Council Opinion

of 18 February 2003

on the updated convergence programme of the United Kingdom 2001/02 to 2007/08

(2003/C 51/05)

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(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 18 February 2003 the Council examined the United Kingdom's updated convergence programme, which covers the period 2001/02 to 2007/08. This update provides detailed information, including the analysis of the long-term sustainability of public finances, which is broadly in line with the code of conduct. The economic policies as reflected in the planned measures in the convergence programme update comply in part with the 2002 Broad Economic Policy Guidelines.

The Council considers it appropriate that the programme stresses, as did the previous programme, the importance of securing macroeconomic stability supported by sound monetary and fiscal policies and continued structural reform. The Council notes with satisfaction that these policies have delivered low and stable inflation in recent years. The convergence criteria on inflation and long term interest rates are fulfilled with some margin and the programme projects that the inflation target will continue to be achieved over the programme period. The Council recommends that the United Kingdom continue with the stability-oriented policies with a view to securing exchange rate stability which, in turn, should help reinforce a stable economic environment.

The programme is based on public finance projections that assume GDP growth rising from 1,6 % in 2002 to 2,5 % in 2003, and 3 % in 2004 and 2,75 % in 2005. This is in line with the Commission Autumn 2002 forecast. The Council considers that the macroeconomic forecasts appear now to be optimistic in the short term and that there are downside risks to growth. However, the trend growth assumption of 2,75 % is consistent with Commission services calculations and higher than the 2,5 % used in the programme that underpins the projections of the government finances. The general government finances are projected, in the programme, to show deficits of 1,8 % of GDP in the current fiscal year, 2002/03, and 2,2 % in 2003/04. In cyclically adjusted terms, these would be equivalent to 1,1 % and 1,4 % of GDP, respectively. The deficit would be around 1,6 % of GDP in the final years of the programme - 2005/06 to 2007/08 - both in nominal and cyclically adjusted terms. Much of the rise in the deficit over the programme period results from the planned reversal of the decline in public investment relative to GDP. This reversal is in itself in line with the 2002 Broad Economic Policy Guidelines. The Council notes, with approval, that the United Kingdom gross debt to GDP ratio is projected to remain relatively low at around 39 % in 2003/04 and subsequently.

The Council notes that the actual projected deficits in 2002/03 and 2003/04 are now substantially higher than those foreseen in the previous programme update by 0,7 and 0,9 percentage points of GDP respectively. The Council acknowledges that this rise in the deficit in 2002/03 and 2003/04 results mainly from cyclical factors.

The Council notes that the relatively high projected deficit of 2,2 % of GDP in 2003/04 is based on GDP growth assumptions of 2,5 % in 2003 and 3 % in 2004 which now appear to be optimistic in light of global uncertainty. Therefore, such budgetary plans could lead to a deficit that could potentially breach the 3 % of GDP reference value and, consequently, they would not be in line with the requirements of the Stability and Growth Pact.

The Council notes that the deficits projected for the later years of the programme are at around 1,5 % of GDP, both actual and cyclically adjusted. Consequently, the Council recommends that the United Kingdom authorities should aim for a "medium-term" budgetary position that is in line with the close to balance requirement of the Stability and Growth Pact.

The projections show a low and stable level of the general government gross debt-to-GDP ratio from 2003/04. The Council notes that on the basis of current policies, ageing populations are projected to have a limited impact on public spending on pensions as a share of GDP. While recognising that the debt levels are well below the 60 % of the GDP reference value, the Council considers that following the "close to balance or in surplus" requirement should help to ensure the sustainability of the public finances in the longer term.

The Council welcomes the attention paid to the sustainability of public finances in the convergence programmes and notes with interest the variety of indicators used to examine long-run budgetary challenges and issues related to intergenerational equity. The Council considers that on current policies and the assumptions in the programme, the United Kingdom is well placed to meet the budgetary costs associated with ageing populations. The Council notes, however, that much of the financial sustainability of the pension system depends on the performance of private pension providers. If private provision produces significantly less than the anticipated coverage or level of pensions, future governments may face increased claims of means-tested benefits. Therefore, it considers that a budgetary position of a limited deficit in the medium term would help avoid any risk of emerging budget imbalances in the context of ageing populations and give greater assurance to the programme view that "the public finances, based on current policies, are sustainable in the long-term".

The Council welcomes the measures of economic reform which, among other objectives, are intended to achieve a higher sustainable rate of productivity growth. In view of the relatively low level of productivity in the United Kingdom, compared to its competitors, the Council welcomes these measures.

(1) OJ L 209, 2.8.1997.