EDP/GFS revisions – user perspective Ingrid TOMING, DG ECFIN

Outline – use of EDP/GFS statistics in budgetary surveillance Corrective arm of SGP Opening and closing of EDPs Assessing "action taken" and intermediate targets Preventive arm of SGP Forecast Statistical revisions in DG ECFIN's work

Corrective arm of SGP – opening and abrogating EDPs Depend on notified data (past and planned), plans in SCPs/DBPs and Commission's forecast For opening and closing of EDPs, nominal data matters When an EDP is opened, MS receives a recommendation Deadline to adopt necessary measures to comply with the recommendation (max 6 months) MS to report to the Council and the Commission Deadline to end the excessive deficit situation As a rule, the year after its identification (t+1 for excessive deficit observed in t-1) Path with intermediate nominal targets Annual fiscal effort In structural terms, consistent with the nominal path, at least 0.5% of GDP annually

Assessing compliance with the EDP recommendation (simplified view) Are the (intermediate) nominal targets met? If not, is the recommended fiscal effort met? Top-down approach (change in the structural balance), adjusted for difference between the forecast at the time of the recommendation and the outcome, including revenue shortfalls/windfalls Bottom-up approach (actual fiscal measures) Outcome: Abrogation (if deficit sustainably below 3%); New recommendation (if deadline missed but fiscal effort done); Stepping up the procedure

Some descriptive statistics on EDPs 38 EDPs leading to 69 recommendations over 2003-2014 (initial and revised) Average deficit at the start of new procedures 5.5% of GDP, average debt 61.1% Average length of recommendation (new and revised procedures) 2.5 years Average recommended annual structural effort (new and revised procedures) 1.1% of GDP

Countries under corrective and preventive arm at the end of the year

Preventive arm of SGP Preventive arm centred on MTO MTO = target in structural terms Compliance with the preventive arm Depend on the level of structural balance (at the MTO or not) Possibility for temporary deviation from the MTO or adjustment path in case of systemic reforms If not at MTO: deviation from and progress towards the MTO are measured in two ways: Δ structural balance and expenditure benchmark, similar (but not identical) to top-down and bottom-up under the corrective arm

Recap: measuring fiscal effort / progress towards or deviation from MTO Top-down Bottom-up Corrective arm: actual fiscal measures Change in the structural balance Revenue: measures taken Under corrective arm: adjusted for developments compared to the EDP scenario Expenditure: evolution of expenditure under control of government In the context of EDP recommendation Preventive arm: expenditure benchmark Evolution of expenditure net of discretionary revenue measures Excludes interest, cyclical unemployment benefits and expenditure fully matched by Union funds revenue Compared to potential growth rate

Fiscal forecast in DG ECFIN (1) Forecast sheet is based on the national accounts approach Ca 40 compulsory variables for general government, largely corresponding to "Table 2", i.e. GFS Most desks have a more detailed approach, tailored to the needs and availability of data Compulsory variables are (mostly) annual, but quarterly data are used by many desks

Fiscal forecast in DG ECFIN (2) "No policy change" fiscal forecast Extrapolates past revenue and expenditure trends and relationships in a way that is consistent with past policy orientations Reflects all measures that are sufficiently detailed, and are adopted or at least credibly announced May include working assumptions to deal with possible structural breaks

Fiscal forecast in DG ECFIN (3) Spring and autumn forecasts perfectly aligned to the notification calendar, winter forecast is more flexible Each forecast leads to the assessment of budgetary situation for countries under corrective and preventive arm Spring forecast feeds into the assessment of Stability and Convergence Programmes Autumn forecast feeds into the assessment of Draft Budgetary Plans for Euro Area

Use in surveillance: EDP deficit and debt EDP deficit and debt (nominal) Treaty based use Opening and abrogation of EDPs Intermediate progress with respect to nominal EDP targets Structural balance = cyclically adjusted balance net of one-offs, top-down approach Measuring fiscal effort (corrective arm) Measuring distance from and adjustment towards the MTO (preventive arm)

Use in surveillance: GFS data DG ECFIN fiscal forecast Almost all "Table 2" variables Adjustment for revenue windfalls/shortfalls in the top-down approach (corrective arm) Revenue (compared to the forecast) Bottom-up approach (corrective arm) / expenditure benchmark (preventive arm) Total expenditure Interest expenditure GFCF (Expenditure fully matched by revenue from the EU) (Cyclical unemployment expenditure – builds on COFOG)

User view on statistical revisions (1) EDP deficit / debt If EDP deficit turns out higher than previously notified, also the correction will take longer: a year may be lost… If there is a risk of revision: should be explicit Inconsistency between EDP and GFS Can lead to a wrong conclusion: nominal deficit is not met, but the fiscal effort is (wrongly) deemed fulfilled To be avoided Revenue and expenditure levels Can lead to a different conclusion because of assymmetric treatment of revenue and expenditure in the bottom-up approach Mitigating factor: rate of change is usually more important than level

User view on statistical revisions (2) Inconsistency between GFS and the rest of macroeconomic data Least harmful (but not entirely problem-free) Public information on the source of discrepancies is a very good idea (national accounts category could be useful…) To consider in case of breaks in series: publishing at least one period on the basis of both "old" and "new" approach