EC Warns UK Over Budget Deficit

by Ulrika Lomas, for LawAndTax-News.com, Brussels

13 January 2006

The European Commission has this week recommended that UK Chancellor Gordon Brown correct the country's budget deficit at the next possible opportunity, arguing that at 3.3% of GDP in the 2004/05 financial year, the United Kingdom is running an excessive budget deficit within the meaning of the European Union Treaty and the revised Stability and Growth Pact.

The Commission went on to ask the Council to endorse this opinion, and to recommend that the deficit be brought below 3% by the forthcoming 2006/07 financial year

In a statement, the Commission explained that:

"This is the second successive year that the UK deficit has exceeded the 3% reference value set in the EU Treaty. In 2003/04 it was 3.2%. Looking ahead, the latest information suggests that, despite recent fiscal policy measures, the deficit is expected to remain above the 3% reference value in 2005/06 (of the order of 3½% of GDP) and remain above 3% in 2006/07."

"The Commission ascertained that the deficit in 2004/05 was caused neither by an ‘unusual event’, in accordance with Regulation 1467/97, nor by a severe economic downturn - the UK economy grew 3.2% in real terms in 2004 and although it is projected to slow to 1.6% in 2005 it is seen recovering to 2.3% in 2005. Although the deficit may be close to the reference value, the excess is not temporary."

"Therefore and although the UK’s gross debt at 40.8% of GDP in 2004/5 remains well below the 60% reference value, the Commission recommends the Council, in conformity with Article 104(6) of the Treaty, to conclude that an excessive deficit situation exists,. On the basis of Article 104(7) of the Treaty and Regulation 1467/97, the Commission is also submitting a draft recommendation for the correction of the deficit by 2006/07. This is the standard one-year deadline since the required fiscal improvement is small and economic growth remains reasonably satisfactory."

"The Commission’s opinion takes account of the opinion of the Economic and Financial Committee on its Report of 21 September 2005, the autumn economic forecasts and the UK’s December pre-budget report."

The Commission's recommendation still needs the approval of EU Finance Ministers, which may be granted at their next meeting on January 24. However, the UK government is likely to dispute the EC findings, arguing that Mr Brown still expects to meet his own "golden rule" over the economic cycle.

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