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COMMISSION OPINION
on the existence of an excessive deficit in the United KingdomGENERAL CONSIDERATIONS
1. Article 104 of the Treaty lays down an excessive deficit procedure
(EDP) to ensure that Member States avoid excessive government deficits
or that they correct such deficits when they occur. The EDP is further
specified in Council Regulation (EC) No 1467/97 "on speeding up and
clarifying the implementation of the excessive deficit procedure"[1],
which is part of the Stability and Growth Pact. However, while most
provisions apply to the United Kingdom in the same manner as to other
countries not participating in the euro area, point 5 of the Protocol
on certain provisions relating to the United Kingdom states that the
obligation under Article 104(1) of the Treaty to avoid excessive
general government deficits does not apply to the United Kingdom
unless it moves to the third stage of economic and monetary union[2].
Instead, while in the second stage of economic and monetary union, the
United Kingdom is required pursuant to Article 116(4) of the Treaty
"to endeavour to avoid excessive deficits". The EDP applies to the
United Kingdom on a financial year basis (running from April to March).
2. According to Article 104(2) of the Treaty, the Commission has to
monitor compliance with budgetary discipline on the basis of two
criteria, namely: (a) whether the ratio of the planned or actual
government deficit to gross domestic product (GDP) exceeds the
reference value of 3% (unless either the ratio has declined
substantially and continuously and reached a level that comes close to
the reference value; or, alternatively, the excess over the reference
value is only exceptional and temporary and the ratio remains close to
the reference value); and (b) whether the ratio of government debt to
GDP exceeds the reference value of 60% (unless the ratio is
sufficiently diminishing and approaching the reference value at a
satisfactory pace).
3. Article 104(3) stipulates that, if a Member State does not fulfil
the requirements under one or both of these criteria, the Commission
has to prepare a report. This report also has to "take into account
whether the government deficit exceeds government investment
expenditure and take into account all other relevant factors,
including the medium-term economic and budgetary position of the
Member State" as further clarified in Article
2(3) of the Regulation mentioned above. The Regulation also specifies
that "any other factors which, in the opinion of the Member State
concerned, are relevant in order to comprehensively assess in
qualitative terms the excess over the reference value and which the
Member State has put forward to the Commission and to the Council"
need to be given due consideration in the report.
4. On the basis of the EDP data notified by the UK authorities in
August 2005 together with an interim economic assessment prepared by
the Commission services, the Commission adopted a report under Article
104(3) for the United Kingdom on 21 September 2005.
5. Subsequently, and in accordance with Article 104(4), the Economic
and Financial Committee formulated an opinion on the report of the
Commission on 30 September 2005.
6. Article 104(5) of the Treaty requires the Commission to address an
opinion to the Council if the Commission considers that an excessive
deficit in a Member State exists or may occur. In order to reach a
conclusion on whether an excessive deficit exists or may occur, the
Commission considers that account should be taken of: (i) the
conclusions of its report under Article 104(3), and (ii) the opinion
of the Economic and Financial Committee on this report. On the basis
of these elements, and taking into account the Commission services'
autumn
2005 forecasts (published on 17 November 2005), the Commission has
established a number of considerations for the United Kingdom.
CONSIDERATIONS CONCERNING THE UNITED KINGDOM
7. In the period since the United Kingdom's previous EDP was abrogated
in May 1998, the general government deficit moved from a comfortable
surplus position in the late 1990s to a deficit of 3.2% of GDP in
2003/04[3],[4], thereby exceeding the Treaty reference value for the
first time since 1997. This development was equivalent to a
deterioration in the structural fiscal balance of around 4 percentage
points of GDP in the period from 1999/00 to 2003/04. During these
years the general government expenditure ratio increased from less
than 40% to about 43% of GDP. In the same period, government gross
fixed capital formation increased from 1.2% to 1.6% of GDP; the
government gross debt ratio went down to 37.6% of GDP in
2002/03 and has been increasing since then. Such an evolution coupled
with developments in interest rates led to interest payments having
fallen from 2.9% to 2.0% of GDP in that period. As a consequence of
the deficit for
2003/04 exceeding the reference level, the Commission initiated an
excessive deficit procedure with the Article 104.3 report prepared in
April 2004[5].
However, since the then assessment was that the excess of the deficit
over 3% of GDP was small and likely to be temporary, the deficit was
not judged to be excessive.
8. In the 2004/05 financial year, according to the EDP data notified
by the United Kingdom in August 2005, the general government deficit
remained at 3.2% of GDP[6], again in excess of the 3% of GDP reference
value. The reported deficit figure for the 2004/05 financial year
deficit provided prima facie evidence on the existence of an excessive
deficit in the United Kingdom in the sense of the Treaty and the
Stability and Growth Pact. The Commission therefore adopted a report
on
21 September
2005 according to Article 104(3) of the Treaty assessing the
fulfilment of the Treaty requirements concerning the deficit and the debt
criteria[7].
The
report considered that, although above the 3% of GDP Treaty reference
value, the 2004/05 deficit was close to it. The excess over the 3% of
GDP reference value was not exceptional. In particular, it did not
result from an unusual event outside the control of the United Kingdom
authorities, nor was it the result of a severe economic downturn.
Growth of 3.2% in 2004 was estimated to have been above-potential as
was growth in financial year 2004/05. The output gap in 2004 was
estimated to be positive. As regards the issue of temporariness, the
deficit was expected to persist above 3% throughout 2005/06 and
2006/07, based on an interim updated economic and budgetary outlook
for the United Kingdom.
9. The Economic and Financial Committee issued its opinion in
accordance with Article 104(4) on 30 September 2005, this opinion
being consistent with the assessment made by the Commission in its
report, and noting that the excessive deficit could not be considered
temporary. The Committee nevertheless recommended that further steps
under the EDP should await the finalisation of the Commission's autumn 2005
forecasts.
10. In the Commission services' autumn 2005 forecasts, assuming United
Kingdom fiscal policy remains as announced, the deficit was expected
to widen to just below 3½% of GDP in 2005/06 and to remain over 3% of
GDP in 2006/07. These projections confirmed the Commission's
assessment made in its report under Article 104(3) and the EFC opinion
adopted under Article
104(4)
that the deficit was expected to remain over 3% of GDP in 2005/06 and
2006/07 and was therefore not temporary. Based on these projections,
the excess over the 3% of GDP reference value is confirmed as neither
exceptional nor temporary, although the deficit is close to the
reference value.
11. Subsequent to the Commission services' autumn forecasts, the
United Kingdom announced fiscal measures in the Pre-Budget Report
presented to Parliament on 5 December. In net terms, United Kingdom
authorities'
costings of these measures, compared with the baseline of announced
policy (as taken into account in the autumn forecasts), represent an
easing of policy by just below 0.1pp of GDP in the current financial
year and a tightening of policy by 0.1pp of GDP in 2006/07. In the
Pre-Budget Report, the UK authorities expect the deficit to be below
3% in 2006/07. Taking into consideration these measures, which are all
structural, the Commission's assessment nevertheless remains that the
deficit in 2006/07, is expected to exceed 3% of GDP, at 3.1% of GDP,
and is therefore not temporary.
12. In accordance with the provisions in the Treaty and the Stability
and Growth Pact, the Commission also analysed in its report "relevant
factors". According to the Stability and Growth Pact, these conditions
can only be taken into account in the steps leading to the decision on
the existence of an excess deficit if the double condition - that the
deficit remains close to the reference value and that its excess over
the reference value is temporary - is fully met. In the case of the
United Kingdom the double condition is not met. Therefore other
relevant factors are not taken into account in this opinion. The
analysis therefore indicates that the deficit criterion in the Treaty is not fulfilled.
13. In contrast, the general government debt ratio remains well below
the 60% reference value (the August EDP data reporting a ratio of
40.8% of GDP in the 2004/05 financial year) although, given the scale
of actual and projected primary deficits, on a rising trend. In the
Commission's autumn forecasts the debt ratio is projected to reach
around 44½% of GDP in 2007/08.
CONCLUSION
14. The monitoring of the budgetary situation in the United Kingdom
and, in particular, the examination of compliance with the criteria
laid down in Article 104(2) has led the Commission to prepare a report
in accordance with Article 104(3) of the Treaty. The Commission,
having taken into account its report, the opinion of the Economic and
Financial Committee, the Commission services' autumn 2005 forecasts
and the United Kingdom's December 2005 Pre-Budget Report, is of the
opinion that an excessive deficit exists in the United Kingdom.
_____
[1] OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC)
No 1056/2005 (OJ L 174, 7.7.2005, p. 5). Account is also taken of the
Opinion of the Economic and Financial Committee on the "Specifications
on the implementation of the Stability and Growth Pact and guidelines
on the format and content of stability and convergence programmes",
endorsed by the ECOFIN Council of 11 October 2005.
[2]
http://europa.eu.int/eur-lex/en/treaties/selected/livre340.html
[3] August 2005 EDP notification, revised down from 3.3% of GDP. The
United Kingdom August data were validated by Eurostat on 26 September
2005.
[4] Actual UK general government balance data reported here apply the
Eurostat decision of 14 July 2000 on the allocation of UMTS receipts.
The UK has not generally applied this decision in domestic publication
of its public finance data, which results in the net lending balance
on a Eurostat basis being approximately 0.1% points of GDP per annum
lower than reported in UK national accounts from respectively 2001 and
2001/02 onwards.
[5] See:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/country
/
edp/e
dprep2004_uk.pdf
[6] However, the 2004/05 deficit outturn has been revised upwards
since the August notification. The outturn consistent with that
reported in the December 2005 Pre-Budget Report is 3.3% of GDP.
[7] See
http://www.ecfineuropa.cec/comm/economy_finance/about/activities/sgp/e
d
p/com
_rep_uk.pdf
---EN
COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, xxx
SEC(2006) yyy final
Recommendation for a
COUNCIL DECISION
on the existence of an excessive deficit in the United Kingdom
(presented by the Commission)
EXPLANATORY MEMORANDUM
The application of the excessive deficit procedure (EDP) is governed
by Article 104 of the Treaty and by Council Regulation (EC) No 1467/97
of
7 July 1997[1] "on speeding up and clarifying the implementation of
the excessive deficit procedure", which is part of the Stability and
Growth Pact. However, while most provisions apply to the United
Kingdom in the same manner as to other countries not participating in
the euro area, Article 5 of the Protocol on certain provisions
relating to the United Kingdom[2] states that the obligation under
Article 104(1) of the Treaty to avoid excessive general government
deficits does not apply to the United Kingdom unless the country moves to the
third stage of EMU.
Instead, while in the second stage of EMU, the United Kingdom is
committed under Article 116(4) of the Treaty "to endeavour to avoid
excessive deficits".
In the period since the UK's previous EDP was abrogated in May 1998,
the UK general government deficit moved from a comfortable surplus
position in the late 1990s to a deficit of 3.2% of GDP in 2003/04[3].
This development was equivalent to a deterioration in the structural
fiscal balance of around 4 percentage points of GDP in the period
between 1999/00 and 2003/04. During these years, the general
government expenditure ratio increased from less than 40% to about 43%
of GDP. In the same period, government gross fixed capital formation
increased from 1.2% to 1.6% of GDP; the government gross debt ratio
went down to 37.6% of GDP in 2002/03 and has been increasing since
then. Such an evolution coupled with developments in interest rates
led to interest payments having fallen from 2.9% to 2.0% of GDP in
that period. As a consequence of the deficit for 2003/04 exceeding the
reference level, the Commission initiated an excessive deficit
procedure with the Article 104.3 report prepared in April 2004[4]
However, since the then assessment was that the excess of the deficit
over 3% of GDP was small and likely to be temporary, the deficit was not judged
to be excessive.
According to the EDP data notified by the United Kingdom in August
2005, the general government deficit in the United Kingdom reached
3.2% of GDP in the
2004/05 financial year (running from April to March)[5],[6], thus
exceeding again the 3% of GDP reference value. The reported figure for
the 2004/05 financial year deficit provided prima facie evidence on
the existence of an excessive deficit in the United Kingdom in the
sense of the Treaty and the Stability and Growth Pact.
The Commission therefore adopted a report according to Article 104(3)
of the Treaty assessing the fulfilment of the Treaty requirements
concerning the deficit and the debt criteria[7]. The report considered
that, although above the 3% of GDP Treaty reference value, the 2004/05
deficit was close to it.
The excess over the 3% of GDP reference value was not exceptional. In
particular, it did not result from an unusual event and the growth
performance accompanying the breach of the reference value in 2004/05
does not qualify as a severe economic downturn. Growth of 3.2% in 2004
was estimated to have been above-potential as was growth in financial
year 2004/05. The estimated output gap in 2004 was positive. As
regards the issue of temporariness, the deficit was expected to
persist above 3% throughout
2005/06 and 2006/07, based on an interim updated economic and
budgetary outlook for the United Kingdom.
In its report the Commission also analysed all relevant factors for
the medium-term economic and budgetary positions as well as others
that appeared relevant to the assessment of public finances in the
United Kingdom.
According to the Stability and Growth Pact, relevant factors can be
taken into account in the steps leading to the decision on the
existence of an excessive deficit (thus including the Economic and
Financial Committee opinion in accordance with Article 104(4), the
Commission opinion in accordance with Article 104(5) and the Council
decision in accordance with Article 104(6)), "if the double condition
of the overarching principle that - before other relevant factors are
taken into account - the excess of the reference value is temporary
and the deficit remains close to the reference value - is fully met".
In the case of the United Kingdom, although the projected deficit for
2004/05 was close to the reference value, the report concluded that
the government deficit was projected to be above 3% of GDP in
financial years 2005/06 and 2006/07..
Article 104(4) of the Treaty states that "the Committee provided for
in Article 114 (i.e. the Economic and Financial Committee) shall
formulate an opinion on the report of the Commission". The Committee
issued its opinion on 30 September 2005, this opinion being consistent
with the assessment made by the Commission in its report, and noting
that the excessive deficit could not be considered temporary. The
Committee nevertheless recommended that further steps under the EDP
should await the finalisation of the Commission's forthcoming autumn forecasts.
In the Commission services' autumn forecasts, assuming United Kingdom
fiscal policy remains as announced, the deficit was expected to widen
to just below 3½% of GDP in 2005/06 and to remain over 3% of GDP in
2006/07, showing a gradual improvement to around 3% of GDP only in
2007/08. These projections confirmed the Commission's assessment made
in its report under Article
104(3) and the EFC opinion adopted under Article 104(4) that the
deficit was expected to remain over 3% of GDP in 2005/06 and 2006/07
and was therefore not temporary. Based on these projections, the
excess over the 3% of GDP reference value is therefore neither
exceptional nor temporary, although the deficit is close to the reference value.
Subsequent to the Commission services' autumn forecasts, the United
Kingdom announced fiscal measures in the Pre-Budget Report presented
to Parliament on 5 December. In net terms, United Kingdom authorities'
costings of these measures, compared with the baseline of announced
policy (as taken into account in the autumn forecasts), represent an
easing of policy by 0.1pp of GDP in the current financial year and a
tightening of policy by just below 0.1pp of GDP in 2006/07. Taking
into consideration these measures, which are all structural, the
Commission's assessment nevertheless remains that the deficit through
to 2006/07 is expected to exceed 3% of GDP, with the deficit in
2006/07 estimated at around 3.1% of GDP, and is therefore not temporary.
Therefore, again based on the double condition above not being
satisfied, for the purpose of the Commission opinion in accordance
with Article
104(5)
and the Council decision in accordance with Article 104(6), other
relevant factors are not taken into account in the case of the United
Kingdom. This analysis therefore suggests that the deficit criterion
in the Treaty is not fulfilled. In contrast, the general government
debt ratio remains well below the 60% reference value (having recorded
40.8% of GDP in the 2004/05 financial year) although, given the scale
of actual and projected primary deficits, on a rising trend: in the
Commission's autumn forecasts reaching around 44½% of GDP in 2007/08.
The table below shows the Commission services' autumn forecasts for UK
general government deficit and debt ratios on a financial year basis.
United Kingdom: public finance projections on a financial year basis
(% of GDP)
Outturn
Projections
2004/05
2005/06
2006/07
2007/08
General government deficit
3.2
3.4
3.2
3.0
General government gross debt
40.8
42.7
43.7
44.5
The Commission, having taken into account its report, the opinion of
the Committee, the Commission services' autumn forecasts and the
United Kingdom's December 2005 Pre-Budget Report, is thus of the
opinion that an excessive deficit exists in the United Kingdom. This
opinion, adopted by the Commission on [11 January 2006], is herewith
addressed to the Council, according to Article 104(5) of the Treaty.
The Commission is recommending that the Council shall decide
accordingly, in conformity with Article 104(6).
In addition, the Commission is submitting to the Council a
recommendation for a Council recommendation to be addressed to the
United Kingdom with a view to bringing the situation of an excessive
deficit to an end, according to Article 104(7) of the Treaty.
According to Council Regulation (EC) No 1467/97, the Council
recommendation should "establish a deadline for the correction of the
excessive deficit, which should be completed in the year following its
identification unless there are special circumstances. In the
recommendation, the Council shall request that the Member State
achieves a minimum annual improvement of at least 0.5% of GDP as a
benchmark, in its cyclically adjusted balance net of one-off and
temporary measures, in order to ensure the correction of the excessive
deficit within the deadline set in the recommendation".
In the case of the United Kingdom, the consideration of relevant
factors does not suggest the existence of special circumstances
warranting a departure from the standard deadline for correcting the
deficit. In particular, while the negative output gap is expected to
widen between
2005
and 2006 by approaching ½% point, output in the Commission services'
autumn
forecasts (before taking account of the measures in the December
Pre-Budget
Report) was projected to be strengthening from late 2005, with
approximately trend-level growth from 2006. The measures announced in
the Pre-Budget Report do not materially affect this growth profile,
with the slight fiscal tightening from 2006/07 focused on the offshore
oil sector of the economy which can be assumed not to react to the
measures in a conventional cyclical manner. As for the
cyclically-adjusted deficit, in the Commission services'
autumn forecasts this was assessed to improve by 0.3% points of GDP
between
2005 and 2006; this improvement can be expected to be around 0.4%
points of GDP, after taking account of the Pre-Budget Report measures.
In sum, therefore, on the basis of announced policies, output growth
is projected to remain reasonably strong in a situation of moderate
reduction of the cyclically-adjusted deficit, but with the actual
deficit remaining slightly above the reference value. Against this
baseline, the application of the benchmark annual improvement of at
least 0.5% of GDP would require only a further slight degree of fiscal
effort.
Accordingly, in the recommendation, since overall growth performance
in the United Kingdom remains reasonably satisfactory and the
structural improvement in the government balance required to put to an
end its excessive deficit is modest, it is considered as being
consistent with the Stability and Growth Pact that a budgetary
correction should be completed at the latest by financial year 2006/07.
Recommendation for a
COUNCIL DECISION
on the existence of an excessive deficit in the United Kingdom
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing the European Community, and
in particular Article 104(6) thereof,
Having regard to the recommendation from the Commission,
Having regard to the observations made by the United Kingdom,
Whereas:
(1) Article 104 of the Treaty lays down an excessive deficit procedure
(EDP) to ensure that Member States avoid excessive government deficits
or that they correct such deficits when they occur.
(2) Pursuant to point 5 of the Protocol on certain provisions relating
to the United Kingdom of Great Britain and Northern Ireland, the
obligation under Article 104(1) of the Treaty to avoid excessive
general government deficits does not apply to the United Kingdom
unless it moves to the third stage of economic and monetary union[8].
While in the second stage of economic and monetary union, the United
Kingdom is required to endeavour to avoid excessive deficits, pursuant
to Article
116(4) of the Treaty.
(3) The Stability and Growth Pact is based on the objective of sound
government finances as a means of strengthening the conditions for
price stability and for strong sustainable growth conducive to
employment creation.
(4) The excessive deficit procedure under Article 104 of the Treaty,
as clarified by Council Regulation (EC) No 1467/97 on speeding up and
clarifying the implementation of the excessive deficit procedure[9],
which is part of the Stability and Growth Pact, provides for a
decision on the existence of an excessive deficit. The Protocol on the
excessive deficit procedure annexed to the Treaty sets out further
provisions relating to the implementation of the excessive deficit procedure.
Council Regulation (EC) No 3605/93[10] lays down detailed rules and
definitions for the application of the provision of the said Protocol.
(5) Article 104(5) of the Treaty requires the Commission to address an
opinion to the Council if the Commission considers that an excessive
deficit exists in a Member State or may occur. Having taken into
account its report in accordance with Article 104(3) of the Treaty and
having regard to the opinion of the Economic and Financial Committee
in accordance with Article 104(4), the Commission services' autumn
2005 forecast, as well as the United Kingdom's December 2005
Pre-Budget Report, the Commission concluded that an excessive deficit
exists in the United Kingdom. The Commission therefore addressed such
an opinion to the Council in respect of the United Kingdom on [11 January 2006].
(6) Article 104(6) of the Treaty states that the Council should
consider any observations which the Member State concerned may wish to
make before deciding, after an overall assessment, whether an
excessive deficit exists. In the case of the United Kingdom, this
overall assessment leads to the following conclusions.
(7) In the period since the United Kingdom's previous excessive
deficit procedure was abrogated in May 1998, the UK general government
deficit moved from a comfortable surplus position in the late 1990s to
a deficit of 3.2% of GDP in 2003/04[11]. This development was
equivalent to a deterioration in the structural fiscal balance of
around 4 percentage points of GDP in the period between 1999/00 and 2003/04.
During these years, the general government expenditure ratio increased
from less than 40% to about 43% of GDP. In the same period, government
gross fixed capital formation increased from 1.2% to 1.6% of GDP; the
government gross debt ratio went down to 37.6% of GDP in 2002/03 but
has been increasing since then. Such an evolution coupled with
developments in interest rates led to interest payments having fallen
from 2.9% to 2.0% of GDP in that period. As a consequence, the
Commission initiated an excessive deficit procedure with the Article
104.3 report prepared in April 2004.[12] However, since the then
assessment was that the excess of the deficit over 3% of GDP was small
and likely to be temporary, the deficit was not judged to be excessive.
(8) In the 2004/05 financial year, according to the EDP data notified
by the United Kingdom in August 2005, the general government deficit
remained at 3.2% of GDP, again above but close to the 3% of GDP Treaty
reference value. The excess over the 3% of GDP reference value was not
exceptional. In particular, it did not result from an unusual event
outside the control of the United Kingdom authorities, nor was it the
result of a severe economic downturn. Growth of 3.2% in 2004 is
estimated to have been above-potential as was growth in financial year
2004/05. The estimated output gap in 2004 is estimated to have been
positive. Therefore, the excess of the deficit over the reference
value cannot be considered as resulting from a severe economic
downturn. The excess over the 3% of GDP reference value is also
considered not temporary, based on the Commission services'
autumn 2005 forecasts. Assuming United Kingdom fiscal policy remained
as hitherto announced, the deficit in these forecasts was expected to
widen to just below 3½% of GDP in 2005/06 and to remain over 3% of GDP
in 2006/07.
Based on these projections, the excess over the reference value could
not be considered either exceptional or temporary in the sense of the
Treaty and the Stability and Growth Pact although the deficit is close
to the reference value. Subsequent to the Commission services' autumn
forecasts, the United Kingdom announced fiscal measures in the
Pre-Budget Report presented to Parliament on 5 December. In net terms,
United Kingdom authorities'
costings
of these measures, compared with the baseline of announced policy (as
taken into account in the Commission services' autumn forecasts),
represent an easing of policy by 0.1pp of GDP in the current financial
year and a tightening of policy by 0.1pp of GDP in 2006/07. Taking
into consideration these measures, which are all structural, the
assessment nevertheless remains that the deficit in 2006/07, at around
3.1% of GDP, is expected to exceed 3% of GDP and is therefore not temporary.
This indicates that the Treaty requirement concerning the deficit
criterion is not fulfilled.
(9) In contrast, the general government debt ratio remains well below
the 60% reference value (the August EDP data reporting a ratio of
40.8% of GDP in the 2004/05 financial year) although, given the scale
of actual and projected primary deficits, on a rising trend. In the
Commission's autumn forecasts the debt ratio is projected to reach
around 44½% of GDP in 2007/08.
(10) According to Article 2(4) of Regulation (EC) No 1467/97,
"relevant factors" can only be taken into account in the Council
decision on the existence of an excessive deficit in accordance with
Article 104(6) if the double condition - that the deficit remains
close to the reference value and that its excess over the reference
value is temporary - is fully met.
This double condition is not met in the case of the United Kingdom.
Therefore, other relevant factors are not taken into account in this
decision.
HAS ADOPTED THIS DECISION:
Article 1
From an overall assessment it follows that an excessive deficit exists
in the United Kingdom.
Article 2
This decision is addressed to the United Kingdom of Great Britain and
Northern Ireland.
Done at Brussels, [...]
For the Council
The President
[...]
_____
[1] OJ L 209, 2.8.1997 as amended by Council Regulation (EC) No
1056/2005 (OJ L 174, 7.7.2005, p. 5).
[2]
<http://europa.eu.int/eur-lex/en/treaties/selected/livre340.html>
http://europa.eu.int/eur-lex/en/treaties/selected/livre340.html
[3] August 2005 EDP notification, revised down from 3.3% of GDP. The
United Kingdom August data were validated by Eurostat on 26 September
2005.
[4] See:
<http://europa.eu.int/comm/economy_finance/about/activities/sgp/countr
y
/edp/
edprep2004_uk.pdf>
http://europa.eu.int/comm/economy_finance/about/activities/sgp/country
/
edp/e
dprep2004_uk.pdf
[5] The EDP applies to the United Kingdom on a UK financial year basis.
Actual UK general government balance data reported here apply the
Eurostat decision of 14 July 2000 on the allocation of UMTS receipts.
The UK has not generally applied this decision in domestic publication
of its public finance data, which results in the net lending balance
on a Eurostat basis being approximately 0.1% points of GDP per annum
lower than reported in UK national accounts from respectively 2001 and
2001/02 onwards.
[6] However, the 2004/05 deficit outturn has been revised upwards
since the August notification. The outturn consistent with that
reported in the December 2005 Pre-Budget Report is 3.3% of GDP.
[7]
http://europa.eu.int/comm/economy_finance/about/activities/sgp/edp/com
_
rep_u
k.pdf
[8]
http://europa.eu.int/eur-lex/en/treaties/selected/livre340.html
[9] OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC)
No 1056/2005 (OJ L 174, 7.7.2005, p. 5).
[10] OJ L 332, 31.12.1993, p. 7. Regulation as amended by Regulation
(EC) No 475/2000 (OJ L 58, 3.3.2000, p. 1) and by Commission
Regulation
(EC) No 351/2002 (OJ L 55, 26.2.2002, p. 23).
[11] August 2005 EDP notification, revised down from 3.3% of GDP. The
United Kingdom August data were validated by Eurostat on 26 September
2005.
[12] See:
<http://europa.eu.int/comm/economy_finance/about/activities/sgp/countr
y
/edp/
edprep2004_uk.pdf>
http://europa.eu.int/comm/economy_finance/about/activities/sgp/country
/
edp/e
dprep2004_uk.pdf
---EN
COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, xxx
SEC(2006) yyy final
Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the situation of an excessive
government deficit
(presented by the Commission)
Recommendation for a
COUNCIL RECOMMENDATION
with a view to bringing an end to the situation of an excessive
government deficit
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing the European Community, and
in particular Article 104(7) thereof;
Having regard to the recommendation from the Commission;
Whereas:
(1) Article 104 of the Treaty lays down an excessive deficit procedure
(EDP) to ensure that Member States avoid excessive government deficits
or that they correct such deficits when they occur.
(2) Pursuant to point 5 of the Protocol on certain provisions relating
to the United Kingdom of Great Britain and Northern Ireland, the
obligation in Article 104(1) of the Treaty to avoid excessive general
government deficits does not apply to the United Kingdom unless it
moves to the third stage of economic and monetary union[1]. While in
the second stage of economic and monetary union, the United Kingdom is
required to endeavour to avoid excessive deficits, pursuant to Article
116(4) of the Treaty.
(3) The Stability and Growth Pact is based on the objective of sound
government finances as a means of strengthening the conditions for
price stability and for strong sustainable growth conducive to
employment creation.
(4) The Council has decided on [24 January 2006], in accordance with
Article 104(6) of the Treaty, that an excessive deficit exists in the
United Kingdom.
(5) In accordance with Article 104(7) of the Treaty and Article 3 of
Council Regulation (EC) No 1467/97 on speeding up and clarifying the
implementation of the excessive deficit procedure[2] (which is part of
the Stability and Growth Pact), the Council is also required to make
recommendations to the Member State concerned with a view to bringing
the situation of excessive deficit to an end within a given period.
The recommendation has to establish a deadline of six months at the
most for effective action to be taken by the Member States concerned
to correct the excessive deficit as well as a deadline for the
correction of the excessive deficit, which should be completed in the
year (budgetary year in the case of the United Kingdom) following its
identification unless there are special circumstances. In deciding
whether special circumstances exist, "relevant factors" as clarified
in Article 2(3) of Regulation (EC) No 1467/97 should be given due
consideration. Article 3(4) of Regulation (EC) No 1467/97 also
specifies that in a recommendation to a Member State to correct an
excessive deficit the Council should request the achievement of a
minimum annual improvement in the structural balance of at least 0.5
percent of GDP as a benchmark.
(6) The Commission, in its autumn 2005 forecasts, projected that on
the basis of unchanged policies the general government deficit would
rise from 3.2% of GDP in financial year 2004/05 to 3.4% in 2005/06,
before declining to 3.2% in 2006/07 and 3.0% in 2007/08. Real GDP
growth, following an outturn of 3.2% in 2004, was projected to slow to
1.6% in
2005 before recovering to 2.3% in 2006 and 2.8% in 2007. Given the
cyclical position evolving from a positive output gap in 2004 to a
negative one in 2005, the cyclically-adjusted deficit was projected to
decline from a trough of 3½% of GDP in 2004 to just over 3% of GDP in
2005. Thereafter, given a widening of the negative output gap in 2006,
the cyclically-adjusted deficit was projected to continue to narrow
progressively, reaching just over 2½% of GDP in 2007. As a consequence
of the existence of significant actual and projected primary deficits,
general government gross debt was projected to increase from 40.8% of
GDP in the 2004/05 financial year to reach around 44½% of GDP in
2007/08.
(7) Subsequent to the Commission services' autumn forecasts, the
United Kingdom announced fiscal measures in the Pre-Budget Report
presented to Parliament on 5 December 2005. In net terms, the United
Kingdom authorities' costings of these measures, compared with the
baseline of announced policy (as taken into account in the autumn
forecasts), represent an easing of policy by 0.1pp of GDP in the
current financial year and a tightening of policy by 0.1pp of GDP in
2006/07. Taking into consideration these measures, which are all
structural, the deficit through to 2006/07 is still expected [by the
Commission] to exceed 3% of GDP, at around 3.1% of GDP in 2006/07. In
the Pre-Budget Report, the UK authorities expect the deficit to be below 3% in
2006/07.
(8) In the case of the United Kingdom, the consideration of relevant
factors, as clarified in Article 2(3) of Regulation (EC) No
1467/97
and examined in the Commission's report under Article 104(3) as being
on their own merit relatively favourable, does not suggest the
existence of special circumstances warranting a departure from the
standard deadline for correcting the deficit. In particular, while the
negative output gap is expected to widen between 2005 and 2006 by
approaching ½% percentage point, output in the Commission services'
autumn forecasts was projected to be strengthening from late 2005,
with approximately trend-level growth from 2006. The measures
announced in the Pre-Budget Report do not materially affect this
growth profile. The cyclically-adjusted deficit in the Commission
services' autumn forecasts was assessed to improve by 0.3% points of
GDP between 2005 and 2006; this improvement can be expected to be
around 0.4% points of GDP, after taking account of the Pre-Budget Report
measures.
Therefore, on the basis of announced policies, output growth is
projected to remain reasonably strong in a situation of moderate
improvement of the cyclically-adjusted deficit, but with the actual
deficit remaining slightly above the reference value. Against this
baseline, the application of the benchmark annual improvement of at
least 0.5% of GDP requires only a further slight degree of fiscal
effort. Accordingly, since overall growth performance in the United
Kingdom remains reasonably satisfactory and the structural improvement
in the government balance required to put to an end its excessive
deficit is modest, the budgetary correction should be completed at the
latest by financial year 2006/07.
(9) In general, in the view of the Council, budgetary consolidation
measures should secure a lasting improvement in the general government
balance, while being geared towards enhancing the quality of the
public finances and reinforcing the growth potential of the economy. A
budgetary correction in the United Kingdom should be consistent with
these objectives.
HEREBY RECOMMENDS:
- The United Kingdom authorities should put an end to the present
excessive deficit situation as soon as possible and by financial year
2006/07 at the latest, in accordance with Article 3(4) of Council
Regulation
(EC) No 1467/97.
- The United Kingdom authorities should bring the general government
deficit below 3% of GDP in a credible and sustainable manner and to
this end ensure an improvement of the structural balance by at least
0.5 percentage points of GDP between the 2005/06 and 2006/07 financial
years.
The Council establishes the deadline of [24 July 2006] for the United
Kingdom authorities to take effective action to this end.
In addition, the Council invites the United Kingdom authorities to
ensure that, after the excessive deficit has been corrected, budgetary
consolidation is sustained towards a medium-term budgetary objective
that
(i) provides a safety margin with respect to the 3% of GDP deficit
limit;
(ii) maintains prudent debt ratios taking into account the economic
and budgetary impact of ageing populations; and (iii) taking (i) and
(ii) into account, allows room for budgetary manoeuvre, in particular
considering the needs for public investment.
This recommendation is addressed to the United Kingdom of Great
Britain and Northern Ireland
Done at Brussels,
For the Council
The President