COUNCIL OPINION of 8 February 1999 on the convergence programme of the United Kingdom, 1997-1998 to 2003-2004 (1999/C 68/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

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 9(1) and (2) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 8 February 1999 the Council examined the United Kingdom's Convergence programme which covers the period 1997-1998 to 2003-2004. The programme envisages a government surplus of 0,8 % of GDP in 1998-1999 and public finances close to balance in the remaining years of the programme. The Council considers it appropriate that the programme emphasises the securing of macro-economic stability supported by budgetary consolidation and continued structural reform. Moreover, the Council considers that the programme is fully in line with the Broad Economic Policy Guidelines.

The programme is built upon a macroeconomic forecast showing a deceleration in the strong domestic demand led growth of recent years towards real GDP growth of 1 to 1½ % in 1999 but for growth to recover subsequently to 2¾ to 3¼ % in 2001 and remain around trend thereafter. The Council acknowledges that the growth scenario appears realistic and notes that growth at the top end of the forecast range is based, inter alia, on the success of the government's labour market policies and the delivery of a reduction in the sustainable rate of unemployment. Moreover, the projections in the programme for the public finances are, for reasons of caution, based on the lower end of the growth range. The Council notes the government's commitment to a framework in which monetary policy is applied promptly, with the support of budgetary policy, with a view to achieving a less volatile growth profile.

With respect to inflation, the United Kingdom continues to fulfil the convergence criterion with some margin. The Council notes that the monetary framework of inflation targeting, with operational responsibility for interest rate changes given to the Bank of England, has been an important condition for securing low inflation expectations. The outlook is for inflation to remain low with downward pressure on domestically generated inflation in the near term. The Council urges that the United Kingdom's inflation target be achieved over the programme period; it is encouraged that such an outturn is likely to be consistent with the ECB's definition of price stability.

The United Kingdom has fulfilled the convergence criterion on the long-term interest rate for some time. This emphasises the credibility given by markets to the United Kingdom's stability oriented framework for macroeconomic policy. However, it is too soon to conclude that this policy framework has, as yet, reduced exchange rate volatility. Therefore the Council recommends that the United Kingdom continue with these policies with a view to securing exchange rate stability which, in turn, should help re-enforce a stable economic environment.

The Council takes note of the programme's budgetary objectives and its expectation of their achievement over the programme period to 2003-2004. It notes with approval that the public finances are projected to be close to balance in underlying terms over the programme period thus fulfilling the medium term requirements of the Stability and Growth Pact. This budgetary objective is intended to be achieved by announced tax policies that will raise the ratio of receipts to GDP a little over the programme period, while maintaining a ratio below that of the European Union on average, and by the adherence to the firm expenditure plans over the medium term. The Council welcomes the raising of government investment as a share of GDP within the expenditure totals. It also notes that the move to three-year allocations of departmental expenditure should help ensure that the tight budgetary position is locked in over the economic cycle.

The Council notes that the Government gross debt ratio in the United Kingdom remains below 60 % of GDP and is expected to fall below 50 % in 1998-1999. The Council welcomes the envisaged further reduction of the gross debt ratio to around 40 % of GDP by 2003-2004.

The Council welcomes the structural reforms included in the programme. It notes, with approval, the programme's emphasis of these reforms, together with the macro-economic reforms and the reforms to the public finances. In particular the labour market reforms should build on earlier reforms which have secured an unemployment rate in the United Kingdom well below the European Union average.

(1) OJ L 209, 2.8.1997, p. 1.