EUROPEAN COMMISSION

Brussels, 16.11.2016

COM(2016) 730 final

COMMUNICATION FROM THE COMMISSION

2017 Draft Budgetary Plans : Overall Assessment

Executive summary This Communication summarises the Commission's assessment of the 2017 Draft Budgetary Plans (DBPs) submitted by the eighteen euro area Member States not under a macroeconomic adjustment programme (EA-18), including no-policy change plans submitted by Lithuania and Spain due to the presence of caretaker governments in these countries at the time of submission. In line with Regulation (EU) No 473/2013, the Commission has assessed these plans and the overall budgetary situation and fiscal stance in the euro area as a whole. The overall assessment of the 2017 DBPs and the aggregate fiscal stance for the euro area can be summarised as follows: 1.The Member States' plans imply a continuing decrease in the aggregate headline budget deficit in the euro area in the context of a recovery that remains fragile and with a number of downside risks. After falling from 2.0% of GDP in 2015 to reach 1.8% of GDP this year, the aggregate deficit is planned to decline further to 1.5% of GDP in 2017. Having peaked in 2014, the aggregate debt ratio based on the DBPs is also planned to decrease slightly from just over 90% for the current year to 89% of GDP in 2017. This corresponds to a deterioration in the structural balance in 2016 of 0.2% of GDP, which then remains broadly unchanged in 2017. 2.Compared to the medium-term plans formulated in the spring 2016 Stability Programmes, the planned deficit reduction in 2017 was revised downward and would be smaller by 0.2 percentage points in the euro area, though starting from a slightly lower deficit in 2016 than had been anticipated in the spring of 2016. 3.The macro-fiscal outlook emerging from the DBPs is broadly confirmed by the Commission's 2016 autumn forecast. Real GDP growth is projected to weaken slightly from 1.7% this year to 1.5% in 2017, though the negative output gap is expected to continue to narrow to 0.5% of potential GDP. The Commission also forecasts a reduction in the headline deficit similar to the DBPs in 2017 (by 0.3 percentage points), to arrive at the same headline balance of -1.5% of GDP. The Commission projects that the aggregate debt-to-GDP ratio will decrease for the second year in a row to 90% in 2016 and fall further to 89% in 2017, which is in line with the plans set out in the DBPs. 4.As in 2015, Member States budgetary positions are being supported by significant falls in borrowing costs. Temporary savings from low interest payments can be used according to the Member State's fiscal position, translating into lower deficits in countries with large budgetary imbalances while allowing a larger increase in future-related expenditure if fiscal space is available. 5.At the aggregate level, the DBPs and the Commission's forecast point to the euro area fiscal stance being broadly neutral over the period 2014-2017, continuing the pause of fiscal consolidation that has occurred since 2013. More specifically, the fiscal stance became broadly neutral in 2014-2015 and slightly expansionary in 2016, against the background of an economic recovery. For 2017, both the aggregation of Member States' DBPs and the Commission forecast point to a broadly neutral fiscal stance again. This should be assessed against the double objectives of short-term macroeconomic stabilisation and long-term sustainability of public finances. 6.As detailed in the Commission's Communication "Towards a Positive Fiscal Stance for the Euro Area", there is a case for a moderately expansionary fiscal stance for the euro area as a whole at this point in time, in the light of the slow recovery and risks in the macroeconomic environment. 1 However, designing such an appropriate fiscal stance for the euro area is the individual and collective responsibility of the Member States. This approach is also reflected in the proposed Recommendation on the economic policy of the euro area for 2017-2018. 2 7.The analysis of the appropriateness of the fiscal stance in the euro area is not just a question of the sign and size of the budget balance, but also very much of the quality and composition of the public finances leading to it. At a broad level, tax revenue structures are not planned to be changed significantly, while the composition of expenditure also shows limited progress towards being more growth-friendly, with capital expenditure still failing to recover as a share of GDP. In addition, improvements in national fiscal governance, including the setting-up of efficient spending reviews, could support the growth-friendliness of public spending. 8.The Commission's assessment of individual Member States' plans can be summarised as follows: No DBP for 2017 has been found in particularly serious non-compliance with the requirements of the Stability and Growth Pact (SGP). In several cases, however, the Commission finds that the planned fiscal adjustments fall short, or risk doing so, of what is required by the SGP. Specifically: Regarding the fifteen countries in the preventive arm of the SGP:  - for five countries (Germany, Estonia, Luxembourg, Slovakia and the Netherlands), the DBPs are found to be compliant with the requirements for 2017 under the SGP. - for four countries (Ireland, Latvia, Malta, Austria), the DBPs are found to be broadly compliant with the requirements for 2017 under the SGP. For these countries, the plans might result in some deviation from the adjustment paths towards each country's medium-term budgetary objective. - for six countries (Belgium, Italy, Cyprus, Lithuania, Slovenia, Finland), the DBPs pose a risk of non-compliance with the requirements for 2017 under the SGP. The DBPs of these Member States might result in a significant deviation from the adjustment paths towards the respective medium-term objective. However, Finland has applied for use of the structural reform clause and investment clause. The Commission will take account of the uncertainty surrounding the output gap estimates when considering Finland's eligibility for the clause, which may in turn impact upon the assessment of compliance. In the case of Lithuania, the no-policy-change DBP included an application for use of the structural reform clause. The complete assessment of both Finland and Lithuania's possible eligibility for flexibility will take place within the normal European Semester cycle in the context of the assessment of the 2017 Stability Programme. Regarding the three countries currently in the corrective arm of the SGP (i.e. in Excessive Deficit Procedure): - for France, the DBP is found to be broadly compliant with the requirements for 2017 under the SGP, as the Commission 2016 autumn forecast projects that the headline deficit will be slightly below the Treaty reference value of 3% of GDP in 2017, although there is a significant shortfall in fiscal effort compared to the recommended level and the correction would not be durable in 2018 on the basis of unchanged policies. - for Spain, the DBP is found to be at risk of non-compliance with the requirements for 2017 under the SGP. While acknowledging the no-policy-change nature of these projections, the Commission's forecast for 2017 projects that neither the intermediate headline deficit target, nor the recommended fiscal effort will be achieved. - for Portugal, the DBP is found to pose a risk of non-compliance with the requirements for 2017 under the SGP, although the projected deviation exceeds the threshold for a significant deviation by a very narrow margin. The risks seem therefore contained provided the necessary fiscal measures are delivered. Portugal, which is currently under the corrective arm, is projected to respect the Treaty reference value of 3% of GDP this year, as recommended. It could become subject to the preventive arm from 2017, if a timely and sustainable correction of the excessive deficit is achieved. Portugal and Spain submitted their DBPs by mid-October, as well as reports on action taken in response to the Council decisions to give notice, adopted on 8 August 2016 in accordance with Article 126(9) of the Treaty. The Commission has in the meantime assessed such documents and engaged in a structured dialogue with the European Parliament. The Commission has come to the conclusion that the Excessive Deficit Procedures of both Member States should be held in abeyance. Accordingly, the event that required a proposal by the Commission to suspend parts of the European Structural and Investment Funds is no longer present and there will be no such proposal.

Table of Contents

I. Introduction    

II. Main euro area findings    

III. Overview of the Draft Budgetary Plans    18

ANNEX I: Country-specific assessment of DBPs    

ANNEX II: The methodology and assumptions underpinning the Commission autumn 2016 forecast    

ANNEX III: Sensitivity analysis    

ANNEX IV. Graphs and Tables    

I. Introduction 

EU legislation foresees that euro area Member States submit Draft Budgetary Plans (DBPs) for the following year to the Commission by 15 October with the aim of improving coordination of national fiscal policies in the Economic and Monetary Union 3 .

These plans summarise the draft budgets that governments submit to national parliaments. On each plan, the Commission provides an Opinion, assessing whether it is compliant with the Member State's obligations under the Stability and Growth Pact (SGP).

The Commission is also required to provide an overall assessment of the budgetary situation and prospects for the euro area as a whole. The latter assessment is provided in the present Communication along with the Commission Communication "Towards a Positive Fiscal Stance for the Euro Area" 4 .

Eighteen euro area Member States were required to submit their 2017 DBPs to the Commission by 17 October, in line with the provisions of the so-called Two-Pack 5 . As the remaining euro area country under a macroeconomic adjustment programme, Greece is not obliged to submit a plan, as the programme already provides for close fiscal monitoring.

In line with the indications of the Two-Pack Code of Conduct 6 , two countries, Lithuania and Spain, submitted no-policy change DBPs due to caretaker governments being in place. The incoming governments are expected to submit full DBPs once they take office.

While respecting Member States' budgetary competence, the Commission's Opinions provide objective policy advice, in particular for national governments and parliaments, to facilitate the assessment of the draft budgets' compliance with EU fiscal rules. The Two-Pack provides for a comprehensive toolbox to treat economic and budgetary policy as a matter of common concern within the euro area, as intended by the Treaty.

In addition, in July 2015, the Council invited the Eurogroup to monitor and coordinate euro area Member States' fiscal policies and the aggregate fiscal stance for the euro area to ensure a growth-friendly and differentiated fiscal policy 7 . The Council recommended that euro area Member States, without prejudice to the fulfilment of the requirements of the SGP, "coordinate fiscal policies to ensure that the aggregate euro area fiscal stance is in line with sustainability risks and cyclical conditions".

In November 2015, the Commission proposed an updated Recommendation on the economic policy for the euro area, which was discussed in Council and endorsed by EU leaders at the European Council meeting on 18 and 19 February 2016 8 .

This recommendation is an anchor for the Commission's assessment. As part of the annual cycle of the European Semester, the Commission is also proposing a new Recommendation on the economic policy of the euro area for 2017-2018 alongside this package. 9

The objective of this Communication is twofold. Firstly, it provides an aggregate picture of budgetary policy at euro area level, building on a horizontal assessment of the DBPs. This exercise mirrors the horizontal assessment of Stability Programmes that takes place in the spring, but with a focus on the forthcoming year rather than on medium-term fiscal plans. Secondly, it provides an overview of the DBPs at country level, explaining the Commission's approach in assessing them, specifically, for compliance with the requirements of the SGP. The assessment is differentiated according to whether a Member State is in the preventive or the corrective arm of the SGP and also takes into account the requirements relating to the level and dynamics of government debt.

II. Main euro area findings

Economic outlook contained in DBPs and Commission 2016 autumn forecast

Governments see the recovery from the economic and financial crisis proceeding steadily but not accelerating in the euro area. According to the macroeconomic assumptions provided in the DBPs, GDP will grow by 1.7% in 2016 in the eighteen Member States concerned (EA-18), slightly below the 1.8% expected at the time of the Stability Programmes in April 2016 (Table 1). For 2017, the growth outlook follows the same pattern, with GDP growth forecast at 1.6% in the EA-18 versus 1.7% projected in the Stability Programmes. With the recovery forecast to proceed, though not gain pace, the difference between actual and potential output continues to narrow. According to the plans, the output gap in the EA-18 is projected to be -0.8% of potential GDP in 2016 and to narrow further to -0.5% in 2017, having been below -2% as recently as 2014. This trend is evident in the majority of Member States, though not without differences across countries. The inflation outlook remains subdued, with the expected level of HICP inflation 2016 falling notably compared to the Stability Programmes submitted in the spring. According to the DBPs, the rate of inflation will be 0.4% in 2016 but is projected to increase to 1.2% in 2017 (slightly below the 2017 projection of 1.4% from the Stability Programmes). Seventeen Member States comply with the requirement of Regulation EU No 473/2013 that the draft budget has to be based on independently endorsed or produced macroeconomic forecasts 10 .

The economic picture emerging from the eighteen DBPs is broadly confirmed by the Commission's forecast. It also points to a continued albeit sluggish economic recovery amid more challenging global conditions. The Commission's forecast projects that real GDP growth will weaken slightly (from 1.7% in 2016 to 1.5% in 2017). Domestic demand is currently supported by a conjuncture of low oil prices, spillovers from a still relatively low euro exchange rate and accommodative monetary policy. At the same time, the underlying dynamics of domestic demand remain slow. Global economic conditions face mounting uncertainty, particularly in the wake of the United Kingdom's referendum on EU membership and other geopolitical developments, while world trade has slowed down. The above emphasises the need to strengthen domestic sources of growth. Moreover, a number of developments could result in lower growth than expected by the Commission, such as a further deterioration of world trade. The fragile but ongoing recovery is reflected in a continuing narrowing in the difference between actual and potential output in the Commission's forecast. The negative output gap of 2.2% of potential GDP in 2014 is expected to contract to 0.8% this year and 0.5% in 2017. Given continuing uncertainty over the measurements of the output gap in some Member States, the Commission has explored potential means to improve the methodology and its application while remaining consistent with the established principles for setting Member States' fiscal requirements (see Box 1 below).

The continuing, if slow, growth is not reflected in price developments, as the inflation outlook remains muted at the aggregate level. The Commission's forecast projects HICP inflation of just 0.3% this year, with a forecast pick-up to 1.4% in 2017, reflecting the closing output gap and a very accommodative monetary stance. Notwithstanding differences across Member States, interest rates are assumed to stay at historically low levels in 2017. At the same time, the large excess of saving over investment is expected to persist in 2017, with the external balance of the euro area forecast in surplus by 3.5% of GDP, only marginally below its size in 2016 (3.7% of GDP).

Fiscal outlook contained in DBPs and Commission 2016 autumn forecast

The aggregate headline budget deficit is planned to continue to narrow this year and next according to the DBPs. In the EA-18, the deficit is forecast to be 1.8% of GDP in 2016, down from 2.0% last year 11 . In 2017, the aggregate deficit ratio is planned to decline to 1.5% of GDP. This adjustment is smaller than the 0.5 percentage point reduction in 2017 projected in the Stability Programmes, though starting from a slightly lower deficit in 2016 than had been anticipated in the spring. Allowing for the marginally downgraded macroeconomic outlook, the smaller reduction in the deficit may still be driven by a lower fiscal effort (see hereafter). Increases in expenditures related to the refugee crisis and security-related measures are expected to contribute to expenditure developments in a few Member States.

Table 1: Overview of economic and budgetary aggregates (EA-18) for 2016-17

	2016			2017
	2016 Stability Programmes (April)	Draft Budgetary Plans (October)	Commission 2016 autumn forecast (November)	2016 Stability Programmes (April)	Draft Budgetary Plans (October)	Commission 2016 autumn forecast (November)
Real GDP growth (% change)	1.8	1.7	1.7	1.7	1.6	1.5
HICP inflation (% change)	1.2	0.4	0.3	1.4	1.2	1.4
Headline deficit (% GDP)	-1.9	-1.8	-1.8	-1.4	-1.5	-1.5
Change in structural balance (p.p. GDP)	-0.3	-0.2	-0.2	0.2	0.1	0.0
Debt (% GDP)	90.3	90.1	90.1	89.0	89.0	89.1
Cyclically-adjusted exp. ratio (% potential GDP)	47.3	47.4	47.5	46.9	47.2	47.3
Cyclically-adjusted rev. ratio (% potential GDP)	46.0	46.1	46.2	45.9	46.0	46.1

The budgetary position as measured by the change in the aggregate structural balance, remains broadly stable over 2016-2017 according to the DBPs. The structural balance is planned to slightly decline in 2016 (0.2% of GDP), to be followed by a 0.1% of GDP increase next year. The trend in the structural budgetary position at the aggregate level is broadly confirmed by using an alternative measurement of discretionary fiscal effort, also known as the DFE, which suggests a negative adjustment of 0.4% according to the DBPs in 2016, and of 0.2% in 2017. (Graph A4.1 of Annex 4) 12 . However, given uncertainties surrounding output gap estimates, the developments in 2016 should not be overstated. These developments are broadly in line with the projections for the 2016-17 period included in the spring Stability Programmes. The pause of fiscal consolidation takes place against the background of a gradually improving but still fragile economic outlook and narrowing output gap. Together with the fact that only five Member States (and only one amongst the largest economies) plan to be at or above their medium-term budgetary objectives at the end of 2017 13 , the planned lack of structural adjustment in 2017 is ostensibly falling short of the requirements of the SGP. However, the aggregate adjustment should only be viewed as illustrative in this respect, as it fails to capture the important differences across Member States vis-à-vis the requirements of the SGP, which are the subject of the Commission's country-specific assessments. 

The Commission 2016 autumn forecast expects the aggregate headline deficit to decline from 1.8% of GDP in 2016 to 1.5% of GDP in 2017, with the structural balance broadly stable over the two-year period. The stability in the structural balance in 2016 and 2017 anticipated by the Commission incorporates a projected decrease in interest expenditure of 0.2% of GDP in 2016 and 0.1% of GDP in 2017. At the aggregate level, the structural primary balance is thus estimated by the Commission Forecast to fall by 0.4% of GDP in 2016 and by 0.2% of GDP in 2017. This reading is confirmed by the DFE, which shows a negative adjustment of 0.5% of GDP in 2016 and 0.3% of GDP in 2017. The gains arising from the historically low levels of interest rates on government debt are therefore, on aggregate, mostly not used to reduce deficits. The Eurogroup advised to use these gains to improve public finances and – depending on the country-specific situation – invest in infrastructure or structural reforms 14 .

The aggregate picture for the deficit in the euro area broadly coincides between the DPBs and the Commission's forecast. Differences between individual DBPs' and the Commission's deficit forecasts can be relatively large, for reasons varying from one country to another. In the majority of countries, the Commission forecasts the deficit to be higher compared to the respective DBPs, with the largest such differentials seen in Slovenia, Portugal, Belgium and Lithuania (Table A4.1 and Graph A4.4 of Annex 4). The remaining positive forecast differentials are all within a 0.3 percentage point range, while the Commission's forecast is for a lower deficit figure in Germany, Cyprus, Estonia, Latvia, the Netherlands and Finland.

The distribution of the change in the aggregate structural balance across Member States does not seem to reflect the position of Member States vis-à-vis the requirements of the SGP and the availability of fiscal space. In particular, some Member States, which remain relatively far from their MTOs, are expected to either pursue an expansionary policy or deliver very little fiscal adjustment, notably Spain, France and Italy. Conversely, some Member States which overachieve their MTOs, are expected to make little use of their fiscal space, notably Germany.

Turning to public debt, after peaking in 2014 at 93% of GDP, the aggregate debt ratio is planned to continue to decrease both in 2016 and in 2017 according to the DBPs, in line with the projections underpinning the Stability Programmes. This is driven by positive primary balances and favourable stock-flow adjustments 15 . At 89% of GDP in 2017, the planned aggregate ratio masks a wide range of national figures. The debt ratios in individual Member States vary from 133% of GDP in Italy to 10% of GDP in Estonia. Data for Greece, which experiences an exceptionally high level of debt, are not included.

The Commission forecasts are in line with the aggregate debt projected by Member States. While the aggregate debt ratio remains at a very high level, the Commission expects it to decline both this year and next, reaching 89.1% of GDP in 2017, reflecting the same drivers as in the government plans (the decline in the debt interest burden and the so-called snowball effect no longer contributing to rising debt in the aggregate). However, it should also be recognised that a large portion of the debt reduction in the euro area is being driven by Germany. When Germany is excluded from the calculations, the aggregate debt ratio forecast by the Commission only falls by 0.2 percentage points in both 2016 and 2017, compared to 1 percentage point falls in both years for the full aggregate. In addition, the level of aggregate debt remains significantly higher excluding Germany, at 99% of GDP. Here again, differences between the DBPs and the Commission's forecast can be larger at Member State level, for reasons varying from one country to another. The larger positive differentials relate to Portugal and France, while there are also negative differentials in a number of countries, where the Commission's debt projections are below those of the Member States (Table A4.3 and Graph A4.5 of Annex 4). At the aggregate level, the change in debt projected by Member States in 2017 is larger than that projected by the Commission, mostly reflecting stock-flow adjustments.

The aggregate euro area debt ratio cannot be assessed in terms of compliance with the debt requirements of the SGP as the Member States of which it is comprised have a differing status vis-à-vis the SGP 16 . However, ten euro area Member States that submitted DBPs are subject to the debt reduction benchmark. According to the Commission's forecast, seven of these ten are expected to be compliant with it (or with the transitional debt rule if applicable).

Application of the Stability and Growth Pact

The flexibility embedded in the SGP allows for accommodating exceptional spending linked to unusual events outside the control of the government and having a major impact on public finances, both under the preventive and the corrective arm of the Pact. As in 2015, a number of Member States' DBPs reference the budgetary impact of the exceptional inflow of refugees (Austria, Belgium, Italy, Slovenia and Finland). On a similar basis, Belgium, Italy and Austria have also made reference in their DBPs to additional costs related to the terrorist threat. In addition, Italy has made a request for special treatment in relation to costs arising from the recent earthquakes. Finland has submitted an application for use of the structural reform clause and the investment clause in 2017 while, although a no-policy change DBP has been submitted due to national elections, Lithuania has also indicated its intention to apply for use of the structural reform clause.

The adjustment requirements under the SGP, in both the preventive and the corrective arms, are set in terms of change in the structural balance. The Commission will assess (on an ex post, case by case basis) the temporary deviation from the requirements for 2016 and 2017 due to the additional costs in each of these two years resulting from the exceptional costs incurred compared to the previous year. Where relevant, the Commission opinions on the DBPs include factual statements on how the assessment of compliance could be impacted if corrected for unusual events, such as refugee inflow and costs related to the terrorist threat.

Composition of fiscal adjustment

The DBPs envisage only very limited changes in the composition of public finances in 2016-17 for the euro area as a whole (Table A4.5 and Graphs A4.2a-b of Annex 4). The ratio of government expenditure to GDP is planned to recede by 0.4 percentage points. in 2017. However, 0.1 percentage points is linked to savings in interest expenditure. The remaining, seemingly substantive reduction is mostly due to the cyclical conditions. In fact, the primary expenditure ratio corrected for the effect of the economic cycle shows a reduction of only 0.1 percentage points. This reduction is partially offset by planned tax cuts, as evidenced by the slight decline in the cyclically adjusted revenue ratio (0.1 percentage points in 2017). In this respect, Members States' plans to reduce expenditure as a share of potential output have, in the aggregate, to a large extent failed to materialise over the last few years. The Commission 2016 autumn forecast confirms this reading. The broadly unitary tax elasticity implied by both the DBPs and the Commission's forecast indicates that the reductions in revenues are driven by government measures (Table A4.6 of Annex 4).

The planned adjustment is not expected to damage medium-term growth prospects, though there may be scope for more growth-friendly choices in reducing spending. Most expenditure categories are planned to fall as a percentage of output, although as noted the overall small decline in expenditure is driven by cyclical factors. The largest declines are affecting compensation of employees and interest expenditure, with Member States benefitting from significant savings on the latter (as discussed in more detail in the next section). As the most productive expenditures are not primarily impacted, the planned adjustment is not expected to damage medium-term growth prospects, though there may be scope for more growth-friendly choices. In particular, capital expenditure is not planned to increase, albeit current levels are low from a historical perspective. In addition, improvements in national fiscal governance, including the setting-up of efficient spending reviews, could support the growth-friendliness of public spending. See Box 2 below on guiding principles for effective spending reviews as agreed by the Eurogroup. The Commission's forecast is broadly in line with the DBPs, confirming the largest reductions in interest payments and public wages, though the Commission's forecast projects a slightly smaller fall in the latter than set out in the DBPs.

Interest expenditure is expected to fall further in 2017, freeing up resources to facilitate consolidation and increases in future-related expenditure if fiscal space is available. Euro area sovereign bond yields remain at historically low levels, with 10-year rates currently ranging from 0% to 1¾ % for the four largest Member States in the euro area. As a consequence, total interest payments by the general government have continued to decrease as a share of GDP. Based on the information included in the DBPs, interest expenditure for the euro area as a whole is expected to fall from 2.4% of GDP in 2015 to 2.1% in 2016 and is projected to decrease further next year, to 2.0% of GDP, well below the 3.0% recorded back in 2012 at the peak of the euro area sovereign debt crisis. The picture stemming from Member States’ plans is broadly confirmed by the Commission forecast. While the costs of servicing debt within the euro area are likely to remain historically low in the coming years, using savings from low interest payments to fund permanent increases in government spending or cut taxes could represent a risk due to their non-permanent nature.

Measures presented in the DBPs would only have a very slight effect on the tax composition for the aggregate EA-18 in 2017. Once corrected for the cycle, the revenue ratio decreases by around 0.1% of GDP. Out of the three main revenue categories, social contributions and indirect taxes are expected to recede as a share of GDP, while direct taxes rise. At the same time, the changes are marginal and do not alter their relative weights significantly. On the revenue side, the Commission's forecasts are aligned with the DBPs (Graph A4.3b of Annex 4).

Assessment of fiscal policy orientation in the euro area

Overall, following the significant fiscal consolidation in 2011-13, the euro area fiscal stance is estimated to be broadly neutral over 2014-2017. The fiscal stance became broadly neutral in 2014-2015 and slightly expansionary in 2016, against the background of an economic recovery. For 2017, both the aggregation of Member States' DBPs and the Commission forecast point to a broadly neutral fiscal stance again.

Box 3: Analysis of the Fiscal Stance The discussion on the fiscal stance is a key aspect of the Commission's efforts to reinforce the collective discussion on the general interest of the euro area 19 . In the EU and euro area, national fiscal policies are primarily shaped by the rules-based framework embodied in the Treaty and the SGP. In addition, an analytical examination of fiscal policies allows for an assessment of whether implemented fiscal policies effectively lay the conditions for strong sustainable growth, for price stability and more especially, whether the best use is made of the room for discretion within the framework. It helps to emphasise aggregate consequences of national policies and spillovers across Member States. The euro area fiscal stance has to strike the right balance between sustainability and stabilisation. There is a need to reduce excessive levels of debt and re-build fiscal buffers. A prudent approach to debt reduction is especially warranted in order to be able to absorb the impact of new shocks. At the same time, the recovery is proceeding slowly with only a gradual decline in unemployment, while inflation expectations continue to fall short of the objective of price stability. The measurement and analysis of the fiscal stance is methodologically challenging. The fiscal stance is a notion with no universally accepted definition but a broadly shared understanding within the economic community. It is usually understood as the orientation which is given to fiscal policy by governments' discretionary decisions on tax and expenditure. Traditionally, the fiscal stance is captured by the change in the structural primary balance, although other indicators can also be used to characterise it. In this box, consolidation needs are measured by the S1 indicator, which is calculated at the fiscal effort needed to ensure that a Member State's public debt reaches 60% of GDP in 2031. A detailed assessment of different indicators and their robustness can be found in the 2016 SCPs: Horizontal Overview and Implications for the Euro Area Fiscal Stance (European Commission Institutional Papers No. 34, 2016). For the euro area as a whole, there is a further trade-off at the current juncture between sustainability and stabilisation needs. The euro area is located in the 'South-East quadrant' of the fiscal map where such a trade-off is at play, see Graph 1. It reflects the existence of an adjustment gap vis-à-vis a trajectory that puts debt on a firm downward path for the future, in conjunction with the persistence of a significant degree of economic slack, albeit a gradually narrowing degree. This conclusion is qualitatively robust to the choice of alternative indicators, though precise magnitudes may differ. From an economic perspective, the overall euro area stance should be differentiated depending on the situations of countries in terms of sustainability and stabilisation. A number of Member States in the south-east of the fiscal map still have significant consolidation needs. The south-west quadrant shows Member States, which have fiscal scope and whose economies would benefit from limited stimulus. In this respect, the DBPs could be improved upon. In particular plans that are tilted towards the stabilisation objective in some large countries could be rebalanced towards more consolidation, while the remaining fiscal scope could be used to support short and long-term growth, notably by fostering investment. Graph 1: A Fiscal map for the euro area in 2016   Note: Based on European Commission 2016 autumn forecast. Good(bad) economic times are measured by the output gap in 2016, in % of GDP. The consolidation needs or fiscal scope are measured by the Commission's S1 indicator of risks to sustainability, also in % of GDP, based on 2016 autumn forecast calculations and using 2016 as the base year.

The orientation of the fiscal position in 2016-17 can be assessed against the double objectives of long-term sustainability of public finances and short-term macroeconomic stabilisation (see Box 3 above). Long-term sustainability requires that public debt is put and maintained on a sustainable path, taking into account the current level of debt and projected future ageing-related expenditures 20 . Macroeconomic stabilisation can be expressed in terms of closing the output gap at an appropriate pace in the short to medium term while, in the current situation, also ensuring a more pronounced rotation from external to domestic sources of growth. As monetary policy is already very accommodative, with nominal interest rates almost at the zero limit alongside very low inflation, attention turns to fiscal policy.

As detailed in the Commission's accompanying Communication, Towards a Positive Fiscal Stance for the Euro Area 21 , designing an appropriate fiscal stance for the euro area is the individual and collective responsibility of Member States. The Communication provides additional analysis of the fiscal stance and guidance on its implications for fiscal policy in the euro area.

III. Overview of the Draft Budgetary Plans

The Commission's Opinion on the DBPs focuses on compliance with the SGP and the recommendations issued on that basis. For Member States in the Excessive Deficit Procedure (EDP), the Commission's Opinions take stock of progress made in correcting the excessive deficits, with respect to both headline deficit and structural effort targets. For Member States in the preventive arm of the SGP, the Commission's Opinions assess adherence to, or the progress towards, the country-specific medium-term budgetary objectives (MTOs), as well as compliance with the debt rule, in order to verify whether the plans are in line with the SGP and the fiscal country-specific recommendations (CSRs) addressed by the Council to the Member States on 12 July 2016.

All non-programme euro-area Member States submitted their DBPs in due time, in line with Article 6 of Regulation (EU) No 473/2013.

No DBP was found in "particularly serious non-compliance" with the SGP as referred to in Article 7(2) of Regulation (EU) No 473/2013. Still, several of the submitted plans give rise to concerns.

Tables 2a and 2b summarise the assessments of individual countries' DBPs as per the Commission's Opinions adopted on 16 November together with the assessment of progress with fiscal-structural reforms. These assessments are based on Commission 2016 autumn forecast. In order to facilitate comparison, the assessment of the plans is summarised in three broad categories, which have different meanings depending on whether a Member State is in EDP or not:

Compliant: according to the Commission's forecast, there is no need to adapt the budgetary plans within the national budgetary procedure to ensure that the 2017 budget will be compliant with the SGP rules.

Broadly compliant: According to the Commission's forecast for 2017, the DBP is expected to ensure broad compliance with the SGP rules.

For Member States in EDP: while the Commission's forecast for 2017 projects that either the intermediate headline deficit target will be achieved or that the excessive deficit will be corrected in a timely manner, there is a noticeable shortfall in fiscal effort compared to the recommended level that puts at risk compliance with the EDP recommendation.

For Member States in the preventive arm of the SGP: the Commission's forecast for 2017 projects some deviation from the MTO or the adjustment path towards it, but the shortfall relative to the requirement would not represent a significant deviation from the recommended adjustment. These Member States are assessed to comply with the debt rule, where applicable.

Risk of non-compliance: According to the Commission's forecast for 2017, the DBP is not expected to ensure compliance with the SGP rules.

For Member States in EDP: the Commission's forecast for 2017 projects that neither the recommended fiscal effort will be delivered nor that the intermediate headline deficit target will be achieved or that the excessive deficit will be corrected in a timely manner.

For Member States in the preventive arm of the SGP: the Commission's forecast for 2017 projects a significant deviation from the MTO or the required adjustment path towards it, and/or non-compliance with the debt reduction benchmark, where applicable.

Following the "Commonly agreed position on flexibility within the Stability and Growth Pact" endorsed by the ECOFIN Council on 12 February 2016, Finland and Lithuania have in their DBP requested flexibility on the basis of the structural reform and investment clause.. Finland has requested in its DBP temporary deviations from the recommended adjustment path towards the MTO in 2017, in view of the implementation of major structural reforms with a positive impact on the long-term sustainability of public finances (request for flexibility amounting to 0.5% of GDP) and of national expenditure on projects co-financed by the EU under the European Structural and Investment Funds (request for flexibility amounting to 0.1% of GDP). Based on the Commission 2016 autumn forecast, whereas Finland does not comply with the minimum benchmark, its output gap estimate is surrounded by uncertainty. A detailed assessment of the output gap estimate for 2016 implies that Finland would meet the minimum benchmark in 2017 22 . As an additional assurance, Finland's government has publicly committed to take the additional measures in 2017, if necessary, to ensure compliance with the SGP, notably including the respect of the Treaty reference value of 3% of GDP. In the case of Lithuania, such a request in the no-policy-change DBP envisaged the planned implementation of major structural labour market and pension reforms with a positive impact on the long-term sustainability of public finances (request for 0.6% of GDP flexibility). Based on the Commission 2016 autumn forecast, it appears that Lithuania has sufficient fiscal space to benefit from a temporary deviation from the required ajdustment path towards the MTO. The complete assessment of both Finland and Lithuania's possible eligibility for flexibility will take place within the normal European Semester cycle in the context of the assessment of the 2017 Stability Programmes.

Furthermore, a number of Member States mentioned the budgetary impact of the increased inflow of refugees and of additional security measures. The provisions of Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 allow for a temporary deviation from the adjustment path towards the medium-term budgetary objective in order to cater for such additional expenditure, to the extent that the inflow of refugees as well as the severity of the terrorist threat are exceptional events, their impact on public finances is significant and sustainability would not be compromised. At this stage, the Commission considered a possible temporary deviation for refugee-related costs in 2015 and 2016 (Belgium, Italy, Austria, Slovenia and Finland) and for security-related costs in 2016 and 2017 (Belgium, Italy and Austria). The Commission will make a final assessment, including on the eligible amounts, on the basis of observed data as provided by the authorities. The Commission stands ready to consider additional deviations related to migration related expenditures in 2017, in due course. In addition, Italy has made a request for a special treatment in relation to the budgetary impact of a preventive investment plan for the protection of the national territory against seismic risks under the unusual event clause. The Commission acknowledges that Italy has been facing unprecedented seismic activity in the past months, which makes the link between prevention and emergency intervention less clear-cut. Thus, the Commission considers that the funds earmarked by the government for this purpose in 2017 could also be considered to allow for a temporary deviation from the adjustment path towards the medium-term budgetary objective, subject to the provision of the necessary ex-ante and ex-post data by the Italian authorities.

Portugal and Spain submitted their DBPs by mid-October, as well as reports on action taken in response to the Council decisions to give notice, adopted on 8 August 2016 in accordance with Article 126(9) of the Treaty. The Commission has in the meantime assessed such documents and engaged in a structural dialogue with the European Parliament. The Commission has come to the conclusion that the Excessive Deficit Procedures of both Member States should be held in abeyance. Accordingly, the event that required a proposal by the Commission to suspend ESI Funds is no longer present and there will be no such proposal.

Finally, the Commission has preliminarily assessed the degree of progress with the implementation of the fiscal-structural reforms outlined in the country-specific recommendations adopted by the Council on 12 July 2016. The assessment of the DBPs is summarised in the following five broad categories: no progress, limited progress, some progress, substantial progress and fully addressed. A comprehensive assessment of progress made with the implementation of the country-specific recommendations will be made in the 2017 Country Reports and in the context of the 2017 country-specific recommendations to be adopted by the Council in 2017.

Table 2a: Overview of individual Commission opinions on the Draft Budgetary Plans – Member States under the preventive arm of the SGP

Member States	Overall compliance of the DBP with the SGP		Progress in implementing the fiscal-structural recommended in the 2016 CSRs
	Overall conclusion based on the Commission 2016 autumn forecast	Compliance with the preventive arm requirements in 2016-2017
BE*	Risk of non-compliance	2016: risk of a significant deviation from the adjustment path towards the MTO; prima facie non-compliance with the transitional debt rule; 2017: risk of some deviation from the adjustment path towards the MTO in 2017, but risk of a significant deviation over 2016-2017 together; prima facie non-compliance with the debt reduction benchmark.	No progress
DE	Compliant	2016: MTO overachieved; compliance with the debt reduction benchmark; 2017: MTO overachieved; compliance with the debt reduction benchmark	Limited progress
EE	Compliant	2016: MTO overachieved; 2017: no deviation from the adjustment path towards the MTO.	n.a.
IE	Broadly compliant	2016: risk of some deviation from the adjustment path towards the MTO; compliance with the transitional debt rule; 2017: risk of some deviation from the adjustment path towards the MTO; compliance with the transitional debt rule.	Some progress
IT*	Risk of non-compliance	2016: risk of some deviation from the adjustment path towards the MTO; without the full allowance of 0.75% of GDP granted under the structural and investment clauses, there would be a risk of a significant deviation from the adjustment path towards the MTO; prima facie non-compliance with the debt reduction benchmark; 2017: risk of a significant deviation from the adjustment path towards the MTO; prima facie non-compliance with the debt reduction benchmark.	Some progress
CY	Risk of non-compliance	2016: MTO overachieved; compliance with the transitional debt rule; 2017: risk of a significant deviation from the adjustment path towards the MTO; compliance with the transitional debt rule.	Some progress

LT**	Risk of non-compliance	2016: no deviation from the adjustment path towards the MTO; 2017: risk of a significant deviation from the adjustment path towards the MTO based on no-policy-change DBP.	n.a.
LV	Broadly compliant	2016: risk of some deviation from the adjustment path towards the MTO; 2017: no deviation from the adjustment path towards the MTO in 2017, but risk of a small deviation over 2016-2017 together;	Limited progress
LU	Compliant	2016: MTO overachieved; 2017: MTO overachieved.	Limited progress
MT	Broadly compliant	2016: no deviation from the adjustment path towards the MTO; compliance with the debt reduction benchmark; 2017: risk of some deviation from the adjustment path towards the MTO.	No progress
NL	Compliant	2016: MTO achieved; compliance with the transitional debt rule; 2017: MTO overachieved; compliance with the debt reduction benchmark.	No progress
AT***	Broadly compliant	2016: no deviation from the adjustment path towards the MTO; compliance with the transitional debt rule; 2017: risk of some deviation from the adjustment path towards the MTO	Limited progress
SK	Compliant	2016: risk of some deviation from the adjustment path towards the MTO; 2017: no deviation from the adjustment path towards the MTO	Some progress
SI	Risk of non-compliance	2016: risk of some deviation from the adjustment path towards the MTO; compliance with the transitional debt rule; 2017: risk of a significant deviation from the adjustment path towards the MTO; compliance with the transitional debt rule.	Limited progress
FI****	Risk of non-compliance	2016: risk of some deviation from the adjustment path towards the MTO; 2017: risk of a significant deviation from the adjustment path towards the MTO	Some progress

*    On 18 May 2016, the Commission issued a report under Article 126(3) of the TFEU, as the Member State did not make sufficient progress towards compliance with the debt rule in 2015. The report concluded that, after the assessment of all relevant factors, the debt criterion should be considered as complied with. A new report will be issued by the Commission shortly.

**    DBP submitted by a caretaker government on a no-policy-change basis.

***    This conclusion is reached once the current estimate of the budgetary impact in 2016 of the exceptional inflow of refugees and security measures (from which Austria can still benefit in 2017 in order to ensure a treatment equal to Member States which are further away from their MTO) is deducted from the requirement.

****    On 18 May 2016, the Commission issued a report under Article 126(3) of the TFEU, as Finland's general government debt exceeded 60% of GDP in 2015. The report concluded that, after the assessment of all relevant factors, the debt criterion should be considered as complied with.

Table 2b: Overview of individual Commission opinions on the Draft Budgetary Plans – Member States under the corrective arm of the SGP

Member States	Overall compliance of the DBP with the SGP		Progress in implementing the fiscal-structural recommended in the 2016 CSRs
	Overall conclusion based on the Commission 2016 autumn forecast	Overall conclusion based on the Commission 2016 autumn forecast
ES*	Risk of non-compliance	2016: intermediate headline target met, fiscal effort not delivered; 2017: intermediate headline target not met: fiscal effort not delivered based on no-policy-change DBP.	Limited progress
FR	Broadly compliant	2016: intermediate headline target met, fiscal effort not delivered; 2017: headline deficit projected just below 3% of GDP; fiscal effort not delivered.	Limited progress
PT**	Risk of non-compliance	2016: expected timely and durable correction of the excessive deficit, fiscal effort delivered. 2017: risk of a significant deviation from the adjustment path towards the MTO; prima facie non-compliance with the transitional debt rule.	Limited progress

*    DBP submitted by a caretaker government on a no-policy-change basis.

**     Portugal is currently under the corrective arm of the SGP, but could move to the preventive arm as from 2017 if a timely and sustainable correction were achieved.

(1)

     See COM(2016) 727 final, 16.11.2016.

(2)

     See COM(2016) 726 final, 16.11.2016.

(3)

     As set out in Regulation (EU) No 473/2013 on common provisions for monitoring and assessing Draft Budgetary Plans and ensuring the correction of excessive deficits of the Member States in the euro area. It is one of the two Regulations in the so-called Two-Pack which entered into force in May 2013.

(4)

     See COM(2016) 727 final, 16.11.2016, and:  http://ec.europa.eu/economy_finance/economic_governance/sgp/budgetary_plans/index_en.htm  

(5)

     As the submission deadline of 15 October fell on a Saturday in 2016, in line with the applicable legal rules, the deadline was extended to Monday 17 October.

(6)

     An updated version of the Two-Pack Code of Conduct is forthcoming, with the current version available at http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/2014-11-07_two_pack_coc_amended_en.pdf

(7)

     Council Recommendation of 14 July 2015 on the implementation of the broad guidelines for the economic policies of the Member States whose currency is the euro (OJ C 272, 18.8.2015, p. 100).

(8)

   See Council Recommendation on the economic policy of the euro area:
http://data.consilium.europa.eu/doc/document/ST-5540-2016-INIT/en/pdf

(9)

     See COM(2016) 726 final, 16.11.2016.

(10)

     In the case of Germany, there is no independent body in charge of producing or endorsing macroeconomic forecasts.

(11)

     When referring to Member States' plans, data for 2015 are based on the figures included in the DBPs and thus may not incorporate revisions made by Eurostat as part of the autumn 2016 EDP notification.

(12)

     The DFE is an alternative indicator of the fiscal effort developed for analytical purposes and is separate from the indicators used to assess compliance under the SGP. It consists of a 'bottom-up' approach on the revenue side and an essentially 'top-down' approach on the expenditure side. For further information, see part III of "Report on Public Finances in EMU 2013", European Economy, 4, 2013.

(13)

   Germany, Estonia, Lithuania, Luxembourg, and the Netherlands. Moreover, two Member States are expected to remain in Excessive Deficit Procedure next year, namely Spain and France.

(14)

     These principles were affirmed by the Eurogroup on 5 October 2015: http://www.consilium.europa.eu/en/meetings/eurogroup/2015/10/05/ .

(15)

     The planned reduction of the aggregate debt ratio is much smaller when excluding Germany from the aggregate (-1.6 versus -3.9 percentage points over 2015-17).

(16)

     Member States' debt requirements under the SGP differ depending on whether they are in the corrective or preventive arm and whether their debt ratio is above or below 60% of GDP.

(17)

      http://data.consilium.europa.eu/doc/document/ST-14345-2015-INIT/en/pdf  

(18)

  http://www.consilium.europa.eu/en/press/press-releases/2016/09/09-eurogroup-statement/  

(19)

See COM(2016) 727 final, 16.11.2016.

(20)

     The Commission's S1 sustainability indicator shows the total effort required over 2016-21 so as to bring debt to 60% of GDP by 2031, taking into account contingent liabilities related to ageing. It points to an additional adjustment of 1.8% of GDP for the euro area over the next five years. This translates into an additional yearly adjustment of approximately 1/3% of GDP in 2016 and the four subsequent years.

(21)

      http://ec.europa.eu/economy_finance/economic_governance/sgp/budgetary_plans/index_en.htm  

(22)

     The Commission, in consultation with the Member States, has developed a screening tool to signal cases where the results of the agreed methodology could be interpreted as being economically counterintuitive. In these cases, a detailed qualitative analysis has been carried out, including on the possible implications for the concerned Member States' requirements under the SGP (see Box 1).

EUROPEAN COMMISSION

Brussels, 16.11.2016

COM(2016) 730 final

ANNEXES

to the

COMMUNICATION FROM THE COMMISSION

2017 Draft Budgetary Plans : Overall Assessment

ANNEX I: Country-specific assessment of DBPs

Member States under the preventive arm of the SGP

Plans compliant with the country's obligations

The Commission is of the opinion that the Draft Budgetary Plan of Germany, which is currently under the preventive arm of the SGP and subject to the debt rule, is compliant with the provisions of the SGP. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', Germany’s favourable budgetary situation should provide scope to cover additional expenditure that may result from the strong inflow of asylum seekers as well as to further increase public investment in infrastructure, education, research and innovation, as recommended by the Council in the context of the European Semester. The Commission is also of the opinion that Germany has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Estonia, which is currently under the preventive arm, is compliant with the provisions of the SGP. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', Estonia is invited to implement its 2017 budget.

The Commission is of the opinion that the Draft Budgetary Plan of Luxembourg, which is currently under the preventive arm, is compliant with the provisions of the SGP. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', Luxembourg's budgetary situation could provide some scope to ensure a supportive budgetary stance, while preserving the long-term sustainability of national public finances. The Commission is also of the opinion that Luxembourg has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of the Netherlands, which is currently under the preventive arm and subject to the (transitional) debt rule, is compliant with the provisions of the SGP. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Netherlands’ budgetary situation could provide some scope to ensure a supportive budgetary stance, while preserving the long-term sustainability of national public finances. The Commission is also of the opinion that the Netherlands has made no progress with regard to the structural part of the fiscal country specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Slovakia, which is currently under the preventive arm is compliant with the provisions of the SGP. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to rigorously implement the 2017 budget. The Commission is also of the opinion that Slovakia has made some progress with regard to the structural part of the fiscal country specific recommendations issued by the Council in the context of the 2016 European Semester and invites the authorities to make further progress especially in the area of improving tax compliance.

Plans broadly compliant

The Commission is of the opinion that the Draft Budgetary Plan of Ireland, which is currently under the preventive arm and subject to the transitional debt rule, is broadly compliant with the provisions of the SGP. At the same time, the government's decision to use a large part of volatile, still uncertain, tax intakes to allocate additional expenditure in 2016 is not in line with Council recommendations in the context of the European Semester which ask Ireland to use windfall gains from better-than-expected economic and financial conditions to accelerate the deficit and debt reduction. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. Furthermore, the Commission is also of the opinion that Ireland has made some progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Latvia, which is currently under the preventive arm, is broadly compliant with the provisions of the Stability and Growth Pact. According to the Commission 2016 autumn forecast, a small deviation is projected over 2016 and 2017 together as the deviation in 2016 is forecast not to be fully compensated for in 2017. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Latvia has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Malta, which is currently under the preventive arm and subject to the debt rule is broadly compliant with the provisions of the SGP. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Malta has made no progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Austria, which is currently under the preventive arm and subject to the (transitional) debt rule until 2016 and to the debt rule from 2017 is broadly compliant with the provisions of the SGP if the current estimate of the budgetary impact in 2016 of the exceptional inflow of refugees and security measures is deducted from the requirement. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Austria has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

Plans at risk of non-compliance

The Commission is of the opinion that the Draft Budgetary Plan of Belgium, which is currently under the preventive arm and subject to the (transitional) debt rule, is at risk of non-compliance with the provisions of the SGP. The Commission projects a significant deviation from the required adjustment path towards the MTO in 2016 and, as a result of this, also over 2016 and 2017 taken together. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission therefore invites the authorities to implement all planned measures within the national budgetary process and to ensure that the 2017 budget complies with the SGP. The Commission is also of the opinion that Belgium has made no progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Italy, which is currently under the preventive arm and subject to the debt rule, is at risk of non-compliance with the provisions of the SGP. In particular, according to the Commission 2016 autumn forecast there is a risk of significant deviation from the required adjustment path towards the MTO in 2017. Moreover, without the full allowance of 0.75% of GDP granted under the structural reform and investment clause, the Commission 2016 autumn forecast would point to a risk of significant deviation from the required adjustment path towards the MTO also in 2016. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Italy has made some progress with regard to the structural part of the fiscal country-specific recommendation issued by the Council in the context of the 2016 European Semester and thus invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Cyprus, which is currently under the preventive arm of the SGP and subject to the transitional debt rule, is at risk of non-compliance with the provisions of the SGP. The Commission projects a significant deviation from the MTO in 2017. In particular, the Draft Budgetary Plan for 2017 plans a fiscal relaxation without compensatory measures, which leads to a risk of significant deviation from the adjustment path towards the MTO in 2017. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Cyprus has made some progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and invites the authorities to make further progress.

The Commission is of the opinion that the Draft Budgetary Plan of Lithuania, which is currently under the preventive arm and submitted a Draft Budgetary Plan on the basis of unchanged policies, is at risk of non-compliance with the provisions of the Stability and Growth Pact. According to the Commission 2016 autumn forecast, a significant deviation from the MTO is to be expected in 2017. The Commission will continue to closely monitor Lithuania's compliance with the obligations under the SGP, notably in connection with the assessment of the next Stability Programme. In the context of the overall assessment of a possible deviation from the adjustment path towards the MTO in 2017, the Commission will take into account the considerations presented in its opinion on the Draft Budgetary Plan on Lithuania's possible eligibility for flexibility under the SGP. Particular attention will be paid to an actual progress made with the structural reform agenda, taking into account the country-specific recommendations adopted by the Council on 12 July 2016. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the Stability and Growth Pact. As soon as a new government takes office and as a rule at least one month before the draft budget law is planned to be adopted by the national parliament, the authorities are invited to submit to the Commission and the Eurogroup an updated Draft Budgetary Plan.

The Commission is of the opinion that the Draft Budgetary Plan of Slovenia, which is currently under the preventive arm and subject to the transitional debt rule, is at risk of non-compliance with the provisions of the SGP in 2017. The Commission 2016 autumn forecast for 2017 projects a significant deviation from adjustment path towards the MTO over 2016 and 2017 taken together. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP rules. The Commission is also of the opinion that Slovenia has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and invites the authorities to accelerate progress.

The Commission is of the opinion that the Draft Budgetary Plan of Finland, which is currently under the preventive arm, is at risk of non-compliance with the provisions of the SGP. In particular, according to the Commission 2016 autumn forecast there is a risk of significant deviation from the required adjustment path towards the MTO in 2017. The Commission will continue to monitor closely Finland's compliance with the obligations under the SGP, notably in connection with the assessment of the next Stability Programme. In the context of the overall assessment of a possible deviation from the adjustment path towards the MTO in 2017, the Commission will take into account the considerations presented in its opinion on the Draft Budgetary Plan on Finland's possible eligibility for flexibility under the SGP. Particular attention will be paid to the existence of credible plans for the resumption of the adjustment path towards the MTO and to progress made with the structural reform agenda, taking into account the country-specific recommendations adopted by the Council on 12 July 2016. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Finland has made some progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and invites the authorities to make further progress.

Member States under the corrective arm of the SGP

Plans broadly compliant

The Commission is of the opinion that the Draft Budgetary Plan of France, which is currently under the corrective arm, is broadly compliant with the provisions of the SGP, as the autumn forecast projects that the deficit will be slightly below the threshold value of 3% in 2017, although the correction would not be durable in 2018 under a no policy change scenario. The Commission 2016 autumn forecast for 2017 projects that the excessive deficit will be corrected in a timely manner, but there is a significant shortfall in fiscal effort compared to the recommended level. Moreover, the projected correction of the excessive deficit would not be durable as the deficit in 2018 is projected to increase to 3.1% of GDP at unchanged policies. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission therefore invites the French authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP rules. The Commission is also of the opinion that France has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester and thus invites the authorities to accelerate progress.

Plans at risk of non-compliance

The Commission is of the opinion that the Draft Budgetary Plan of Spain, which is currently under the corrective arm of the SGP and submitted a Draft Budgetary Plan on the basis of unchanged policies, is at risk of non-compliance with the provisions of the SGP. While acknowledging the no-policy-change nature of those projections, the Commission's forecast for 2017 projects that neither the intermediate headline deficit target, nor the recommended fiscal effort will be achieved. Therefore, in line with the Commission Communication 'Towards a positive fiscal stance for the euro area', further measures will be needed to meet the headline deficit and structural effort targets going forward. Until such measures are taken, risks to the timely and durable correction of the excessive deficit by 2018 remain. The Commission is also of the opinion that Spain has made limited progress in responding to the specific Council requirements to strengthen its fiscal framework and its public procurement policy framework. The Commission therefore invites the authorities to accelerate progress. The Commission invites Spain to submit to the Commission and the Eurogroup an updated Draft Budgetary Plan for 2017, showing compliance with the requirements set out in the Council decision of 8 August 2016, in principle at least one month before the draft budget law is planned to be adopted by the national parliament. The updated Draft Budgetary Plan will also have to include information on the actions being taken in response to the Council requirements to strengthen Spain's fiscal and public procurement policy frameworks, in accordance with Article 1(5) and (6) of the Council decision to give notice of 8 August 2016. The Commission will re-examine compliance with the requirements set out in the above-mentioned Council decision on the basis of the information in the updated Draft Budgetary Plan.

The Commission is of the opinion that the Draft Budgetary Plan of Portugal, which is currently under the corrective arm of the SGP and could become subject to the preventive arm of the SGP from 2017, if a timely and sustainable correction of the excessive deficit is achieved, is at risk of non-compliance with the provisions of the SGP. In particular, the Commission forecast for 2017 projects a significant deviation from the required adjustment path towards the MTO and non-compliance with the debt reduction benchmark. The projected deviation however exceeds the threshold for a significant deviation by a very narrow margin. The risks seem therefore contained provided the necessary fiscal measures are delivered. In line with the Commission Communication 'Towards a positive fiscal stance for the euro area', the Commission therefore invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2017 budget will be compliant with the SGP. The Commission is also of the opinion that Portugal has made limited progress with regard to the structural part of the fiscal country-specific recommendations issued by the Council in the context of the 2016 European Semester, and thus invites the authorities to accelerate progress.

ANNEX II: The methodology and assumptions underpinning the Commission autumn 2016 forecast

According to Article 7(4) of Regulation (EU) No 473/2013, "the methodology and assumptions of the most recent economic forecasts of the Commission services for each Member State, including estimates of the impact of aggregated budgetary measures on economic growth, shall be annexed to the overall assessment". The assumptions underlying the Commission 2016 autumn forecast, which is produced independently by Commission staff, are explained in the forecast document itself 1 .

Budgetary data up to 2015 are based on data notified by Member States to the Commission before 1 October 2016 and validated by Eurostat on 21 October. Eurostat has made no amendments to the data reported by Member States during the autumn 2016 notification round. Eurostat has withdrawn the reservations on the quality of the data reported by France in relation to (1) the classification of the French Deposit Guarantee and Resolution Funds and (2) the recording of settlements costs related to the restructuring of complex debt instruments issued by local government. Eurostat is maintaining the reservation on the quality of the data reported by Belgium in relation to the sector classification of hospitals. Eurostat has expressed a reservation on the quality of the data reported by Cyprus in relation to a series of technical issues, such as the recording of EU flows.

For the forecast, measures in support of financial stability have been recorded in line with the Eurostat Decision of 15 July 2009 2 . Unless reported otherwise by the Member State concerned, capital injections known in sufficient detail have been included in the forecast as financial transactions, i.e. increasing the debt, but not the deficit. State guarantees on bank liabilities and deposits are not included as government expenditure, unless there is evidence that they have been called on at the time the forecast was finalised. Note, however, that loans granted to banks by the government, or by other entities classified in the government sector, usually add to government debt.

For 2017, budgets adopted or presented to national parliaments and all other measures known in sufficient detail are taken into consideration. In particular, all the information included in the DBPs submitted by mid-October is reflected in this forecast. For 2018, the 'no-policy change' assumption used in the forecasts implies the extrapolation of revenue and expenditure trends and the inclusion of measures that are known in sufficient detail. 

European aggregates for general government debt in the forecast years 2016-18 are published on a non-consolidated basis (i.e. not corrected for intergovernmental loans). To ensure consistency in the time series, historical data are also published on the same basis. For 2015, this implies a debt-to-GDP ratio in the euro area (19 MS) which is 2.2 percentage points higher than the consolidated general government debt ratio published by Eurostat in its news release 186/2015 of 21 October 2016 3 . General government debt projections for individual Member States in 2016-18 include the impact of guarantees to the EFSF 4 , bilateral loans to other Member States, and the participation in the capital of the ESM as planned on the cut-off date of the forecast.

According to the Commission autumn 2016 forecast, the aggregate budgetary measures in the DBPs for 2016 increase the aggregate deficit by around 0.1% of GDP. Expenditure measures are estimated to reach around 0.1% of GDP in the aggregate, while revenue measures, in the aggregate, have a deficit-increasing effect of less than 0.1% of GDP. Overall, the mechanical impact on growth in the short-term would be only marginal (less than 0.1 percentage point).

It is important to be prudent in interpreting this estimate:

Not acting on fiscal imbalances could heighten financial-asset fragility and lead to higher spreads and lending rates, with a negative impact on growth.

The Regulation aims at evaluating the effect of the measures taken in the DBPs. So measures taken and having entered into force before the DBP are not included in the assessment (even if they can affect the forecast).

Measures taken with effect in 2017 can also compensate for existing measures having a one-off impact in 2016 and for the trend increase in expenditure. At the EA-18 aggregate level, the Commission evaluates one-offs in 2016 at 0.1% of GDP (implying an improvement in the government balance) and the trend increase in expenditures (as measured by the change in the cyclically-adjusted primary expenditure ratio) in absence of policy measures at -0.1% of GDP.

ANNEX III: Sensitivity analysis

According to Article 7 of Regulation (EU) No 473/2013, "the overall assessment shall include sensitivity analyses that provide an indication of the risks to public finance sustainability in the event of adverse economic, financial or budgetary developments". This Annex therefore presents a sensitivity analysis of public debt developments to possible macroeconomic shocks (to growth, interest rates and the government primary balance), relying on results from stochastic debt projections 5 . The analysis allows gauging the possible impact on public debt dynamics of downside and upside risks to nominal GDP growth, the effects of positive/negative developments on financial markets, translating into lower/higher borrowing costs for governments, and fiscal shocks affecting the government budgetary position.

With stochastic projections the uncertainty in future macroeconomic conditions is featured in the analysis of public debt dynamics around a 'central' debt projection scenario, which corresponds respectively to the Commission 2016 autumn forecast scenario and the DBPs' forecast scenario in the two panels of the graph below, reporting results for the EA-18 (in both cases the usual no-fiscal policy change assumption is made beyond the forecast horizon) 6 . Shocks are applied to the macroeconomic conditions (short-term and long-term interest rates on government bonds; growth rate; government primary balance) assumed in the central scenario to obtain the 'cone' (distribution) of possible debt paths presented in the graph below. The cone corresponds to a wide set of possible underlying macroeconomic conditions, with as many as 2000 shocks simulated on growth, interest rates and the primary balance. The size and correlation of the shocks reflect the variables' historical behaviour 7 . This implies that the methodology does not capture real-time uncertainty, which at the present juncture may be higher especially for the output gap. The resulting fan charts in the graph below therefore provide probabilistic information on debt dynamics for the EA-18, taking into account the possible occurrence of shocks to growth, interest rates and the primary balance of a magnitude and correlation mirroring those observed in the past.

The fan charts report the projected debt path under the central scenario (around which macroeconomic shocks are applied) as a dashed line, and the debt projection trajectory that divides into two halves the whole set of possible trajectories obtained by applying the shocks (the median) as a solid black line at the centre of the cone. The cone itself covers 80% of all possible debt paths obtained by simulating the 2000 shocks to growth, interest rates and the primary balance (as the lower and upper lines delimiting the cone represent respectively the 10th and the 90th percentiles of the distribution), thus excluding from the shaded area simulated debt paths (20% of the whole) that result from more extreme (less likely) shocks, or 'tail events'. The differently shaded areas within the cone represent different portions of the overall distribution of possible debt paths. The dark blue area (delimited by the 40th and 60th percentiles) includes the 20% of all possible debt paths that are closer to the central scenario.

Graph A3.1: Fan charts from stochastic public debt projections around the Commission's forecast scenario and the Draft Budgetary Plans' (DBP) forecast scenario

For both the Commission and the DBP forecast scenario, the fan charts highlight a probability of around 50% of a worse than forecasted debt-to-GDP ratio for the EA in 2017, due to the occurrence of adverse macroeconomic shocks 8 . Accounting for both downside and upside risks to the government primary balance, growth and financial market conditions in the two scenarios leads to a EA-18 debt in 2017 lying between around 86% and 92% of GDP with an 80% probability (as the cone represents 80% of all possible simulated debt paths). Lower and upper bounds of the debt ratio interval in 2017 would be fairly similar for the Commission scenario compared to the DBP scenario, due to a very small difference between the respective central forecasts to which shocks apply (a debt ratio at around 89% in the Commission scenario and the DBP scenario).

Beyond 2017, the horizon of the current DBPs, simulation results show that the difference in projected debt ratios under shocks between the Commission and the DBP scenarios remains fairly limited. At the end of the projection horizon considered in the fan charts (2021), there would be a 50% probability of a debt ratio higher than around 83% and 84½% of GDP in the DBP and Commission scenarios respectively. This difference is mainly due to the structural primary balance kept constant at a higher last forecasted surplus in the DBP scenario compared to the Commission scenario.

Note that since the size and correlation of the shocks reflect the variables' historical behaviour, the methodology does not capture real-time uncertainty, such as may exist in particular for assessing the output gap. Bearing in mind the past experience of significant revisions of output gap estimates, often in the direction of lower potential output than thought in real time, this suggests an additional source of risks on future debt paths that is not reflected in the previous analysis.

ANNEX IV. Graphs and Tables

Table A4.1: Headline deficit targets (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2016 autumn forecast (COM)

Table A4.2: Changes in structural balance (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2016 autumn forecast (COM)

Table A4.2b: Changes in structural primary balance (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2016 autumn forecast (COM)

Table A4.3: Debt-to-GDP ratio (% of GDP) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2016 autumn forecast (COM)

Table A4.4: Real GDP growth (%) for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2016 autumn forecast (COM)

Table A4.5: Composition of fiscal consolidation in 2016 and 2017 for the EA-18 according to the Stability Programmes (SP), the Draft Budgetary Plans (DBP) and the Commission 2016 autumn forecast (COM)

Table A4.6: Short-term elasticities underlying revenue projections for 2017 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2016 autumn forecast (COM) and OECD

Note: the comparison between the elasticities derived from the DBPs and the Commission's forecast, on the one hand, and the OECD's elasticities, on the other, should be made with care. While the first two are net elasticities to GDP growth, the latter are, strictly speaking, computed with respect to the output gap. Differences are in general minor.

Table A4.7: Medium-Term budgetary Objectives (MTOs), as nominated in the spring Stability Programmes, and Minimum Benchmarks (MB) as from 2017 for EA-18

Note: * in the case of Slovenia, the table shows the minimum MTO, since Slovenia nominated an MTO in its 2016 Stability Programme, which does neither adequately take into account the need to bring debt below the Treaty reference value nor the implicit liabilities related to ageing.
Graph A4.1: Discretionary Fiscal Effort: Draft Budgetary Plans (DBP) versus Commission 2016 autumn forecast (COM)

Note: The data provided in the Draft Budgetary Plans per se is not sufficiently detailed to calculate the DFE. Additional information provided by ECFIN country desks was thus used to approximate the DFE.

Graph A4.2a: Projected changes in expenditure ratios for 2017 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2016 autumn forecast (COM)

The graph shows the changes in expenditure ratios (lhs) between 2016 and 2017 and the ratios in 2017 (rhs).

Graph A4.2b: Projected changes in revenue ratios for 2017 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2016 autumn forecast (COM)

The graph shows the changes in revenue ratios (lhs) between 2016 and 2017 and the ratios in 2017 (rhs).

Graph A4.3a: Projected changes in main types of expenditure (% of GDP) for 2017 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2016 autumn forecast (COM)

The graph shows the contributions from the main components of expenditure to the projected changes in expenditure-to-GDP ratios.

Graph A4.3b: Projected changes in main types of tax revenue (% of GDP) for 2017 in EA-18: Draft Budgetary Plans (DBP) versus Commission 2016 autumn forecast (COM)

The graph shows the contributions from the main components of revenue to the projected changes in revenue-to-GDP ratios.

Graph A4.4: Comparison of headline government balance (% of GDP) as projected for 2017 by the Commission 2016 autumn forecast (COM) and by the Draft Budgetary Plans (DBP)

The graph plots the 2017 nominal budget balances from the Commission's forecast (horizontal axis) against those planned in the DBPs (vertical axis). Member States above (below) the bi-sector line are those where the Commission forecasts a higher (lower) nominal balance than the DBPs.

Graph A4.5: Decomposition of the difference in debt targets (% of GDP) for 2017 between the Commission 2016 autumn forecast and the Draft Budgetary Plans

The graph breaks the projected differences in debt-to-GDP ratios down into differences in base effects, primary balances, stock-flow adjustments and snowball effects. The snowball effect represents the difference between projected growth rates and interest rates.

(1)

     Methodological assumptions underlying the Commission autumn 2016 forecast, available at: http://ec.europa.eu/economy_finance/publications/eeip/forecasts_en.htm ).

(2)

     Available at: http://ec.europa.eu/eurostat/documents/1015035/2041337/FT-Eurostat-Decision-9-July-2009-3--final-.pdf .

(3)

     Available at: http://ec.europa.eu/eurostat/documents/2995521/7704449/2-21102016-AP-EN.pdf/f113daf6-9f48-4bb1-832d-e3a71e5ef009  .

(4)

     In line with the Eurostat decision of 27 January 2011 on the statistical recording of operations undertaken by the EFSF, available at: http://ec.europa.eu/eurostat/documents/2995521/5034386/2-27012011-AP-EN.PDF .

(5)

     The methodology for stochastic public debt projections used here is presented in the European Commission's Fiscal Sustainability Report 2015, Section 1.3.2, and in Berti K. (2013), "Stochastic public debt projections using the historical variance-covariance matrix approach for EU countries", European Economy Economic Paper No. 480.

(6)

     This entails that the EA-18 structural primary balance is assumed to remain constant at the last forecasted value – a 0.8% surplus in 2017 in the DBP scenario, against a 0.5% surplus in 2018 in the Commission scenario – over the rest of the projection horizon.

(7)

     The assumption is made that shocks follow a joint normal distribution.

(8)

     In 2017, the dashed line representing forecasts for the central scenario in the two fan charts corresponds, in both the DBP and Commission scenario, with the line indicating the 50th distribution percentile (meaning that 50% of all possible values for the debt-to-GDP ratio in 2017 would lie above the forecasted value).