# EUR-Lex - 52012DC0309 - EN

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# 52012DC0309

**Recommendation for a COUNCIL RECOMMENDATION on the United Kingdom’s 2012 national reform programme and delivering a Council opinion on the United Kingdom’s convergence programme for 2012-2017 /* COM/2012/0309 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on the United Kingdom’s 2012 national
reform programme
and delivering a Council opinion on the United Kingdom’s convergence programme
for 2012-2017

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 5(2)
thereof,

Having regard to Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular Article 6(1)
thereof,

Having regard to the recommendation of the
European Commission[3],

Having regard to the resolutions of the
European Parliament[4],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the
European Council agreed to the European Commission’s proposal to launch a new
strategy for jobs and growth, Europe 2020, based on enhanced coordination of
economic policies, which will focus on the key areas where action is needed to
boost Europe’s potential for sustainable growth and competitiveness.

(2)       On 13 July 2010, the
Council adopted a recommendation on the broad guidelines for the economic
policies of the Member States and the Union (2010 to 2014) and, on 21 October
2010, adopted a decision on guidelines for the employment policies of the
Member States[5],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 12 July 2011, the
Council adopted a recommendation on the United Kingdom’s national reform
programme for 2011 and delivered its opinion on the United Kingdom’s updated
convergence programme for 2011-2014.

(4)       On 23 November 2011, the
Commission adopted the second Annual Growth Survey, marking the start of the second
European semester of ex-ante and integrated policy coordination, which is
anchored in the Europe 2020 strategy. On 14 February 2012, the Commission, on
the basis of Regulation (EU) 1176/2011, adopted the Alert Mechanism Report[6], in which it identified the
United Kingdom as one of the Member States for which an in-depth review would
be carried out.

(5)       On 2 March 2012, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to pursue
differentiated, growth-friendly fiscal consolidation, to restore normal lending
conditions to the economy, to promote growth and competitiveness, to tackle
unemployment and the social consequences of the crisis, and to modernise public
administration.

(6)       On 30 April 2012, the
United Kingdom submitted its convergence programme covering the period 2011-12
to 2016-17 and its national reform programme for 2012. In order to take account
of their interlinkages, the two programmes have been assessed at the same time.
The Commission has also assessed, in an in-depth review under Article 5 of
Regulation (EU) No 1176/2011, whether the United Kingdom is affected by
macroeconomic imbalances. The Commission concluded in its in-depth review[7] that the United Kingdom is
experiencing an internal imbalance, although not excessive.

(7)       Based on the assessment of
the 2012 convergence programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the macroeconomic scenario underpinning
the budgetary projections in the programme is plausible. The objective of the
budgetary strategy outlined in the programme is to implement the necessary
fiscal consolidation to achieve the government's fiscal targets on net debt and
cyclically-adjusted current balance. The convergence programme does not include
a medium-term objective (MTO) as foreseen by the Stability and Growth Pact. According
to programme projections, the deadline to correct the
excessive deficit set by the Council in its recommendation of 2 December 2010 is expected to be missed by one year. The government deficit in
2014/15, the deadline set by the Council, is estimated at 4.4% of GDP, implying,
based on the (recalculated) structural deficit,[8]
an average fiscal effort of 1.25% of GDP between 2010/11 and 2014/15 which is
below the 13⁄4% effort set out in the Council recommendation under the Excessive Deficit
Procedure. Although the government has not deviated from its fiscal
consolidation strategy which initially, based on previous macroeconomic
projections, appeared sufficient to comply with EDP targets, the fiscal
performance and outlook have been affected by a deterioration of economic growth
prospects. Revenue measures have been significantly front-loaded in the
adjustment path of the fiscal consolidation. Almost 40% of the total annual
fiscal consolidation planned for the 2010-11 to 2014-15 period has been
achieved by the end of 2011-12, including 30% of the spending cuts and
two-thirds of the net tax increases. The potential revenue contribution from an
increased efficiency of the tax system, stemming from a review of the VAT rate
structure, remains relatively underexploited. According to the convergence
programme, the general government deficit is expected to be 8.3% of GDP in
2011-12, 5.9% in 2012-13, 6.0% of GDP in 2013-14, 4.4% of GDP in 2014-15, 2.9%
of GDP in 2015-16 and 1.2% of GDP in 2016-17. These estimates are somewhat
lower than those by Commission services, who in its 2012 spring forecast expect
a deficit of 6.1% of GDP in 2012-13 (which would be 7.9% without an upcoming
one-off pension fund transfer) and 6.5% of GDP in 2013-14. The differences stem
from a lower growth forecast and amendments made by Eurostat to UK data. Some
adjustments were made to the government’s fiscal plans in the 2011 Autumn
Statement to prioritise growth-enhancing expenditure, but public sector
investment is still set to fall sharply by 2014-15. Government debt, forecast
at 94.7% in 2013-14, is expected to peak in 2014-15.

(8)       The run-up to the crisis
saw the housing market overheat, with house price-to-income ratios reaching
historic highs in the context of a growing housing supply shortage, leading to
the accumulation of high levels of mortgage debt. According to the Commission’s
in-depth review, high household debt constitutes an internal imbalance in the
United Kingdom's economy. Due to a high share of variable interest rate
mortgages, household finances are vulnerable to interest rates rises, with a
potentially destabilising knock-on effect on the economy as a whole via the
financial sector. A sustained and significant fall in household debt is only
likely if house prices fall relative to disposable income; however, if nominal
house prices were to fall rapidly it would risk pushing many households into
negative equity. Residential construction remains at record lows, due both to a
restrictive planning system and cyclical weakness, and wider housing market activity
is also still muted. In November 2011, the government published its housing
strategy for England, which aims to facilitate an increase in residential
construction, but significant uncertainty remains about the net impact of the
new system on housing development. Also, the housing strategy did not mention
the issue of property taxation, where the UK system combines a regressive
recurring tax (council tax) with a progressive transaction tax (the Stamp Duty
Land Tax - SDLT), which may play a role in cyclical developments in budget
revenues and financial stability. Some adjustments were made to SDLT rates in
the 2012 Budget, but only minor changes have been made in this field overall.

(9)       The UK has growing
challenges of unemployment and labour market participation. Unemployment in the
UK currently stands at 8.4 %. Youth unemployment is much higher, at 22.2 %,
and more than 38 % of the unemployed in the UK are under 25. 17.7% of
young people (16-24 year olds) are not in employment, education or training. Private
sector employment has been growing modestly, but not enough to offset
reductions in public sector employment and the growth of the workforce. The UK has an oversupply of low-skilled workers, for whom
demand is falling, and a shortage of workers with high-quality vocational and
technical skills that are particularly needed by goods producing and exporting
sectors in which the UK's performance is relatively weak. The main focus in vocational
education and training (VET) policy is on basic skills and level 2
qualifications, while the economy increasingly demands more advanced VET
qualifications. The UK also continues to have a relatively high number of
adults with very poor basic literacy and numeracy skills, who are not well
placed to benefit from vocational training. Early school-leaving has increased
by 3.3 pp. since 2005 and is above the EU average at 14.9 %; continued support
for low-income families is crucial to prevent school drop-outs.

(10)     The government has a
welfare reform agenda to help more people get into work, while supporting the
most vulnerable. The Universal Credit, which aims to simplify the benefit
system, has not yet been implemented, but considerable risks remain that the
positive impact of new policies on employment and incomes will be more than
offset by declining amounts available for benefits, so poverty, particularly
for families with children, risks increasing. Independent estimates forecast that
in 2020-21 absolute child poverty will reach its highest level since 2001-02,
and that the government will miss targets for reducing child poverty set down
in the Child Poverty Act. Insufficient access to childcare, in particular for
low earners, still causes significant problems and the government has not yet
come up with adequate plans to tackle this challenge. Cuts to support for
childcare also risk exacerbating the problem.

(11)     Financing conditions remain
tight, particularly for SMEs. Net lending to the corporate sector was negative
in 2011, while survey evidence shows that a significant number of SMEs are
credit constrained. Additionally, access to non-bank lending remains largely
restricted to bigger firms, and competition in the banking industry is limited.
Notwithstanding the steps taken by the authorities to improve the situation, the
Breedon task force on alternative debt markets estimated a substantial ongoing
financing gap over the next five years, especially for SMEs.

(12)     The UK has a challenge to
improve its energy and transport infrastructure, which is linked to laying the
foundations for long-term growth and competitiveness, and to addressing the
causes of the UK's lack of external competiveness in manufacturing sectors. The
UK needs substantial investment to upgrade its electricity generation capacity,
given the need to replace a large part of the existing generating capacity,
which will close over the next decade, and the need to meet the renewable
energy obligation and tighter carbon emissions standards. . The UK’s transport
sector faces shortcomings in the capacity and quality of its networks, which
could work against the government’s aim of rebalancing the UK economy towards
investment and exports. As part of the government’s fiscal consolidation strategy,
public sector net investment will fall sharply by 2014-15, which risks
exacerbating existing pressures on transport infrastructure unless alternative
funding sources can be secured.

(13)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of
the United Kingdom’s economic policy. It has assessed the convergence programme
and national reform programme, and presented an in-depth review. It has taken
into account not only their relevance for sustainable fiscal and socio-economic
policy in the United Kingdom, but also their compliance with EU rules and
guidance, given the need to reinforce the overall economic governance of the
European Union by providing EU-level input into future national decisions. Its
recommendations under the European Semester are reflected in recommendations
(1) to (6) below.

(14)     In the light of this
assessment, the Council has examined the United Kingdom’s convergence programme,
and its opinion[9]
is reflected in particular in recommendation (1) below.

(15)     In the light of the results
of the Commission’s in-depth review under Article 5 of Regulation (EU) No
1176/2011 and this assessment, the Council has examined the United Kingdom’s national
reform programme for 2012 and the United Kingdom’s convergence programme for
2012-17. Its recommendation under Article 6 of Regulation (EU) No 1176/2011 is
reflected in particular in recommendations (2), (3) and (6) below,

HEREBY RECOMMENDS that the United
Kingdom should take action within the period 2012-2013 to:

1.           Fully implement the
budgetary strategy for the financial year 2012/13 and reinforce the budgetary
strategy for the financial year 2013/14 and beyond, supported by sufficiently
specified measures, to ensure a timely correction of the excessive deficit in a
sustainable manner and the achievement of the structural adjustment effort
specified in the Council recommendations under the Excessive Deficit Procedure and
to set the high public debt ratio on a sustained downward path. Prioritise
growth-enhancing expenditure to avoid the risk that a further weakening of the
medium-term outlook for growth will negatively impact on the long-term
sustainability of public finances.

2.           Address the destabilising
impact of high and volatile house prices and high household debt by
implementing a comprehensive housing reform programme to increase housing
supply and alleviate problems of affordability and the need for state subsidy
of housing. Pursue further reforms to the mortgage and rental markets,
financial regulation and property taxation to prevent excessive volatility and
distortions in the housing market.

3.           Continue to improve the
employability of young people, in particular those not in education, employment
or training, including by using the Youth Contract. Ensure that apprenticeship
schemes are taken up by more young people, have a sufficient focus on advanced
and higher-level skills, and involve more small- and medium-sized businesses. Take
measures to reduce the high proportion of young people leaving school with very
poor basic skills.

4.           Step up measures to
facilitate the labour market integration of people from jobless households.
Ensure that planned welfare reforms do not translate into increased child
poverty. Fully implement measures aiming at facilitating access to childcare
services.

5.           Further improve the
availability of bank and non-bank financing to the private sector, in
particular to SMEs. Support competition within the banking sector, in
particular through measures to reduce barriers to entry, increase transparency
and facilitate switching between banks as recommended by the Independent
Commission on Banking and explore ways to improve access to venture and risk
capital and other forms of non-bank lending.

6.           Pursue a long-term
strategy for improving the capacity and quality of the UK’s network infrastructure,
including measures to address pressures in transport and energy networks by
promoting more efficient and robust planning and decision-making processes, and
harnessing appropriate public-private financing arrangements.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 02.08.1997, p. 1

[2]               OJ L 306, 23.11.2011, p. 25

[3]               COM(2012)309 final

[4]               P7_TA(2012)0048 and P7_TA(2012)0047

[5]               Council Decision 2012/238/EU of 26 April 2012

[6]               COM(2012) 68 final

[7]               SWD(2012)161 final

[8]               Cyclically adjusted balance net of one-off and
temporary measures, recalculated by the Commission services on the basis of the information provided in the programme, using
the commonly agreed methodology.

[9]               Under Article 9(2) of Council Regulation (EC) No
1466/97.