Recommendation for a

COUNCIL RECOMMENDATION

with a view to bringing an end to the situation of an excessive government deficit in the United Kingdom

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(7) thereof,

Having regard to the recommendation from the European Commission,

Whereas:

(1)According to Article 126 of the Treaty on the Functioning of the European Union (TFEU) Member States shall avoid excessive government deficits.

(2)Pursuant to paragraph 4 of the Protocol (No. 15) on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland, the obligation in Article 126(1) of the TFEU to avoid excessive general government deficits does not apply to the UK unless it adopts the euro. Paragraph 5 of the Protocol provides that the UK is to endeavour to avoid an excessive government deficit.

(3)The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation.

(4)On 8 July 2008 the Council decided, in accordance with Article 104(6) of the Treaty establishing the European Community (TEC), that an excessive deficit existed in the United Kingdom and issued recommendations to correct the excessive deficit by financial year 2009-10 at the latest, in accordance with Article 104(7) of the TEC and Article 3 of Council Regulation (EC) No. 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure,.

(5)In accordance with the provisions of Article 104(8) of the TEC, the Council decided on 27 April 2009 that the United Kingdom had not taken action in response to the Council recommendation of 8 July 2008. On 2 December 2009, the Council issued revised recommendations under Article 126(7) TFEU recommending that the United Kingdom should put an end to the excessive deficit situation by 2014-15. On 6 July 2010, the Commission concluded that based on the Commission 2010 spring forecast, the United Kingdom had taken effective action in compliance with the Council recommendation of 2 December 2009 and considered that no additional step in the excessive deficit procedure was therefore necessary at that point in time.

(6)On [X June 2015], the Council established in accordance with Article 126(8) that the United Kingdom had not taken effective action over the period 2010-11 to 2014-15 in response to the Council Recommendation of 2 December 2009.

(7)In accordance with Article 126(7) of the TFEU and Article 3 of Council Regulation (EC) No. 1467/97, the Council is required to make recommendations to the Member State concerned with a view to bringing the situation of an excessive deficit to an end within a given period. The recommendation has to establish a maximum deadline of six months for effective action to be taken by the Member State concerned to correct the excessive deficit. Furthermore, in a recommendation to correct an excessive deficit, the Council should request the achievement of annual budgetary targets which, on the basis of the forecast underpinning the recommendation, are consistent with a minimum annual improvement in the structural balance, i.e. the cyclically-adjusted balance excluding one-off and other temporary measures, of at least 0.5% of GDP as a benchmark.

(8)The updated Commission 2015 spring forecast projects an increase in real GDP of 2.4% in 2015-16 and 2.1% in 2016-17, following growth of 2.8% in 2014-15. The main contributions to growth in both years stem from domestic demand. Private consumption is expected to pick up gradually over the forecast horizon as nominal wage growth accelerates and inflation remains low. Inflation has been declining rapidly from its peak of 5.2% in September 2011 to reach 0.1% in the first quarter of 2015. It is expected to increase to 1.1% in the final quarter of 2015 with an annual estimate of 0.4%, and further to 1.6% in 2016. Investment is projected to decline somewhat from 2014 but should remain relatively strong based on favourable credit conditions, healthy corporate profits and strong demand. The external sector is foreseen to continue to contribute negatively to growth but to a lesser degree as the outlook for the euro area, the UK’s largest trading partner, improves. Employment has been strong and the unemployment rate is expected to fall to 5.4% in 2015 and further to 5.3% in 2016.

(9)The general government deficit has fallen from a peak of 10.9% of GDP in 2009-10 to 5.2% of GDP in 2014-15. The structural balance was reduced from 8.0% of GDP to 4.7% of GDP over the same period. The average annual improvement in the structural effort amounted to 0.7% between 2010-11 and 2014-15. When adjusted for the impact of revisions in potential output growth between the current forecast and that underlying the Council recommendations of 2 December 2009 as well as for the impact of revenue developments as compared to standard elasticities to GDP growth, the average annual adjusted structural effort over the period is estimated at 1.1% of GDP. The vast majority of measures for the consolidation plan were set out in the emergency budget in June 2010 amounting to 2.5% of GDP over the period 2010-11 to 2014-15. Just over one-quarter of these were taxation measures with spending cuts accounting for the remaining three-quarters. The remaining fiscal consolidation, of around 1% of GDP, was implemented via the two fiscal announcements prior to the June 2010 budget and the subsequent budgets and Autumn Statements until November 2014. There were some shifts between current and capital spending and the period of consolidation was extended until 2018-19.

(10)General government gross debt increased from 42.7% of GDP in 2007-08 to 88.4% in 2014-15; continuously above the Treaty reference value since 2009-10. The dynamics of the primary deficit and financial sector interventions, which effectively nationalised two banks, have contributed to this debt increase. Based on the Commission's 2015 spring forecast, the debt-to-GDP ratio is projected to further increase marginally. At the same time off-balance sheet items related to the financial sector interventions could have a positive effect on the future debt development.