COUNCIL OPINION

of 17 February 2005

on the updated convergence programme of Estonia, 2004-2008

(2005/C 136/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to 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(1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 17 February 2005 the Council examined the updated convergence programme of Estonia, which covers the period 2004 to 2008. The programme complies with the data requirements of the revised ‘code of conduct on the content and format of stability and convergence programmes’.

(2) The macroeconomic scenario underlying the programme envisages real GDP growth to pick up from 5.6 % in 2004 to 6.0 % on average over the rest of the programme period. On the basis of currently available information, this scenario seems to reflect plausible growth assumptions. The programme's projections for inflation also appear realistic.

(3) Estonia aims at achieving a budgetary position of close-to-balance or small surplus throughout the programme period. For 2004, the programme targets a budget surplus of 1 % of GDP which is 0.3 % higher than the surplus planned in the programme of last May. From 2005 onwards, balanced budgets are envisaged, as was the case in the previous programme. Public investment in 2004 is foreseen to increase by one percentage point of GDP to 4.4 % before declining to 3.9 % by 2008, and remains thus well above the EU average (2.4 % of GDP in 2004).

(4) The risks to the budgetary projections in the programme appear broadly balanced. On the one hand, the cautious macroeconomic scenario suggests that revenues could be higher and expenditure somewhat lower than budgeted. Indeed, Estonia has established a track record of prudent forecasting and repeated overshooting of fiscal targets over the past few years. On the other hand, unexpected revenue shortfalls from the planned tax cuts, or an adverse impact on growth from exogenous shocks cannot be excluded altogether. Considering the balance of risks, the budgetary stance in the programme seems adequate to maintain the Stability and Growth Pact's medium-term objective of a position of close-to-balance over the entire programme period 2004-2008. It also seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations.

(5) The debt ratio is estimated at 4.8 % of GDP in 2004, well below the 60 % of GDP Treaty reference value and indeed the lowest in the EU. The programme projects the debt ratio to further decline by 1.9 percentage points over the programme period.

(6) Estonia appears to be in a favourable position with regard to the long-term sustainability of the public finances, despite important projected budgetary costs of an ageing population. A low government debt level, considerable government financial reserves and a medium-term budgetary strategy that is fully consistent with the objective of a close-to-balance-or-in-surplus budgetary position, together with credible and thorough reforms of the pension and health care systems which are meant to stem budgetary pressures in the longer term, should ensure that public finances remain on a sustainable footing.

(7) The economic policies outlined in the update are broadly consistent with the country-specific broad economic policy guidelines in the area of public finances. The higher-than-projected budget surplus in 2004 is in line with the recommendation to avoid pro-cyclical fiscal policies. Nevertheless, given that the external account deficit has most likely not narrowed significantly (if at all) in 2004, a rapid run-down of the budget surplus may provide insufficient support from the fiscal policy stance to the correction of the external imbalance.

Comparison of key macroeconomic and budgetary projections

		2004	2005	2006	2007	2008
Real GDP (% change)	CP Dec 2004	5,6	5,9	6,0	6,0	6,0
	COM Oct 2004	5,9	6,0	6,2	n.a.	n.a.
	CP May 2004	5,3	5,8	5,6	5,9	5,8
HICP inflation(2) (%)	CP Dec 2004	3,3	3,2	2,5	2,8	2,8
	COM Oct 2004	3,4	3,5	2,8	n.a.	n.a.
	CP May 2004	3,1	3,0	2,8	2,8	2,8
General government balance (% of GDP)	CP Dec 2004	1,0	0,0	0,0	0,0	0,0
	COM Oct 2004	0,5	0,2	0,1	n.a.	n.a.
	CP May 2004	0,7	0,0	0,0	0,0	0,0
Primary balance (% of GDP)	CP Dec 2004	1,3	0,2	0,2	0,2	0,2
	COM Oct 2004	0,8	0,4	0,3	n.a.	n.a.
	CP May 2004	1,0	0,3	0,3	0,3	0,3
Government gross debt (% of GDP)	CP Dec 2004	4,8	4,6	4,3	3,1	2,9
	COM Oct 2004	4,8	4,4	4,2	n.a.	n.a.
	CP May 2004	5,4	5,1	4,7	3,4	3,2
convergence programme (CP); Commission services autumn 2004 forecasts (COM);

(1)

OJ L 209, 2.8.1997, p. 1

(2) the programme refers to the national CPI definition, not the HICP

Sources:

convergence programme (CP); Commission services autumn 2004 forecasts (COM);