BUDGETARY CONSOLIDATIONS IN EU-12 Tulai Constantin Universitatea Babeș -Bolyai, Facultatea de Științe Economice și Gestiunea Afacerilor Cluj Napoca,… [613156]

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BUDGETARY CONSOLIDATIONS IN EU-12

Tulai Constantin
Universitatea Babeș -Bolyai, Facultatea de Științe Economice și Gestiunea Afacerilor Cluj
Napoca, str. Teodor Mihali 58-60, [anonimizat]
Sabău -Popa Claudia Diana
Universitatea din Oradea, Facultatea de Științe Economice Oradea, str. Universității nr. 1,
[anonimizat], [anonimizat]

This article treats on the behaviour of fiscal autorities of the twelve new state members o f the EU during
the post-adhesion period. We analyze the factors which determined the fiscal consolid ations of the new
member states, identifying two groups of states differing significantly in their fiscal behaviour . Because of
the limited number of pages of this article, we presented the budgetary policies of only six countries, three
from each group. Through the research made on the behaviour of the grou p of countries irresponsible from
fiscal point of view, we concluded that the great budgetary deficits have their orig ins in the superficial
approach and the lack of desire to politically implement the expenditures reductions, which can be
observed in the repeated revisions of the budget and the inconsideration of the d eficit reduction.

Keywords: stability pact, budgetary deficit, excessive deficit procedure

Classification JEL: H60, F36

The concept of european integration is based on the coordination of the ˝great orientation of
economic policies˝, based on a process of regular surveillance of the economic situation an d
economic policies from the member states. In order to assure the viability of the Economic and
Monetary Union and the stability of a currency, there have been elaborated the so-called
economic convergence criteria that must be accomplished by the states who want to adopt t he
euro currency: price stability implying the maintaining of the inflati on at low rates, severe
budgetary discipline which allows a deficit of maximum 3% and a rate of public debt of
maximum 60%, monetary stability in certain limits and interest rate conver gence for a long term.
Through the Stability and Growth Pact, adopted by the European Council in 1996 at Dublin, one
try to prevent the adoption of a relaxed and inadequate fiscal policy in one or more member states
of the European Union. Essentially, this Pact provides penalties applied authomati cally to the
member states which have an excessive deficit exceeding 3% of GDP, except the situati ons when
strong recessions are registered (a decrease of GDP with more than 2% means a sit uation of
recession). But the application of these penalties have been made in a flexible w ay, taking into
account the economic difficulties of the countries not respecting the engagement ( among whom
France, Italy, Germany) and the political equilibrium in the European Union.
Even if Great Britain, Danemark and Sweden chose not to participate to the Economic and
Monetary Union, they are obliged to respect the decisions taken by the EU regar ding the
coordination of the economic policies. These states are not obliged to respect t he dispositions of
common monetary policy, applied only to the states from the eurozone, but they must accept the
monitoring of their own economies by the European Union, in order it be able to establi sh
whether they accomplish the convergence criteria, in case they would like to adhere to the Euro
Zone.
An important result emerging from the recent study of the authors Evzen Kocenda, Ali M. Kutan,
Taner M. Yigit Fiscal convergence in the European Union , is the fact that there is a significant
level of heterogeneity in fiscal convergence, implying concerns regarding the abili ty of monetary
unions to provide fiscal convergence to their members. This observation proves the neces sity to
appoint future fiscal policies to improve the fiscal performances. Some countries, such as Poland
and Holland, have already included fiscal rules in their legislations. Of course, t he fact that the

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member states have different fiscal positions causes implementation problems, at least at the
beginning.
On the 1st May 2004, it took place the fifth enlargement of the European Union, re ceiving at
once ten new member states: Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Malta, Pol and,
Slovakia, Slovenia, Hungary, eight of which belonges to the ex-soviet orbit. After the
enlargement, the population of the European Union counted 77 million of habitants, its s urface
increased to 700 000 km² and its medium GDP decreased to 5%. The adhesion of Bul garia and
Romania, on the 1st January 2007 ended the fifth enlargement begun on the 1st May 2004. All
the twelve states declared to adopt the euro currency as soon as possible. In order to reali ze this,
the ten new member states must adjust their economic policies – more precisely, their fiscal and
monetary policies – but for the moment, it is the fiscal policy which proved to be the most
challenging. Some of these states have a fiscal deficit higher than 3% of GDP and si x form the
ten states have been put under excessive deficit procedure from the beginning of their adhesion to
the EU (among these, Hungary is still under excessive deficit procedure).
Fiscal policy proves to be even more difficult to be controlled by the authorities bec ause of the
political connotations. The Governments of these countries considered difficult t o convince the
electorate of the fact that this fiscal consolidation has a public interest and they entered into
collapse the moment they introced or barely just brouched the fiscal reform.
The ten new member states can be devided into two major groups: states violating the rules of the
Stability and Growth Pact and having been put under excessive deficit procedure in July 2004
(Cyprus, Czech Republic, Hungary, Malta, Poland and Slovakia) and states respecting the rules
of the Stability and Growth Pact and having very few debts (Estonia, Latvia, Lithuania and
Slovenia). For the moment, Romania and Bulgaria can be included in the second category.
The European Commission monitors the evolution of the public budget situation and the
ministerial debt of the new member states of the European Union in order to i dentify the major
errors of budgetary discipline. In turn, after having consented to the existence of t he excessive
budgetary deficit in the case of a member state, the Council of the European Union makes
recommendations regarding the limitation of the ministerial deficit of the concerned st ate.
We consider that the states violating the rules of the Stability and Grow th Pact increased the level
of their previewed deficit, more frequently and more severely than those corr esponding to the
Pact. The more spendthrift (squanderer) are the governments the more they tend to be excessively
ambitious regarding their concolidation plan, trying to convince the European Union instit utions
that they will be prepared on time for the Economic and Monetary Union. The major differ ences
between the first member states from before 2004 and the new member states are obvious,
because the new member states are based on the indirect taxes, especially on the value added tax
(VAT). The massive usage of the indirect taxes may be explained by the fact that t heir
procurement is more efficient than that of the direct taxes. The states from the EU-15 are more
based on the direct taxes, which represent almost the third part of their budgets. Simi larly, the
countries under excessive deficit procedure are based more on VAT regarding the form ation of
their budgetary income, while the others on the incomes resulting from the taxes put on the
incomes of the corporations and in a more reduced average on those resulting from the taxes put
on the incomes of the private persons, in comparison with the other countries 1.
We can define the fiscal consolidation as a period during which the budgetary deficit percentage
of GDP improved with more than 1% of GDP in the first year and it contin ued to improve in the
following years. It is sustained that the consolidation persists when the b udgetary deficit
percentage of GDP decreases.
In the following we will present a short description of the budgetary policy of six of the new
member states: Cyprus, Malta, Slovenia, Hungary, Bulgaria, Romania based on their
convergence program and we will try to discover the key factors which influenced t he fiscal

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position development, having priority for the integration of the Economic and Monetary Union of
the six new member states.
In Cyprus , the negative development from September 2001, affected the minor Cypriot economy
based on tourism, and had a negative effect on the position of the state´s budget. Since Janu ary
2003, a new fiscal reform came into effect, in the fields in which Cyprus had to conform to the
EU directives and the OECD indications to eliminate the practices of ˝fisc al paradise˝. The new
fiscal law imposes the same level of tax for the international and national com panies, but the rate
of tax of 10% remains however reduced. Because of the bad and repeated implementation of the
consolidation measures, as a consequence of the lack of political will and the impossi bility to
face the increase on the defence spending, agriculture and public administration spe nding, the
position of the state budget damaged during the whole pre-adhesion period. As a result, Cypr us
has been put under the excessive deficit procedure after 2004, which ended in June 2006. The
introduction of a middle term budgetary framework, begun in 2006, improved the quality cost s of
the ministry resort, and meanwhile, promoted the reallocation of expenditures in fav our of
economic increase. Due to this budgetary reform, in 2007 Cyprus registered a budgetary excedent
of 3,4% of GDP. Meanwhile, the Cypriot government repayed a major part of it s debts, using the
financial actives (sinking funds), which proves the improvement of the public finances quality.
As usually, the monetary and currency policies in Cyprus turned to the maintai nance of
macroeconomic stability and a low inflation, and since the 1st January 2008 euro has been
adopted as official currency. The deterioration of the current account form the l ast years seems to
be first of all the result of the deficit of commercial balance, as a consequence of high demand for
consumption and investments and the increase of the price of oil and other materia ls and wares.
In the field of tourism, Cyprus faces in the last period a problem of competition , a fact reflected
by the balance of current account in the field of tourism, which can be solved both by the
adjustment of prices and the relative modernization of tourist products. In this per iod of major
turbulence on the financial market, the general strategy of budgetary policy is to continue the
consolidation of public finances, in order ti keep reducing the public debts, through the reduction
of current expenditures and restructuring of public expenditures, in favour of capi tal expenditures
and those allocated to research and education, which can boost the economic increase 1.
Hungary reviewed continually its budgetary plans and postponed the setting in a straight line th e
budgetary deficit with the Stability and Growth Pact. The major reasons cited by the government
are the unpredictible high expenditures for the pensions, the wages of public offi cers, the
expenses related to health system and welfare and the unexpectedly increase in the cost s of the
ministerial debt service. Despite some reductions of expenditures, implemented during the fiscal
years 2003 and 2004, the budgetary deficit exceeded 3% from GDP after the integrati on in EU,
initializing the excessive deficit procedure. Until 2006, when the budgetary deficit reached the
maximum rate of 9,3% from GDP, the Hungarian budgetary framework was extremely
vulnerable to the fiscal slideslips. In 2006, it has been lanced an austerity plan, mea nt to decrease
the budgetary deficit under 3% until 2010, aiming at a strengthen of fiscal ity (espacially of
VAT), a reduction with 20% of the effective of public officers and the dramatic reduction of the
payments for the health system. After the gradual improvement of the transparency , planification
and budgetary control begun in 2006, in November 2008 it has been adopted the fiscal legisl ation
reform, containing multianual numeric norms and providing the constitution of a n ew Fiscal
Council. This new committee will elaborate independently macroeconomic and budgetary
previsions, evaluations on the fiscality and budgetary situation and will make propositio ns in the
budgetary field. Regarding the expenditures, there have been recently taken a series of positive
measures. For 2008, the budgetary deficit is estimated at 3,4% of GDP, in the previsi ons of the
Commission service from January 2009, this representing an improvement in comparison w ith
the 5% from the GDP in 2007. Despite the improvement of the budgetary deficit in the last years
in Hungary, the country remained vulnerable because of the high level of external debt . The main

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aim of the budgetary authorities on middle term is to reduce the budgetary deficit from 3,4% of
GDP in 2008 to 2,6% of GDP in 2009, followed by a slow reduction to 2,5% in 2010 and 2,2% of
GDP in 2011. On the whole, this budgetary consolidation of 1,2% of GDP is planned to be
equally distributed between the incomes and the payments. In order to assure a lasting fi scal
convergence, Hungary is advised by the European Union Council to take the necessary m easures
to reduce the budgetary deficit under 3% of GDP in 2009, and to reduce for a middle ter m the
public debt to the limit of 60% of GDP and to continue to reform the public debt, th e medical
care services and the education systems 1.
Malta entered into the 21st century with an enormous budgetary deficit of 6% of GDP, that
however has been a progress in comparison with the deficits registered in the second half of the
´90. Malta´s government lanced a consolidation program to reduce the deficit to a more
reasonable level, but this has been only a partial success. Partially, because of the events from the
11th September 2001, and partially because of the increase of payments on the public office rs
wages, on pensions, Malta didn´t manage t conform to the Stability and Growth Pact in 20041. In
2001, there has been introduced the Business Promotion Act offering fiscal stimulents ( reduction
of the tax on the profit, reduction of the tax on the reinvested profit) to the industrial societies
which demontrated a potential of increase and creation of new jobs in the manufacturer fie ld
(including the software domain), reparations and maintainance. These fiscal facilities were
available until 31.12.2008. In the last years, the fiscal policy of Malta has been submitted to some
significant reforms, reflecting especially the effort to improve its efficiency, the opening of
Malta´s economy to the international commerce and the setting in a straight line o f the tax system
with those existing in the EU. It has been important the increase, in 2004, of the standard rate of
VAT from 15% to 18%, which implied the increase of the fiscal incomes with about 1% of GDP.
In the same year, another modificaton in the tax system represented the introduction of an eco-
tax, meant to fight against pollution and to encourage the usage of containers. The incomes from
the tax on the profit of the societies continued to increase and they raised to 0,3% of GDP in
2007 1. In March 2007, the European Commission asked Malta to gipe up the discriminatory
system of taxing the foreign and international commerce companies until the end of 2010, and
Malta decided to abolish gradually the existing supporting system; thus, the internation al
commerce companies are taxed until the end of 2010 with a rate of tax on the profit of 4%, while
the rate of ta on the profit of national companies is of 35%. Malta escaped of the excessive deficit
procedure in May 2007, but the remarkable tendencies to reduce the general public def icit in th
period 2004-2007 ended temporarily in 2008, when the budgetary deficit is estimated to have
grown from 1,8% in 2007 to 3,5% of GDP, because of the decision to increase the pay ments. On
long term, the budgetary impact of aging is lower in Malta than in the averag e of the EU, with
decreasing payments on pensions in the GDP for long term according to the estimat ions made in
2005. However, the reform of the pesnion system in 2006, which aims at improving the pensi on
level at the same time with the increasing of the age of pension, implies higher payments on long
term. Malta entered the eurozone on the 1st January 2008. The fiscal policy from 2009 represent s
the global consolidation of the budget which is adequate and according to the European
Economic Recovery (adopted because of the high public deficit and debt), accepted in December
2008 by the European Council. Malta adopted several economic supporting measures in 2009.
Most of these measures are favourable and directed and are meant to the fields cons idered
stronger in face of the slowing down of the economic increase, for exemple, tourism and
manufacturing. Though the percentage of public debt remains high at 61,9%, one previews it will
diminish gradually to 60% taking into account the significant reduction betwe en 2004 and 2007.
Malta is advised by the European Union Council to resume the fiscal consolidation process to
reach again a deficit in GDP of 3% in 2009 and to stregthen its budgetary fr amework on middle
term in order to increase the efficiency of public expenditures, including the accela ration of the
projection and application of a reform of the healthcare system.

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Because of the deterioration of the budgetary deficit level, the Slovene government negociated a
new social agreement for the period 2003-2005 which, among others, included new rules of
wages index in the public field. It has also been made a similar attempt in the sen se of index and
rationalization of the social transfer system. On the other hand, the reduced tax r ates of the
incomes of individual persons and the modification of tax of the corporations put the pu blic
budget under negative pressure. The comprising fiscal reform initiated in 2005 keep being a key
project, having as objective the reduction of the fiscal incomes weight in GD P with 2% in the
period 2006-2009, expecting positive effects regarding the way of usage of work force and t he
economic concurrence. These measures have been completed with seven fiscal laws, applied in
2007, regarding the VAT, the taxes on the real estate wealth, taxes on ships, taxes on the incomes
of the corporations and the fiscal procedures, concerning the abolition of the double-tax of the
incomes and the increase of the transparency of the tax system. Regarding the payments, there
have been made modifications concerning the assistance and social protection system; especi ally,
the elligibility for the welfare and social assistance has been related to t he disponibility to accept
a job, while all the social transfers, except the pensions, are now indexed to the inflation instead
of the wages, expecting the creation of economies with payments of 1% of anual GDP. Since
2002, Slovenia adopted simultaneously the budgets for two consecutive years depending on a
base of calculation, a procedure that is kept continually. The public debt in Slovenia is very
reduced in comparison with the eurozone, of about 25,6% in 2007. The budgetary deficit in 2007
was of 0,7% in comparison with that of 1,2% in 2006, and in 2008 it was of 0,1% of G DP.
Slovenia registered a strong increase of GDP in the last years, reaching its maxi mum rate in
2007, the first adhesion year to the eurozone. For the future, it is considered to continue t he fiscal
consolidation to promote the macroeconomic stability and a lower inflation. However, the
viability on long term of the public finances in Slovenia keeps remaining a challenge, t aking into
account the significant effects of the aging on the public budget in the lack of a new reform of the
pension system 1.
Bulgaria deals with the existing macroeconomic imbalances through the maintainance of t he
existing fiscal policies. Despite the reduced percentage of public debt in GDP and the h igh
budget excess, the high rate of inflation and current account deficit prevented the government to
adopt a fiscal stimulation package of the internal demand. On long term, the country conf ronts
the necessity to improve the quality of public payments by improving the administ rative capacity
and the intesification of structural reforms. For 2008, the national budget surplus is estimated at
3% of GDP. Despite the significant increase of the import and of the high rate of inflation in
2008, the incomes gathered from indirect taxes represented 1,5% of GDP, less than it´s been
previewed. As a result of the introduction of reduced tax rate on the incomes of the indivi dual
persons of 10%, the incomes gathered from direct taxes represented 0,5% of GDP, less th an it´s
been anticipated in 2007. Concerning the public expenditures, which represented 1,75% of GDP,
the discipline was not entirely respected, because of the social payments and the supplimentary
infrastructure. The general conclusion is that Bulgaria had and still has as purpose the
maintainance of a solid budgetary position for the following three year s, too, intention reflected
in the planification of the budget surplus. However, Bulgaria is advised by the Europe an Union
Council to continue the present fiscal policy and to maintain the restriction of the payments
increase, in the purpose of correcting the existing internal imbalances and to conti nually
consolidate the efficiency of public expenditures 1.
In Romania , the fiscal policy, detensioned in the last years, has a key role in correcting the
increasing external imbalances, especially through the reorientation to the invest ments generating
economic increase. But the budgetary execution is prevented by the frequent rect ifications during
the budgetary exercice, which redirects the expenditures to the current expenditures, especially
wages and social transfers, as a result of the supplimentary incomes and the usage of the
expenditures for investments. In the last years, Romania adopted a series of mea sures regarding

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the consolidation of the budgetary program and execution and the improvement of fiscal
administration. In 2005, it has been introduced the unique rate of 16%, taxing the incomes of the
individual persons and the profit of societies. As a consequence, it has increased the weight of the
incomes from the direct taxes in the total of fiscal incomes from 25,07% in 20 04 to 32,04% in
2007. In 2006, it´s been applied a budgetary framework on middle term and the principle of
budgetary allocation based on programs. However, because of the wages slideslips in the public
field, of the continuous registration of low results regarding the budgetary program and
execution, of the pressure on the public expenditures as a result of the political cy cle, it keeps
existing a major risk of budgetary deficit increase. Thus, we remark a deterio ration of the
budgetary deficit, from 2,5% of GDP in 2007 to 5,2% of GDP in 2008, being possible to reac h
7,5% of GDP in 2009, according to the studies made by the European Commission. The
ministerial expenses doubled in the period 2005-2008 and the wage increases and the policy of
massive engagements in the public domain determined the Romanian government to pay to the
administrative employees almost three times more in 2008 in comparison with 2005. T he
European Union Council advises Romania to avoid the procyclical fiscal policy in order to limit
the current account deficit which is increasing and the inflationist pressures, to improve the
budgetary program and execution and to review the structure of the public payments, as wel l as
the diminution of state aid.
Our analyze on the policies of fiscal consolidation shows the fact that many of the new member
states implemented important reforms, some of them realizing even records of impres sive
reforms. But there remains still much to be done. The healthcare systems are more diffi cult to be
reformed than the pension systems; the wages from the public domain remains high and the
social security systems represented the source of some unexpected budgetary developments. The
implementation remains a a problem in the case of many reforms, because many politica l
situations from the new member states are unstable.
The fiscal perspective of several new member states is worrying in this sense. Their governments
got used to their high deficits and the external pressure is less after the revi ew of the Stability and
Growth Pact. Moreover, if the new member states enter into the Economic and Monetary Union,
the political desire to control the fiscal deficits could weaken and, even more, derisioned, as it
happened in many countries in the EU-15. Taking into account the success of Finland, as member
of the eurozone, and that of Sweden, not taking part of the eurozone, we can conclude that th e
status of member of the Economic and Monetary Union is nor decisive for the development of
the new member states.
Prudent fiscal policies, which don´t represent a threaten to the prices stabi lity, and a monetary
policy having credible purposes of low inflation represent the key of the success. Simi larly,
without a strong domain of production which operates on the open and flexible market s of goods
and services and the capacity to be competitive abroad, the Economic and Monetary Union
doesn´t represent a success in itself.
Our paper suggests the fact that the countries being under ˝fiscal surveillance˝ of the European
Union, especially Hungary and Malta, illustrate the failure while trying to stabil ize their fiscal
policies, even in a delicate situation. During an economic slowing down caused by the present
economic crisis, these countries will confront again massive budgetary deficits.

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3. Council Opinion on the updated Convergence Programme of Hungary 7317 from March 2009,
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