Croatia and Portugal: Deficits below 3% of GDP, procedures closed

Source: Council of the European Union (Council) i, published on Friday, June 16 2017.

On 16 June 2017, the Council closed excessive deficit procedures for Croatia and Portugal, confirming their deficits have dropped below the EU's 3% of GDP reference value.

The Council thereby abrogated its decisions on the existence of excessive deficits in the two countries.

As a consequence, only four of the EU's 28 member states remain subject to excessive deficit procedures, continuing the positive trend since 2011. A peak was reached during a 12-month period in 2010-11 when procedures were open for 24 member states.

Member states are required by article 126 of the Treaty on the Functioning of the European Union to avoid excessive government deficits. The procedure is used to support a return to sound fiscal positions.

Following an exit from the procedure, member states remain subject to the preventive arm of the Stability and Growth Pact, the EU's fiscal rulebook.

Croatia

Croatia has been subject to an excessive deficit procedure since January 2014, when it was found to be in breach of both deficit and debt criteria. The Council issued a recommendation calling for the deficit to be corrected by 2016.

The Council noted that Croatia planned a general government deficit of 5.5% of GDP for 2014, above the 3% of GDP reference value. It planned a general government gross debt reaching 62% of GDP in 2014, thus exceeding the EU's 60% debt-to-GDP reference value for government debt.

The Council set deficit targets of 4,6 % of GDP for 2014, 3,5 % of GDP for 2015 and 2,7 % of GDP for 2016.

Croatia's general government deficit amounted to 0.8% of GDP in 2016, down from 3.4% of GDP in 2015. The Commission's 2017 spring economic forecast projects the deficit to rise to 1.1% of GDP in 2017, and to fall back to 0.9% of GDP in 2018. The deficit is thus set to remain below the 3% of GDP reference value over the forecast horizon.

Croatia's gross government debt-to-GDP ratio peaked at 86.7% in 2015 and fell to 84.2% in 2016. The spring forecast projects it to decrease further to 79.4% in 2018, backed by strong nominal GDP growth. In that manner, the 2016 debt ratio fulfils the forward-looking element of the EU's debt reduction benchmark.

The Council concluded that Croatia's deficit has been corrected.

Portugal

Portugal has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by 2013.

In April 2011 however, after several months of market pressure on its sovereign bonds, Portugal requested assistance from international lenders. It obtained a €78 billion package of loans from the EU, the euro area and the IMF. In October 2012, the Council extended the deadline for correcting the deficit by one year to 2014, given the recession at that time in Portugal.

Economic prospects deteriorated further, and the general government deficit reached 6.4% of GDP in 2012. In June 2013, the Council extended the deadline for correcting the deficit by another year, to 2015.

Portugal exited its economic adjustment programme in June 2014.

However, its general government deficit came out at 4.4% of GDP in 2015 and it thereby missed the deadline set by the Council. Portugal's fiscal effort fell significantly short of what the Council had recommended.

In July 2016, the Council concluded that Portugal's response to its June 2013 recommendation had been insufficient.

A month later, following a reasoned request from Portugal, the Council decided not to impose a fine. It stepped up the excessive deficit procedure, calling for the deficit to be corrected by 2016 and giving notice of measures to be taken. It called on Portugal to reduce its general government deficit to 2.5% of GDP in 2016 and to implement consolidation measures amounting to 0.25% of GDP during the year.

Portugal's general government deficit amounted to 2.0% of GDP in 2016. The Commission's 2017 spring economic forecast projects deficits of 1.8% of GDP in 2017 and 1.9% of GDP in 2018, thus remaining below the 3% of GDP reference value over the forecast horizon. The potential deficit-increasing impact of bank support measures should not put at risk the durable reduction of the deficit.

Portugal's gross government debt-to-GDP ratio reached 130.4% in 2016. The spring forecast projects it to decrease to 128.5% in 2017 and 126.2% in 2018, due to primary surpluses.

The Council concluded that Portugal's deficit has been corrected.

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The decisions were taken at a meeting of the Economic and Financial Affairs Council.

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