EN Official Journal of the European Union C 261/122

COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2017 Convergence Programme of the United Kingdom

(2017/C 261/27)

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 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1) On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify the United Kingdom as one of the Member States for which an in-depth review would be carried out.

(2) The 2017 country report for the United Kingdom was published on 22 February 2017. It assessed the United Kingdom’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and United Kingdom’s progress towards its national Europe 2020 targets.

(3) The United Kingdom submitted its 2017 National Reform Programme on 21 April 2017 and its 2017 Convergence Programme on 27 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4) Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5) The United Kingdom is currently in the corrective arm of the Stability and Growth Pact. Should a timely and durable correction have been achieved in 2016-17, the United Kingdom will become subject to the preventive arm of the Stability and Growth Pact and to the transitional debt rule in 2017-18. In its 2017 Convergence Programme, the Government expects to have corrected the excessive deficit by the fiscal year 2016-17, in line with the Council Recommendation of 19 June 2015, with a headline deficit of 2,7 % of GDP. The headline deficit is then expected to increase slightly to 2,8 % of GDP in 2017-18 before declining to 1,9 % of GDP in 2018-19. The Convergence Programme does not include a medium-term budgetary objective. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to broadly stabilise around 87,5 % from 2016-17 to 2018-19 before falling to 84,8 % of GDP in 2020-21. The macroeconomic scenario underpinning those budgetary projections is favourable. While the measures needed to support the planned deficit targets are overall well specified, downside risks to the macroeconomic outlook pose a risk to the achievement of the planned deficit reduction.

(6) On 12 July 2016, the Council recommended that the United Kingdom put an end to the excessive deficit situation by 2016-17 and, following the correction of the excessive deficit, achieve a fiscal adjustment of 0,6 % of GDP in 2017-18 towards the minimum medium-term budgetary objective. Based on the Commission 2017 spring forecast, the headline deficit is projected to have reached 2,7 % of GDP in 2016-17, in line with the target recommended by the Council. In 2017-18, there is a risk of some deviation from the preventive arm requirement.

(7) In the light of its fiscal situation and, in particular, of its debt level, the United Kingdom is expected to further adjust towards an appropriate medium-term budgetary objective. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (4) which does not exceed 1,8 %. It would correspond to an annual structural adjustment of 0,6 % of GDP. Under unchanged policies, there is a risk of some deviation from that requirement over the period 2017-18 and 2018-19 taken together. At the same time, the United Kingdom is prima facie not projected to comply with the transitional debt rule in 2017-18 but is forecast to comply in 2018-19. Overall, the Council is of the opinion that the United Kingdom needs to stand ready to take further measures as of 2017-18 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in the light of the cyclical conditions. As recalled in the Commission Communication accompanying these country-specific recommendations, the future assessment will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of the United Kingdom’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in the light of the cyclical situation of the United Kingdom.

(8) Private investment has been consistently well below the Union average and public investment marginally below. Productivity is significantly below the G7 average and has stagnated since 2008. The Government is putting a strong policy emphasis on raising investment to boost productivity growth. A key challenge is addressing significant shortcomings in the capacity and quality of the United Kingdom’s infrastructure networks. Road congestion is high and rail capacity is increasingly inadequate in places in the face of rapidly growing demand. There is also an increasingly urgent need for higher investment in new energy generation and supply capacity. The National Infrastructure Delivery Plan sets out ambitious plans to improve the UK’s economic infrastructure and a number of investment decisions on major transport and energy projects were made in 2016. However, concerns remain over whether adequate public and private investment can be secured to address infrastructure backlogs in a timely and cost-effective way. The United Kingdom has a major challenge to increase housing supply. A chronic shortage of housing contributes to high and rising house prices and has significant economic and social costs, especially around poles of economic growth. The reformed planning system, and a range of complementary housing policies, are together somewhat more supportive of increased residential construction. Nevertheless, a number of constraints on housing supply remain, including very strict and complex regulation of the land market and residential construction, and new housing supply is still not keeping up with the growth in demand.

(9) Labour market headline figures continue to be positive, with low long-term and youth unemployment overall. However the levels of inactivity, and part-time and low-wage employment have room for improvement. Earnings growth remains modest, linked to weak productivity growth. Concerns about skills supply, utilisation and progression remain. There have been significant policy developments focusing on skills and progression via reforms to technical education and apprenticeships. Quality in apprenticeships will need focus on both the qualification level undertaken and the subject area in which it is taken. Other, strategically important, funded routes for skills enhancement, particularly for people over 25, would expand the skills offer available to the State, to business and to individuals seeking career progression. There are also challenges related to the supply of childcare and social care, which contribute to the high rate of female part-time employment. Childcare reforms to date have been constant but gradual. A step-change is likely with the full roll-out of some initiatives in the next 2 years. The participation of children less than 3 years old in formal childcare is relatively low. While recent measures improve to some extent the availability and affordability of childcare for children aged 3 and 4, they do not address the issue of childcare supply for children under 3 years old. As a result of previously announced reforms and cutbacks, in particular to in-work support, social policy outcomes including child poverty may come under pressure in the near-to-medium term, particularly in a context of higher inflation. The number of children in poverty who live in working households is a particular cause for concern.

(10) In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of United Kingdom’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to the United Kingdom in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the United Kingdom but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(11) In the light of this assessment, the Council has examined the 2017 Convergence Programme and its opinion (5) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that United Kingdom take action in 2017 and 2018 to:

1. Pursue a substantial fiscal effort in 2018-19 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of the United Kingdom’s public finances.

2. Take further steps to boost housing supply, including through reforms to planning rules and their implementation.

3. Address skills mismatches and provide for skills progression, including by continuing to strengthen the quality of apprenticeships and providing for other funded ‘further education’ progression routes.

Done at Brussels, 11 July 2017. For the Council The President T. TÕNISTE

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

(2) 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 (OJ L 306, 23.11.2011, p. 25).

(3) Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4) Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(5) Under Article 9(2) of Regulation (EC) No 1466/97.