Updated convergence programme of Estonia, 2006-2010 - Main contents

EN

Official Journal of the European Union

C 72/5

On 27 February 2007 the Council examined the updated convergence programme of Estonia, which covers the period 2006 to 2010.

The macroeconomic scenario underlying the programme envisages that real GDP growth abates from a peak of 11 % in 2006 to 8

% in 2007 and 7

% per year in the outer years. Assessed against currently available information, this scenario appears to be based on cautious growth assumptions. However, the projected medium-term path of a smooth deceleration of growth from the current pace prone to overheating is clearly surrounded by risks. The programme's projections for inflation appear realistic.

For 2006, the general government surplus is estimated at 2,5 % of GDP in the Commission services' autumn 2006 forecast, against a target of 0,3 % of GDP set in the previous update of the convergence programme. The much better outcome, also expected in the new update, arises from carry-over from the better-than-expected outcome in 2005 and from the growth surprise in 2006. Expenditure has been lower than planned in the budget.

The main goals of the medium-term budgetary strategy embodied in the programme are keeping the general government finances at least in balance and securing long-term sustainability in the light of the budgetary impact of population ageing. The budgetary strategy foresees the headline general government surplus to decline from 2

% of GDP in 2006 to around 1

% in 2007-2008 and rebound to around 1

% of GDP thereafter. The primary balance will follow a similar profile, given the negligible weight of interest expenditure. The drop in the surplus in 2007 is driven by a rise in the expenditure-to-GDP-ratio while the revenue ratio follows a declining trend. From 2008 onwards, the overall revenue and expenditure ratios decline in lock-step, reflecting notably the income tax cuts and expenditure growth remaining below the buoyant nominal GDP growth. The new programme departs from the past practice of always targeting zero balance for general government finances (which were as a rule overachieved over the last years) and targets instead a sizeable surplus over the entire programme period, which is a step forward in responding to the cyclical conditions of the economy. Compared to the previous update, the targets from 2007 onwards have been revised upwards by at least 1 percentage point of GDP against the background of a more favourable (and more realistic) macroeconomic scenario.

The structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to drop by about 1 percentage point to reach

% of GDP in 2007, and rebound to above 1 % of GDP in 2008 and above 1

% of GDP in 2009 and 2010. As in the previous update of the convergence programme, the medium-term objective (MTO) for the budgetary position presented in the programme is a balanced position in structural terms which the programme plans to maintain throughout the programme period. As the MTO is more demanding than the minimum benchmark (estimated at a deficit of around 2 % of GDP), achieving it should fulfil the aim...