Council Opinion

of 28 February 2000

on the updated convergence programme for the United Kingdom for the period 1998-1999 to 2004-2005

(2000/C 98/05)

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 28 February 2000 the Council examined the updated Convergence programme of the United Kingdom which covers the period 1998-1999 to 2004-2005. The programme envisages a government surplus of 0,3 % of GDP in 1999-2000, small surpluses in the two following years to 2001-2002 and small deficits in the years 2002-2003 to 2004-2005. The Council commends the clear presentation of the convergence programme update that facilitates the analysis of the United Kingdom's current and prospective macro-economic and fiscal developments. The Council considers it appropriate that the programme stresses the securing of macro-economic stability supported by a sound budgetary position 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 macro-economic framework showing a recovery in GDP growth from 13/4 % in 1999 to growth close to trend - put at 21/2 % - thereafter, which the Council considers to be realistic. Moreover, the projections in the programme for the public finances are, for reasons of caution, based on a lower assumption for trend growth - namely 21/4 % - which the Council considers to be appropriate.

With respect to inflation and interest rates, 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 Council notes that under the current policy framework, the programme projects the United Kingdom inflation target to be achieved over the programme period; it further notes 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 helps confirm the credibility given to the United Kingdom's stability oriented framework for macro-economic policy. It notes that while there are signs of reduced exchange rate volatility, it cannot yet be concluded that this policy framework has delivered a stable exchange rate. Therefore, as in the opinion on the previous convergence programme(2), 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 re-enforce a stable economic environment.

The Council notes with approval, that over the programme period - to 2004-2005 - the general government finances are projected to be close to balance in underlying terms thus fulfilling the requirements of the Stability and Growth Pact. The Council nevertheless notes and 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 has placed the government finances on a more stable footing and the mechanism 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 to 45 % in 1999-2000. The Council welcomes the envisaged further reduction of the gross debt ratio to below 40 % of GDP by 2004-2005.

The Council welcomes the structural reforms included in the programme. It notes, with approval, that the progress on economic reforms should help provide the flexibility required to improve the underlying performance of the economy and ensure that divergences in economic cycles between the United Kingdom and its European partners are minimised.

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

(2) Council Opinion of 8 February 1999 on the convergence programme of the United Kingdom, 1997-1998 to 2003-2004 (OJ C 68, 11.3.1999, p. 5).