targeted and untargeted) to households and firms in response to energy price hikes (by 1.4 percentage points of GDP). Pensions and cuts to the labour tax wedge were the main drivers of growth in nationally financed primary current expenditure (net of discretionary revenue measures). Expenditure financed by Recovery and Resilience Facility grants and other EU funds amounted to 0.8% of GDP in 2023. Nationally financed investment amounted to 2.9% of GDP in 2023, representing an increase of 0.3 percentage points as compared to 2022. Italy financed additional investment through the Recovery and Resilience Facility and other EU funds, including public investment for the green and digital transitions, and for energy security, such as the strengthening of smart grids, the construction of the “Tyrrhenian link”, the development of rapid mass transport systems, the production of hydrogen in brownfield sites, fast internet connections and the digitisation of the public administration, which are partly funded by the Recovery and Resilience Facility and other EU funds
Based on the Commission’s estimates, the fiscal stance is projected to be contractionary at 3.1% of GDP in 2024. According to the Commission Spring 2024 Forecast, Italy’s net nationally financed primary expenditure is projected to decrease by 2.8% in 2024, which is below the recommended maximum growth rate. However, net expenditure in 2023 was higher than expected at the time of the recommendation (by 2.9% of GDP). Therefore, as the recommendation for 2024 was formulated as a growth rate, the assessment of compliance also needs to take into account the base effect from 2023. Had net expenditure in 2023 been the same as expected at the time of the recommendation, the resulting growth rate of net expenditure in 2024 would have been above the recommended growth rate by 0.9% of GDP. Therefore, net nationally financed primary expenditure is assessed as at risk of being not fully in line with the recommendation. According to the Commission Spring 2024 Forecast, the net budgetary cost of energy support measures is estimated at 1.0% of GDP in 2023 and projected at 0.0% in 2024. If the related savings were used to reduce the government deficit, as recommended by the Council, these projections would imply a fiscal adjustment of 1.0% of GDP in 2024, whereas net nationally financed primary expenditure provides a contractionary contribution to the fiscal stance of 2.7% of GDP in that year. However, the latter is driven by the contractionary contribution of other capital expenditure of 3.2% of GDP, which is mainly related to the above-mentioned sharp reduction of subsidies related to tax credits for housing renovation in 2024. At the same time, the contribution of net nationally financed current primary expenditure to the fiscal stance, which is affected by the phase-out of current energy support measures, is projected to be expansionary by 0.4% of GDP, pointing to the full use of the 0.8% of GDP savings from those current energy support measures for expansionary policies increasing net current spending in 2024, including labour tax wedge cuts. The emergency energy support measures are projected to be wound down as soon as possible in 2023 and 2024. This is in line with what was recommended by the Council. However, the related savings are not projected to be fully used to reduce the government deficit. This risks being not in line with what was recommended by the Council. According to the Commission Spring 2024 Forecast, nationally financed public investment is projected at 2.8% of GDP in 2024 from 2.9% of GDP in 202343 . This is in line with the Council recommendation. In turn, public expenditure financed from revenues from EU funds, including Recovery and Resilience Facility grants, is expected to decrease to 0.8% of GDP in 2024 (from 1.2% of GDP in 2023), mainly in relation to ReactEU.
Debt challenges and medium-term debt position. Government debt decreased from 155.0% of GDP at the end of 2020 to 147.1% at the end of 2021, 140.5% in 2022 and 137.3% in 2023. It is then projected to increase to 138.6% and 141.7% of GDP at the end of 2024 and 2025 respectively.
Overall, the debt sustainability analysis indicates high risks over the medium term. According to the baseline 10-year projections, the general government debt ratio increases continuously to about 168% of GDP in 2034. The debt trajectory is sensitive to macroeconomic shocks. According to the stochastic projections, which simulate a large range of possible temporary shocks to macroeconomic variables, there is a high likelihood that the debt ratio would be higher in 2028 than in 2023.
Other factors need to be taken into account for an overall assessment of debt sustainability. On the one hand, risk-increasing factors are related to the share of short-term government debt. On the other hand, risk-mitigating factors include the structure of the debt. In particular, the major share of government debt is still held by domestic lenders. Moreover, the fact that public debt is completely denominated in euro excludes currency risks. Italy’s positive net international investment position further mitigates fiscal risks.
In addition, structural reforms and investments under the NextGenerationEU (NGEU)/Recovery and Resilience Facility (RRF), if fully implemented, could have a positive impact on GDP growth in the coming years. The implementation of reforms and investments included in the Recovery and Resilience Plan of Italy is underway, however timely completion requires increased efforts.
Assessment under the macroeconomic imbalances procedure. Italy is experiencing macroeconomic imbalances, after being identified with excessive imbalances in 2023. In particular, Italy faces vulnerabilities related to high government debt and weak productivity growth in a context of labour market fragilities and some residual weaknesses in the financial sector, which have cross-border relevance.
National budgetary framework. The Italian Parliamentary Budget Office (PBO) has a broad mandate and represents an example of good practice among European independent fiscal institutions. The PBO stands in a continuous dialogue with the government. The Italian Constitution and accompanying laws introduced a balanced budget-rule in structural terms and a debt rule for the general government, an expenditure rule that applies to the general government and a regional balanced-budget rule. A medium-term budgetary strategy outlining the government’s fiscal objectives and medium-term priorities over three years is also in place. At the same time, the annual budget is weakly anchored on the medium-term plan. In its national Recovery and Resilience Plan, Italy has committed to conduct yearly spending reviews over 2023-2025.
Increase in government investment in defence. Based on COFOG data published by Eurostat, total general government expenditure in defence amounted to 1.3% of GDP in 2022. Of this, government investment in defence represented 0.3% of GDP in 2022, remaining unchanged compared to 2019.
Other factors put forward by the Member State. The analysis presented in the previous sections already covers the relevant factors put forward by Italy on 17 May 2024.
Hungary
Medium-term macroeconomic position. Real GDP decreased by 4.5% in 2020. After an expansion of 7.1% in 2021, real GDP grew by 4.6% in 2022 and then contracted by 0.9% in 2023. It is expected to grow by 2.4% in 2024 and 3.5% in 2025. Growth in 2024 is set to be mainly driven by private consumption and investment.
Medium-term budgetary position, including investment. The government deficit has been above 3% of GDP since 2020; it decreased from 7.2% in 2021 to 6.2% of GDP in 2022, before rising again, to 6.7% of GDP, in 2023. It is projected to amount to 5.4% and 4.5% of GDP in 2024 and 2025, respectively. After increasing to 6.3% of GDP in 2021, government investment decreased to 5.4% of GDP in 2022 and 5.1% in 2023. It is projected to be at 4.6% of GDP in 2024 and 4.7% in 2025, thus being larger than the general government deficit in the latter year.
In 2023, according to the Commission estimates, the fiscal stance was contractionary, at 4.7% of GDP, in a context of high inflation. The growth in nationally financed primary current expenditure (net of discretionary revenue measures) in 2023 provided a contractionary contribution to the fiscal stance of 1.7% of GDP. The growth of nationally financed primary current expenditure in 2023 was in line with the Council recommendation. However, it is important to note that this was largely driven by the very high level of net expenditure in 2022 compared to 2023, including untargeted expenditure in several areas, which contributed to macroeconomic imbalances, financed by windfall profit and sectoral taxes levied on companies mainly in the energy, financial and retail sectors. Nationally financed investment amounted to 4.6% of GDP in 2023, representing an increase of 0.2 percentage points as compared to 2022. Hungary financed public investment for the green and digital transitions, and for energy security, such as energy efficiency enhancements and digitalisation in healthcare and education. Hungary has not yet submitted a payment request under the Recovery and Resilience Facility.
Based on the Commission’s estimates, the fiscal stance is projected to be contractionary by 1.0% of GDP in 2024. According to the Commission Spring 2024 Forecast, Hungary’s net nationally financed primary expenditure is projected to increase by 3.6% in 2024, which is below the recommended maximum growth rate. However, net expenditure in 2023 was higher than expected at the time of the recommendation (by 1.8% of GDP). Therefore, as the recommendation for 2024 was formulated as a growth rate, the assessment of compliance also needs to take into account the base effect from 2023. Had net expenditure in 2023 been the same as expected at the time of the recommendation, the resulting growth rate of net expenditure in 2024 would have been above the recommended growth rate by 1.5% of GDP. Therefore, net nationally financed primary expenditure is assessed as at risk of being not fully in line with the recommendation. According to the Commission Spring 2024 Forecast, the net budgetary cost of energy support measures is estimated at 1.6% of GDP in 2023 and projected at 0.9% in 2024 and 0.4% in 2025. If the related savings were used to reduce the government deficit, as recommended by the Council, these projections would imply a fiscal adjustment of 0.6% of GDP in 2024, whereas net nationally financed primary expenditure provides a contractionary contribution to the fiscal stance of 1.9% of GDP in that year. The emergency energy support measures are not projected to be wound down as soon as possible in 2023 and 2024. This risks being not in line with what was recommended by the Council. However, the related savings are projected to be fully used to reduce the government deficit. This is in line with the Council recommendation. According to the Commission Spring 2024 Forecast, nationally financed public investment is projected to decrease to 4.0% of GDP in 2024 (from 4.6% of GDP in 2023). This is largely due to the cuts and postponements in nationally financed investment projects announced by the authorities in light of the high projected deficits. This risks being not in line with what was recommended by the Council. In turn, public expenditure financed from revenues from EU funds, including Recovery and Resilience Facility grants, is expected to increase to 1.7% of GDP in 2024 from 0.8% of GDP in 2023. This increase is due to a projected pickup in the absorption of the EU cohesion policy funding from the 2020-2027 programming period and higher expenditure on investments supported by the Recovery and Resilience Facility.
Debt challenges and medium-term debt position. Government debt decreased from 79.3% of GDP at the end of 2020 to 76.7% at the end of 2021 and 74.1% at the end of 2022, further reducing to 73.5% in 2023. It is then projected to rise to 74.3% in 2024, before decreasing to 73.8% at the end of 2025.
Overall, the debt sustainability analysis indicates medium risks over the medium term. According to the baseline 10-year projections, the general government debt ratio would increase to around 78% of GDP in 2034. The debt trajectory is relatively sensitive to macroeconomic shocks. According to the stochastic projections, which simulate a large range of possible temporary shocks to macroeconomic variables, there is a moderate probability that the debt ratio would be higher in 2028 than in 2023.
Other factors need to be taken into account for an overall assessment of debt sustainability. On the one hand, risk-increasing factors are related to the structure of public debt, particularly the major shares of both short-term government debt and government debt held in foreign currency. Contingent liability risks stemming from the banking sector, as well as Hungary’s negative net international investment position, pose additional fiscal risks. On the other hand, risk-mitigating factors include the high share of domestically held government debt.
In addition, structural reforms and investments under the NextGenerationEU (NGEU)/Recovery and Resilience Facility (RRF), if fully implemented, could have a positive impact on GDP growth in the coming years. The implementation of reforms and investments included in the Recovery and Resilience Plan of Hungary is significantly delayed, due to substantial challenges.
Assessment under the macroeconomic imbalances procedure. Hungary is experiencing macroeconomic imbalances. In particular, Hungary faces vulnerabilities related to price pressures and external and government financing needs, although an improving external environment has mitigated some short-term risks.
National budgetary framework. Hungary’s independent fiscal institution (the Fiscal Council) is a relatively small organisation with a rather narrow mandate. It is currently not involved in the production of budgetary forecasts, costings of planned policy measures or ex-post evaluations of the macroeconomic forecasts. Hungary has several national fiscal rules, one rule limiting public debt and two balanced budget rules. The debt reduction rule puts an effective constraint on annual budgets but has certain procyclical features, as it restricts spending and allows for tax increases when growth and inflation are lower and vice versa. The multiannual balanced budget rule restricts the annual national budgets to a lesser extent, as the targets for the medium-term plans can be changed twice a year for all years covered under the plans. In its national Recovery and Resilience Plan, Hungary has committed itself to conduct spending reviews as a way to increase the efficiency of public expenditure and find additional fiscal space to meet new spending pressures.
Increase in government investment in defence. Based on COFOG data published by Eurostat, total general government expenditure in defence amounted to 1.4% of GDP in 2022. Of this, government investment in defence represented 0.3% of GDP in 2022, which was 0.1 percentage points higher than in 2019. According to preliminary estimates provided by Hungary, expenditure on defence is expected to have approached 2% of GDP in 2023.
Other factors put forward by the Member State. On 17 May 2024, Hungary provided an additional relevant factor not already mentioned above, namely that the primary balance improved significantly in 2023, including in structural terms.
5. Conclusions
The government deficit exceeded the reference value of 3% of GDP in 2023 in ten EU Member States: Belgium, Czechia, Estonia, Spain, France, Italy, Hungary, Malta, Poland and Slovakia. In all those Member States with the exception of Estonia, the government deficits were above and not close to the reference value in 2023.
For Estonia, the deficit was above but close to the reference value in 2023.
Finland had a government deficit not exceeding the reference value in 2023, but reported a planned deficit above but close to 3% of GDP in 2024; the Commission’s forecast likewise projects a deficit above but close to 3% of GDP for 2024.
Slovenia had a government deficit not exceeding the Treaty reference value in 2023, but reported a planned deficit above and not close to 3% of GDP in 2024; as the Commission Spring 2024 Forecast projects the 2024 deficit below 3% of GDP, the planned breach of the reference value in 2024 in the sense of Article 126(3) TFEU is not confirmed for Slovenia.
According to the Commission’s forecast, the government deficits in Belgium, Estonia, France, Italy, Hungary, Malta, Poland, and Slovakia are projected to exceed 3% of GDP in 2025. Therefore, the deficits in excess of the reference value are assessed to be not temporary for Belgium, Estonia, France, Italy, Hungary, Malta, Poland, and Slovakia. Differently, the government deficits in Czechia, Spain, Slovenia and Finland are presently projected not to exceed the reference value in 2025, and therefore the excess deficits are assessed as temporary.
The excess over the reference value is assessed as exceptional for Estonia and not exceptional Czechia, Malta, Poland, Slovakia, Belgium, France, Italy, Hungary, Spain, Slovenia and Finland.
In sum, this analysis suggests that the deficit criterion is not fulfilled by twelve Member States before the consideration of the relevant factors: Belgium, Czechia, Estonia, Spain, France, Italy, Hungary, Malta, Poland, Slovenia, Slovakia and Finland.
Relevant factors can be taken into account in the steps leading to the decision on the existence of an excessive deficit for Member States with government debt below 60% of GDP (Czechia, Estonia, Malta, Poland and Slovakia) and for Member States with government debt above 60% of GDP if the deficit remains close to the reference value and the excess over the reference value is temporary (Slovenia and Finland). They can affect the assessment of compliance with the deficit criterion as aggravating or mitigating factors, whereby substantial debt challenges are regarded as a key aggravating factor.
Overall, the relevant factors examined in this report are assessed as presenting a mixed picture for Malta, Poland and Finland. They are assessed as, on balance, mitigating for Czechia, Estonia and Slovenia, and aggravating for Slovakia.
For Slovenia and Finland, given the uncertainty attached to planned data as well as the fact that, according to the Commission’s Spring 2024 Forecast, the planned breach of the reference value in 2024 is not confirmed for Slovenia, and the deficit is projected to remain close to the reference value in 2024 and fall below it in 2025 for Finland, the Commission will monitor budgetary developments carefully and re-assess the situation in autumn.
For Czechia and Estonia, taking into account the relevant factors brought forward by the Member State, the deficit criterion is assessed as being fulfilled.
For Spain, the budgetary deficit in excess of the reference value is temporary. Based on the Commission 2024 Spring Forecast, the deficit is projected to be below the reference value of in 2024 and 2025, without additional measures. As no additional fiscal adjustment will be required for Spain to bring its deficit below the reference value, initiating an excessive deficit procedure would not, at this stage, serve a useful purpose. The Commission will, in any case, continue monitoring budgetary developments in Spain and re-assess the situation in autumn.
In the light of this assessment, and after considering the opinion of the Economic and Financial Committee as established under article 126(4) TFEU, the Commission intends to propose in July to open excessive deficit procedures, by proposing to the Council to adopt a Decision under Article 126(6) establishing the existence of an excessive deficit, for Belgium, France, Italy, Hungary, Malta, Poland and Slovakia.
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1 Council Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997) as last amended by Council Regulation (EU) 2024/1264 of 29 April 2024 (OJ L, 2024/1264, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1264/oj).
2 Regulation (EU) 2024/1263 of the Parliament and of the Council of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and repealing Regulation (EC) No 1466/97 (OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj).
3 Council Directive (EU) 2024/1265 of 29 April 2024 amending Directive 2011/85/EU on requirements for budgetary frameworks of the Member States (OJ L, 2024/1265, 30.4.2024, ELI: http://data.europa.eu/eli/dir/2024/1265/oj).
4 This is to the extent that the new rules are already put into practice. Some elements of the amended regulation are yet to be implemented e.g. the net expenditure path as set by the Council, which is referred to in the context of the relevant factors laid down in Article 2(3) of Regulation (EC) No 1467/97.
5 Relevant factors would be always taken into account when assessing compliance with the debt criterion.
6 In accordance with Article 17 of Regulation (EU) 2024/1264, the net expenditure path will be defined in the Council Recommendation endorsing the national medium-term fiscal-structural plan to be submitted by each Member State and assessed by the Commission. According to the transitional provisions under Article 36, Member States shall submit their first national medium-term fiscal-structural plans by 20 September 2024, unless the Member State and the Commission agree to extend the deadline by a reasonable period.
7 Figures on general government debt-to-GDP ratio are presented in section 3.
8 In the absence of data reported to Eurostat in the context of the fiscal notification, the source of planned deficits for 2024 is the Stability/Convergence Programme. In the present report, all the concerned Member States with the exception of France submitted their planned deficits for 2024 to Eurostat in the context of the spring 2024 fiscal notification.
9Eurostat Euro Indicators of 22 April 2024.
10 Romania’s government deficit also exceeded 3% of GDP in 2023 and it is planned to be above the reference value also in 2024. However, Romania is not covered in this report since the Council decided on the existence of an excessive deficit in Romania on 3 April 2020. The latest Council Recommendation with a view to bringing an end to the situation of an excessive government deficit in Romania is of 18 June 2021. The Commission has today recommended the Council to adopt a Decisions establishing that Romania has taken no effective action in response to the Council Recommendation of 18 June 2021 (COM(2024)597).
11 The complete set of tables reported to Eurostat by Member States is available at: https://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-notification-tables.
12 Council Recommendations of 14 July 2023 (2023/C 312/01 to 2023/C 312/27, OJ C 312, 1.9.2023, p. 1).
13 Commission Opinions on the 2024 Draft Budgetary Plans of 21.11.2023 (C(2023) 9501 final to C(2023) 9520 final), Commission Opinion on the updated 2024 Draft Budgetary Plan of Slovakia of 16.01.2024 (C(2024) 343 final) and Commission Opinion on the updated 2024 Draft Budgetary Plan of Luxembourg of 18.04.2024 (C(2024) 2626 final).
14 Communication of 8 March 2023 on fiscal policy guidance for 2024 (COM(2023) 141 final). See also the Communication on the 2024 Draft Budgetary Plans: Overall Assessment (COM(2023) 900 final).
15 Council Recommendation of 12 April 2024 on the economic policy of the euro area (OJ C, C/2024/2807, 23.04.2024, ELI: http://data.europa.eu/eli/C/2024/2807/oj).
16 In the same context, the Council also recommended the euro area Member States to develop fiscal strategies to achieve a prudent medium-term fiscal position and strengthen debt sustainability where necessary, through determined, differentiated, gradual and realistic consolidation, combined with high-quality public investments and reforms, notably to deliver higher sustainable growth and boost the resilience of the euro area in the face of future challenges. Where needed, Member States should include in such strategies measures to further increase the efficiency and quality of public expenditure and to improve the sustainability and adequacy of the pension, healthcare and long-term care systems.
17 France did not submit a planned deficit for 2024 to Eurostat in the context of the spring 2024 fiscal notification. However, France published its stability programme for 2024-2027 in April 2024, according to which the deficit for 2024 is planned at 5.1% of GDP.
18 As reported to Eurostat in the context of the spring 2024 fiscal notification with the only exception of France, for which the stability programme is the relevant source for planned data for 2024 (see footnote17).
19 As reported to Eurostat in the context of the spring 2024 fiscal notification.
20 The planned deficit for 2024 as reported to Eurostat in the context of the spring 2024 fiscal notification amounts to 3.5% of GDP. However, in its Stability Programme submitted on 25 April 2024, Finland revised its planned deficit for 2024 slightly downwards, to 3.4%, based on additional consolidation measures amounting to 1% of GDP that the government has committed to deliver in a supplementary budget in spring 2024.
21 As reported to Eurostat in the context of the spring 2024 fiscal notification.
22 Unless stated otherwise, the source for the figures for 2024 and 2025 provided in this report is the Commission’s Spring 2024 Forecast (European Economy Institutional Papers 286).
23 See Commission Communication to the Council on Fiscal policy guidance for 2024, COM(2023) 141 final. See European Commission ‘A Green Deal Industrial Plan for the Net-Zero Age’, COM(2023) 62 final of 1 February 2023. See European Commission ‘2022 European Semester - Spring Package,’ COM(2022) 600 final of 23 May 2022.
24 COM(2022) 600 final.
25 Council Recommendations of 14 July 2023 (2023/C 312/01 to 312/27), OJ C 312, 1.9.2023, p.1.
26 In the EU, the budgetary cost of COVID-19 temporary emergency measures is estimated to have fallen from 3.3% of GDP in both 2020 and 2021 to 0.7% in 2022. Pandemic-related measures were phased out in 2023. The costs of humanitarian assistance to refugees fleeing the Russian war of aggression against Ukraine – which has been specifically mentioned in the fiscal recommendations adopted by the Council in 2022 – did not exceed 0.1% of GDP in 2023 in the EU. The cost of the measures to mitigate the economic and social impact of high energy prices amounted to 1.2% of GDP in 2022 and decreased to 0.9% of GDP in 2023. In 2024, the budgetary impact is expected to fall to 0.2% of GDP in the EU.
27 Further country-specific considerations are discussed in section 4.2.
28 According to Article 2(1) of Regulation 1467/97, the excess of the government deficit over the reference value shall be considered exceptional, in accordance with the second indent of point (a) of Article 126(2) of the Treaty on the Functioning of the European Union (TFEU), if it results from the existence of a severe economic downturn in the euro area or the Union as a whole established by the Council in accordance with Article 25 of Regulation (EU) 2024/1263 or from exceptional circumstances outside the control of the government with a major impact on the public finances of the Member State concerned, in accordance with Article 26 of that Regulation. In 2022 and 2023, economic activity in Estonia contracted by 0.5% and 3.0%, which contributed to increase the government deficit in 2023. Regulation (EU) 2024/1263 entered into force on 30 April 2024 and no procedures under Articles 25 and 26 are launched to date. However, the Commission considers that exceptional circumstances outside the control of the government have a major impact on the public finances of Estonia which justify considering the excess of the government deficit over the reference value as exceptional. The Commission considers this approach warranted, taking into account the recent transition to the newly established framework. Nevertheless, this conclusion does not constitute a precedent.
29 COM(2024) 601 PO/2024/4130.
30 As for the other Member States, government gross debt also exceeded the 60% reference value at end-2023 in Germany, Greece, Croatia, Cyprus, Austria and Portugal, and in each of them, the ratio declined from the end of the previous year.
31 COM(2024) 601 PO/2024/4130.
32 The fiscal stance aims to assess the economic impulse stemming from fiscal policies, both those that are nationally financed and those that are financed by the EU budget.
33 The respective reporting deadline in the ESA Transmission Programme is t+12 months, to be advanced to t+11 months from September 2024. Taking into account the need for Eurostat to validate and process the data, this implies that the data become publicly available in January-February of year t+2.
34 The debt sustainability analysis has been updated compared to the 2021 Fiscal Sustainability Report (European Economy-Institutional Papers 171) by reflecting the latest Commission’s forecast. See the Communication on the main elements of the European Semester 2024 Spring package (COM (2024) 600 final), and the Commission Recommendations for Council Recommendations (COM(2024) 601 to 627). For the latest assessment by the Commission of Member States experiencing imbalances or excessive imbalances, see the respective in-depth reviews (SWD(2024) 80 to 85 and 100 to 105). For the assessment of debt sustainability risks in all the Member States discussed in this report, see the annexes on Debt Sustainability Analysis in the country reports (SWD(2024) 601 to 627).
35 https://www.riigikogu.ee/tegevus/eelnoud/eelnou/a17529fc-9cd3-46a0-bc61-2f0ef5c7edb4/2024.-aasta-lisaeelarve-seadus/
36 At the moment this report is published, there are exchanges between the Estonian national statistical office and Eurostat regarding the time of recording of military spending. An independent decision by Eurostat on this matter is pending.
37()The figure represents the level of the annual budgetary cost of those measures, including revenue and expenditure and, where applicable, net of the revenue from taxes on windfall profits of energy suppliers.
38 According to the Commission 2024 Spring Forecast for Slovenia, nationally-financed expenditures for reconstruction after the floods in August 2023 amount to 0.7% of GDP.
39 This contribution is measured as the change in general government primary expenditure, net of (i) the incremental budgetary impact of discretionary revenue measures, (i) one-offs, (iii) cyclical unemployment expenditure and (iv) expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other EU funds, relative to the medium-term (10-year) average potential nominal GDP growth rate, expressed as a ratio to nominal GDP.
40 The figure represents the level of the annual budgetary cost of those measures, including revenue and expenditure and, where applicable, net of the revenue from taxes on windfall profits of energy suppliers.
41 The Classification of the Functions of Government (COFOG) classifies government expenditure data from ESA by the purpose for which the funds are used.
42 See Eurostat (2023), Advice on recording of 2023 Superbonus IT+Advice+on+recording+of+2023+Superbonus.pdf (europa.eu).
43 When rounding at the first decimal, the difference of nationally financed public investment between 2024 and 2023 is 0.0.
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