The Council will be preceded by the customary Eurogroup meeting, which will be held in Brussels in the "Justus Lipsius" building, on Monday 12 May at 19h00.  The Eurogroup will discuss the economic situation and policy stand, Euro area issues in the draft of the Broad Economic Policy Guidelines and productivity developments, labour costs and prices.

A press conference will be held after the Eurogroup meeting (+/- 21h00).

The Council itself will start on Tuesday  at 10am.  The items included on the provisional agenda of the ECOFIN are: the Preliminary draft Community budget for 2004, the Broad Economic and Policy Guidelines, the Stability and Growth Pact (examination of Austria's updated Stability programme), pensions (mandate for further work by the Economic Policy Committee), the International Finance Facility, financial services (pension funds), and finally taxation-VAT (right to deduct and cross-border funds).

Over lunch, Ministers will discuss the Tax package and an Italian request concerning a decision under Article 88(2) of the Treaty.

A press conference will be held after the ECOFIN Council (+/- 17h00).

Preliminary draft Community budget for 2004

The Council will hear a presentation by Commissioner Schreyer of the preliminary draft budget (PDB) for 2004 as adopted by her institution on 30 April 2003. Ministers may comment on certain aspects of the PDB.

It is recalled that the Council adopted conclusions on the budget priorities for 2004 at its meeting of 7 March 2003. The Council is likely to instruct Coreper to examine the PDB in order to prepare a package allowing the July ECOFIN Council to adopt a draft budget for 2004.

The budgetary procedure for 2004 will be marked by two important challenges: this budget will be the first one adopted in accordance with the provisions of the new Financial Regulation, and so has been drawn up under the new activity-based structure. Moreover, it will also be the first budget that takes fully into account the forthcoming enlargement in the course of the year 2004. For the first time, too, the date of enlargement falls not on a 1 January but on 1 May. The preliminary draft therefore contains estimates for the EU-15 and the EU-25. The budget for the EU-15 will take effect at the start of 2004 and the increase for enlargement will follow on the date of accession, 1 May.

The Commission proposes a PDB for 2004 with a total of EUR 100.6 billion in appropriations for payments (+3.3% compared to the 2003 budget), which covers only the 15 current Member States, and EUR 112.2 billion in appropriations for commitments for the enlarged Union, of which EUR 11.8 billion is for the new Member States. Appropriations for payments represent 0.99% of the Gross National Income (GNI) of EU25.

The amount of agricultural expenditure (Heading 1) included in the PDB is EUR 45.8 billion for the EU-15 and of EUR 2 billion for the new Member States. The Commission will present the latest estimates for agricultural expenditure in a letter of amendment in October 2003.

The volume in commitment appropriations for structural operations (Heading 2) shows an increase of 20.8% for the enlarged Union compared with the 2003 figure for the EU-15, of which EUR 6.7 billion is planned for the new Member States. The amount for payment appropriations comes to EUR 30.68 billion for the enlarged Union, 7.5% less than in the 2003 budget. This significant drop is due to the fact that the closure of the pre-2000 programmes was financed in 2003. Cohesion fund expenditure for Spain, Portugal, Greece and Ireland in 2004 is projected at the same level as in 2003.

Total commitment appropriations intended for internal policies (Heading 3) are put at EUR 8.63 billion, with payment appropriations at EUR 7.5 billion, an increase of 21%. The aid programme for the application of the Schengen acquis, which was adopted for the new Member States in Copenhagen (2002), is completely new and provides EUR 317 million.

The amount in commitment appropriations for external action (Heading 4) is EUR 4 912 million, the same level as 2003. However, the scope for external action has been expanded as the financial support for Cyprus, Malta and Turkey is no longer financed from this heading. The amount available for the other operations is thus 4.5% higher than 2003. It includes EUR 51 million for Common Foreign and Security Policy (+ 11 million compared with 2003).
The amount in administrative expenditure (Heading 5) entered in the PDB is EUR 6.11 billion (+ 14%), on which 9.8% for the Commission, excluding pensions.

Under the budgetary procedure, the Council's first reading will take place in July 2003, followed by Parliament's first reading in October. The objective is to adopt the budget for 15 Member States in December for the period up to 1 May 2004 as well as to reach agreement on the figures for the enlarged Union.

Broad Economic Policy Guidelines

The Council is expected to hold an Orientation Debate on the Commission Recommendation on the Broad Economic Policy Guidelines (BEPGs) for the 2003-2005 period. Following this debate, the Council is expected to give orientations to the Economic and Financial Committee (EFC) and the Economic Policy Committee (EPC) for their work on the next BEPGs with a view to adopting a text at the ECOFIN in June.

The Commission paper makes recommendations for strengthening the EU's economy, against the background of economic growth that is significantly weaker than anticipated a year ago, and where the outlook is clouded by economic uncertainties and global political risks. Thus, these recommendations emphasise the need for economic policies to inspire confidence.

In particular, the Commission recommends the following:

a) Growth- and stability-oriented macroeconomic policies

In macroeconomic policy, Member States should maintain budgetary discipline in line with the Stability and Growth Pact and therefore should:

- achieve and maintain budgetary positions of close to balance or in surplus over the economic cycle. Those euro area Member States that are not yet there, should annually improve their cyclically-adjusted budget position by at least 0.5% of GDP; 
- let the economic stabilisers operate within the Stability and Growth Pact; and
- ensure that nominal wage increases are consistent with price stability and productivity gains.

b) Economic reforms to raise Europe's growth potential

i) Towards full employment: more and better jobs

In terms of structural reforms, the Commission recommendations are based on the idea that creating the conditions for full employment, better quality and productivity at work and greater cohesion and inclusive labour markets are fundamental to the Lisbon strategy, and that they have become the overarching objectives of the European Employment Strategy. Making better use of human resources to contribute to raise Europe's growth potential and attaining higher employment rates to help with the financing of social security systems are targets for which the root causes of high unemployment and low labour force participation in the EU must be tackled. Thus, in pursuing reforms to increase employment, Member States should vigorously implement all the Employment Guidelines.
 

ii) towards a competitive and dynamic knowledge-based economy with better jobs: increasing productivity and business dynamism

Increasing productivity makes it possible to raise real wages, gives scope for investing and enhances the funding base for public services. To boost productivity it is necessary to fully reap the benefits of the internal market, to invest in skills, knowledge, innovation and organisational change and  make broader use of new technologies. Thus policies should aim at improving the economic framework conditions, which will encourage businesses to innovate, invest and grow. This is fundamental because the lion's share of the increase in investment will have to come from the private sector.

c) Strengthening sustainability

- Economic sustainability: ensuring the long-run sustainability of public finances.
To address the economic and budgetary consequences of ageing, Member States should over the next three years:
- ensure a further decline in government debt ratios to further strengthen public finances
- sign, introduce and effectively implement reforms of pension systems

- Social Sustainability: contributing to economic and social cohesion.
Member States should over the next three years:
- take steps to modernise social protection systems and fight poverty and exclusion, in order to achieve an inclusive labour market and a more cohesive society for all
- improve the functioning of markets so that they are conducive to private investment in regions lagging behind
- ensure that public support in regions lagging behind is strongly focused on efficient investment in human and knowledge capital, as well as adequate infrastructure.

- environmental sustainability: promoting efficient natural resource use
Member States should over the next three years:
- reduce sectoral subsidies, tax exemptions and other incentives that have a negative environmental impact and are harmful to sustainable development.
- reduce energy subsidies, promote market instruments, further broaden the coverage, and ensure appropriate differentiation of energy taxation.
- adjust the system of transport taxes, charges and subsidies to better reflect environmental damage and scoial costs due to transport.
- renew efforts to meet their commitments under the Kyoto Protocol.

Stability and Growth Pact

In the context of the cycle of reviewing Member States' updated stability and convergence programmes, the Council will adopt its Opinion on the Stability programme of Austria.

This exercise takes place in accordance with the Stability and Growth Pact agreed at the Amsterdam European Council in June 1997, which requires Member States to present annually updated stability or convergence programmes to the Council and the Commission. The aim of these updated programmes is to provide information on how Member States intend to meet the objectives of the Pact, in particular the medium term goal of budget close to balance or in surplus. They also provide an indication of how the Member States have complied with the relevant recommendations of the Broad Economic Policy Guidelines (BEPGs).

As regards Austria, the Council is expected to approve its opinion on its Stability programme, on the basis of work carried out by the Economical and Financial Committee (EFC).

On 20 April 2003, the Commission assessed the updated Austrian stability programme and drew the following main conclusions:

- output growth is projected to accelerate from 1% in 2002 to some 2½% by 2005, resulting in an annual average growth rate of 2.1% over the period 2003-2007, which appears plausible.
- Regarding public finances, in 2002 the government position weakened markedly, although output growth accelerated slightly. For the years to come, the updated programme foresees deficits over the entire programme period, which in three out of five years are set to exceed 1% of GDP. In particular, the deficit is set to widen markedly in 2005 due to major income tax cuts to be covered only partly by accompanying expenditure restraint.
- Figures for gross government debt were significantly revised upwards to almost 68% of GDP in 2002. This was mainly due to a rectification of the Austrian gross debt reporting relating to debt issued for public enterprises ("Rechtsträgerfinanzierung"). The debt-to-GDP-ratio is now expected to fall to slightly below the 60% reference value by 2007 only.

The Commission therefore considered that the projected budgetary position is only partly in compliance with the Stability and Growth Pact. Thus, Austria should make greater efforts to achieve and maintain budgetary balance earlier than envisaged.

The Stability and Growth Pact (SGP) - background and evolution (from Europapers Number 45 - July 2002)

The Maastricht Treaty represents a clear commitment to sound public finances, both in response to the preceding secular upward drift in government spending, deficits and debt, and in view of EMU, in which sound budgets are necessary to support price stability and strengthen the conditions for sustained growth and employment, in the euro area at large and the constituent countries.

Yet, even after ratification of the new Treaty, the discussion of public finance issues continued.  Two opposing concerns were voiced.  On the one hand, the Treaty (Article 104) was perceived as not clear and biting enough to effectively counter gross errors.  On the other hand, Member States were concerned about unduly constraining fiscal stabilisation through additional rules. Political agreement on how to combine a rules-based quasi-automatic procedure to prevent excessive deficits and to maintain leeway for fiscal stabilisation in severe economic downturns was reached at the Dublin European Council in late 1996.  This paved way for the formal adoption of the SGP in 1997.

The pact consists of three parts, a European Council resolution and two regulations, with focus on the prevention and dissuasion of excessive deficits, respectively.

- Resolution on the SGP - It recalls the economic rationale for sound public finances and highlights the objective agreed to this end: sound budgetary positions of close to balance or in surplus.  These allow for dealing with normal cyclical fluctuations while keeping the balance within the deficit reference value of 3% of GDP.  In view of this, the resolution provides strong political guidance to implement the pact in a strict and timely manner to all parties concerned, i.e. the Member States, the Commission and the Council.
 

- Regulation 1466/97 on surveillance and co-ordination - It introduces stability programmes as an instrument of multilateral surveillance.  Goals are: (i) to reach and sustain a medium-term objective for the budgetary position of close to balance or in surplus that provides for a safety margin to ensure the avoidance of an excessive deficit; (ii) to prevent at an early stage the emergence of an excessive deficit through adequate monitoring, notably by giving early warning; (iii) to promote surveillance and co-ordination at large.  To these ends the regulation defines the contents of stability programmes and sets  out rules for their submission, examination and monitoring.

- Regulation 1467/97 on the excessive deficit procedure (EDP) - Its purpose is to speed up and clarify the EDP set out in Article 104, in order to deter excessive deficits and, if they occur, to further their prompt correction, by means of an integrated set of rules for the application of Article 104.  This includes the definition of concepts, the setting of deadlines for implementing steps in the procedure and the specification of sanctions together with guidance on their application.

Pensions: mandate for further work by the Economic Policy Committee (EPC)

The European Council of March 2003 endorsed a report of the Ecofin Council on strengthening the co-ordination of budgetary policies. A key element of this report was the consensus on the need to upgrade the assessment of the long-term sustainability of public finances in the Broad Economic Policy Guidelines (BEPGs). Improvements were requested in particular on the quality and comparability of long-run budgetary projections on pension, health and long-term care expenditure.

To this end, the Ecofin Council is expected to request the EPC to continue its work on the sustainability of public finances and to prepare a progress report on the overall impact of ageing populations on public finances for its meeting on 4 November 2003. This report should:

- provide an overview of analyses carried out at EU level to date on the impact of ageing populations on public finances;
- examine how the assessment of sustainability was made on the basis of the 2002 stability and convergence programmes; assess the merits and limitations of approaches and indicators used and present proposals on how the indicators could be improved for use within the BEPGs and SGP; examine national budgetary procedures to assess long-term sustainability;
- present detailed proposals and timetable for the conduct of a next round of common long-run projections on age-related public spending with the aim of substantially improving their quality and comparability across Member States (existing and acceding).

International Finance Facility

The Council will have an exchange of views on the basis of a UK proposal concerning an International Finance Facility (IFF).

The Facility would be built on long-term donor commitments, comprising a series of pledges for a flow of annual payments to the IFF. On the basis of these commitments, the Facility would leverage up immediate resources for aid by issuing bonds in the international capital markets. Aid flows would provide the predictability necessary for effective aid, by funding 4-5 year disbursement programmes to poor countries, through existing bilateral and multilateral mechanisms. There would be necessary safeguards for donors.

Financial Services: Pension Funds

The Council is expected to approve the European Parliament amendments on the Pension Funds Directive in second reading, with Belgium abstaining. Following the Council's approval of these amendments, the Directive will be deemed to have been adopted in the form of the common position thus amended, in accordance with Article 251(3) of the EC Treaty.

The text of the common position was published in the OJ C 299E of 3 December 2002. The text of the Parliament's amendments is in doc. 7136/03.

The objectives of the common position are:

- to ensure that investments are secure and efficient,
- enable institutions to choose their asset managers and custodians freely,
- to ensure a level playing field between all service providers,
- to facilitate cross-border activities,
- to ensure the protection of present and future pensioners,
- to build a single market for financial services,
- in particular for supplementary pensions.

Taxation - VAT

The Council will have an orientation debate on VAT (right to deduct and cross-border refund) on the basis of a report prepared by the Presidency.

The Presidency's report contains the outcome of the work of the preparatory bodies of the Council in respect of the harmonisation of the rules governing the right to deduct VAT on expenses relating to passenger vehicles, accommodation, food and drink, as well as cross-border deductibility (a right to deduct VAT paid in a Member State where the taxable person is not established).

Regarding harmonisation of deductibility, there was broad consensus in the preparatory bodies of the Council on a Presidency compromise proposal allowing Member States the option of a maximum of flexibility in determining their national rules on deduction of VAT on expenditure relating to accommodation, food, drink and passenger vehicles and certain other means of transport. Technical examination of some parts of the text is still needed.

Regarding cross-border deductibility, the Council is expected to give policy guidance to its preparatory bodies to determine the direction of their future discussions.

It is recalled that the Commission is preparing a communication, to be submitted before the summer, which will take stock of progress with the new VAT strategy launched in June 2000 and will present the new initiatives which the Commission intends to take in the future. In particular, the Commission will identify the areas where it will propose bringing in a "one-stop" mechanism in order to simplify the tax obligations on business and to improve the operation of the internal market. In this context, experience with the mechanism for the exchange of information and payments between Member States for electronically-supplied services, which will be in operation as from 1 July 2003, may prepared the ground for a decision on whether cross-border deduction should be covered by a similar mechanism.
 

Lunch items:

1. Italian request concerning a decision under article 88(2) of the Treaty (Milk quotas)

The Council is expected to consider an Italian request for the authorisation of a fiscal measure concerning a decision under article 88(2) of the Treaty (Milk quotas).

The purpose of the measure is to recover, over a period of time, the debt of around EUR 648 million that 23 399 milk producers owe to the Italian Administration. The proposed measure would enable producers to settle their debt with the Italian Administration by repaying it over a period not exceeding thirty years, interest free.  In order to do this, Italy needs authorisation by the Council by unanimity.

2. Tax package

Following the conclusions of the Brussels European Council of 20-21 March 2003 and the results of the discussions held in the Ecofin on 19 March, the Council will aim at reaching an agreement in view of the final adoption of the tax package.

It is recalled that, on 19 March (doc. 7431/03 Presse 79), all delegations but one reached political agreement on the tax package and reaffirmed their commitment to formally adopting it as soon as possible.

This note has been drawn up under the sole responsibility of the Press Service.