EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 11.6.2008 
SEC(2008) 2014 final 
  
REPORT FROM THE COMMISSION 
United Kingdom 
 
Report prepared in accordance with  Article 104(3) of the Treaty 
{SEC(2008) 2016} 
 
EN 2   EN REPORT FROM THE COMMISSION 
United Kingdom 
 
Report prepared in accordance with  Article 104(3) of the Treaty 
 
1. INTRODUCTION  
This report assesses recent and current budgeta ry developments in the United Kingdom and 
reviews the short- and medium-t erm prospects in the light of overall economic conditions and 
policy action taken by th e government. It is pr epared according to Article 104(3) of the 
Treaty and follows the United Kingdom's announcement of a planned  deficit exceeding the 
reference value. 
Article 104 of the Treaty lays down an excessive deficit procedure (EDP). This procedure is 
further specified in Council Regulation (EC)  No 1467/97 “on speeding up and clarifying the 
implementation of the excessive deficit procedure”1, which is part of th e Stability and Growth 
Pact. While the provisions above apply to the UK in the same manner as to other countries 
not participating in the euro ar ea, it should be recalled that unde r Article 5 of the Protocol on 
certain provisions relating to the United Kingdom of Great Br itain and Northern Ireland, the 
obligation under Article 104(1) of the Treaty to  avoid excessive general government deficits 
does not apply to the United Kingd om unless it moves to the thir d stage of EMU. Instead, as 
long as it is in the second stage of EMU, the UK is committed under Article 116(4) of the 
Treaty to "endeavour to a void excessive deficits". 
According to Article 104(2) of the Treaty, the Commission ha s to monitor compliance with 
budgetary discipline on the basis of two criteria,  namely: (a) whether th e ratio of the planned 
or actual government deficit to gross domestic  product (GDP) exceeds the reference value of 
3% (unless either the ratio ha s declined substantially and co ntinuously and reached a level 
that comes close to the reference value; or, alternatively, the excess over the reference value 
is only exceptional and temporary and the ratio remains close to the reference value); and (b) 
whether the ratio of government debt to GDP exceeds the reference valu e of 60% (unless the 
ratio is sufficiently diminishing and approachin g the reference value at a satisfactory pace).  
Article 104(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commission has to pr epare a report. The report also has to “take 
into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”.  
                                                
 
1 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). The report also takes into accoun t the “Specifications on the implementation of the 
Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by the ECOFIN Council of 11 October 2005, available at 
http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm. 
 
EN 3   EN The preceding EDP in respect of the Un ited Kingdom (its th ird such procedure2) was 
abrogated in October 2007. This was initia ted in September 2005 with the Commission's 
adoption of a report under Article 104(3) following the August 2005 EDP notification which 
reported a general government deficit rati o of 3.2% in the financial year 2004/053. In January 
2006, the Council decided, on a recommendation from the Commission, that the United Kingdom was in excessive defic it according to Article 104(6)
4. At the same time, and also 
based on a Commission recommendation, the Council addressed recommendations under 
Article 104.7 to the UK with a view to bringi ng the situation of an excessive government 
deficit to an end by 2006/07 at the latest. On 12 Septem ber 2007, the Commission adopted a 
recommendation for a Council decision abroga ting the procedure. On  9 October 2007, the 
Council decided to abrogate the EDP according to Article 104.12 of the Treaty. 
According to the EDP data notified by the UK authorities in March 20085, the general 
government deficit in the United Kingdom wa s planned to reach 3.2% of GDP in 2008/09, 
thus exceeding the 3% of GDP reference value,  while general government gross debt would 
be 43.0% of GDP6, below the 60% of GDP reference valu e but on a rising trend; these ratios 
are identical to those published in the Un ited Kingdom's March 2008 budget. A subsequent 
policy announcement on 13 May reducing pers onal income tax in 2008/09, financed by 
additional borrowing (see Section 2)  results in higher planned de ficit and debt ratios than 
those in the notification. 
Table 1 : General government deficit and debt a 
 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 
 
     COM 2008 
budget b COM 2008 
budget b 
General government balance 
General government gross 
debt 3.5 
 
39.7 3.1 
 
41.7 2.6 
 
42.5 2.9 
 
43.2 3.3 
 
46.2 3.2 
 
45.2 3.3 
 
47.5 2.8 
 
46.1 
Note : 
a In percent of GDP. 
b The projections notified in March 2008 are iden tical to those published in the 2008 budget. 
Source : Eurostat, Commission services’ spring 2008 forecasts and 2008 Budget 
The figure for the 2008/09 deficit in the notification provides prima facie  evidence of a 
planned excessive deficit in th e United Kingdom in the sense of  the Treaty and the Stability 
and Growth Pact, while the more recent pol icy announcement is additional evidence. The 
Commission has therefore decided to initiate the excessive deficit procedure for the United 
Kingdom with the adoption of this report. Se ction 2 of the report examines the deficit 
criterion and Section 3 the debt criterion. Sec tion 4 deals with public investment and other 
                                                 
2 The first EDP vis-à-vis the United Kingdom was abrogated in 1998. Following a deficit outturn of 
3.2% of GDP in 2002/03, in April 2004 the Commi ssion initiated a second EDP with an Article 104.3 
report. Given expectations that the excessive deficit would revert to below the threshold level in the following year, the Commission and the Economic and Financial Committee then concluded that the 
United Kingdom could not be considered to be in an excessive deficit situation as defined in the Treaty. 
3 The UK financial year runs from April to March. The EDP applies to the UK on a financial year basis 
(annex to Regulation No 1467/97).  
4 All EDP-related documents for the United Kingdom can be found at the following website: 
 http://ec.europa.eu/economy_finance/netsta rtsearch/pdfsearch/pdf.cfm?mode=_m2  
5 According to Council Regulation (EC) No 3605/93, Member States have to report to the Commission, 
twice a year, their planned and actua l government deficit and debt le vels. The most recent notification 
of the United Kingdom can be found at: 
 http://epp.eurostat.ec.europa.eu/portal/page?_p ageid=2373,58110711&_dad=portal&_schema=portal. 
6 Using FISIM-adjusted version of GDP. 
 
EN 4   EN relevant factors. The technical analysis underp inning the conclusions of the report is provided 
in a more detailed Commission staff working docume nt, which is released in parallel with this 
report7. Both documents take into account the Commission services’ spring 2008 forecasts, 
released on 28 April.  
2. DEFICIT CRITERION   
In 2008/09, the general government deficit was pl anned to reach 3.2% of GDP in the March 
2008 notification. 
• Although in excess of 3%  of GDP, the planned deficit is close  to the Treaty reference 
value. 
• The planned excess over the 3% of GDP  reference value is not exceptional . In particular: 
i) it does not result from an unusual event in the sense of the Treaty and the Stability and 
Growth Pact;  
ii) It does not result from a severe economic dow nturn in the sense of  the Treaty and the 
Stability and Growth Pact. GDP growth in  2006 and 2007 was above potential, with an 
annual outturn of 2.9% and 3.0% respectivel y. For the years 2008 a nd 2009, the Commission 
services’ spring 2008 forecast can be considered  as an up-to-date assessment of the UK’s 
economic prospects. This forecast projects UK growth to slow in 2008 and 2009 to annual rates below potential, due to a weakening of  domestic demand driven by adverse credit 
conditions as a result of the turmoil in financ ial markets, a weaker housing market and higher 
inflation weakening real disposable incomes. The spring 2008 forecast is more cautious than 
the UK's budget forecast regarding the speed of reversion to normal credit market conditions, 
including for secured and unsecured household borrowing, which the spring forecast expects 
to last into 2009. The expected improvement in ne t exports is not able to fully compensate for 
the shortfall in domestic demand. Nevertheless, qua rterly GDP growth is expected to remain 
positive and annual GDP growth to reach 1.7% in 2008 and 1.6% in 2009. These growth rates 
are on a par with the average of independent forecasts in May 2008, as compiled by the UK Treasury.
8 On a financial year basis, the spring forecast expects GDP growth of 1.4% in 
2008/9 and 1.8% in 2009/10.  
• The planned excess over the 3% of GDP  reference value is not temporary  in the sense of 
the Treaty and the Stability and Growth P act. In 2009/10, assuming that the government 
will adhere to the non-cyclical primary expend iture plans that were announced in the 2008 
budget, the Commission services' spring 2008 for ecast had projected the deficit to remain 
at 3.3% of GDP, with the weak economic c ontext feeding-through into slow revenue 
growth. In marked contrast, the March 2008 budget projection is of  a 2009/10 deficit of 
2.8% of GDP, with the government's greater  optimism based on an earlier and stronger 
economic recovery than in the Commission serv ices' spring forecast: growth of 1¾% in 
2008/9 followed by a rebound to 2½ % in 2009/10. 
                                                 
7 Technical document by the Commission services accompanying the report on the United Kingdom 
prepared in accordance with Article 104(3) of the Treaty [ECFIN/G1/2008/REP 52966]. 
8 HM Treasury (2008): Forecasts for the UK econom y – A comparison of independent forecasts, May 
2008 (http://www.hm-treasury.gov.uk/media/0/C/200805forcomp.pdf). 
 
EN 5   EN Table 2 : Macroeconomic and budgetary developments a 
  2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 
     COM 2008 
Budget COM 2008 
Budget 
Real GDP (% change) b 3.3 1.8 2.9 3.0 1.7 2.0 1.6 2½ 
Potential GDP (% change) b,c 2.7 2.7 2.8 2.7 2.4 2 ½ 2.3 2 ½ 
Output gap (% of potential 
GDP) b,c 0.7 -0.1 0.0 0.4 -0.3 -0.6 -1.0 -0.6 
General government balance 3.5 3.1 2.6 2.9 3.3 3.2 3.3 2.8 
Primary balance -1.4 -1.0 -0.4 -0.7 -1.1 -1.2 -1.2 -0.8 
One-off and other temporary 
measures - 0.3 - - - - - - 
Government gross fixed capital 
formation 1.8 0.6 1.8 1.9 2.0 2.0 1.9 2.0 
Cyclically-adjusted balance c,d -3.7 -3.0 -2.7 -3.0 -3.1 -2.9 -2.9 -2.6 
Cyclically-adjusted primary 
balance -1.7 -0.9 -0.6 -0.8 -0.9 -0.9 -0.8 -0.6 
Structural balance d,e -3.7 -3.3 -2.7 -3.0 -3.1 -2.9 -2.9 -2.6 
Structural primary balance -1.7 -1.2 -0.6 -0.8 -0.9 -0.9 -0.8 -0.6 
Notes : 
a In percent of GDP unless specified otherwise. 
b Data on a calendar-year basis. Numbers reported in  2004/05 column refer to the 2004 calendar year. 
c Potential GDP growth, output gaps and cyclically-adjuste d balances attributed to the 2008 budget are reported as 
recalculated by the Commission services on the basis of the information in the budget. 
d The 2008 budget estimate of the cyclically -adjusted and structural balances in 2007/08 (as recalculated by the Commission 
services) is 2.8% of GDP. 
e Cyclically-adjusted balance excluding on e-off and other temporary measures. 
Source : Eurostat and Commission servic es’ spring 2008 forecasts. 
However, the Commission’s sp ring 2008 fiscal projections (a nd the 2008 budget report) pre-
dated the government's statement on the 23 Apr il 2008 that it now envisaged elements of 
compensation to some of those negatively aff ected by the removal fr om April 2008 of the 
10% starting rate of income tax (one of th e measures announced in the March 2007 budget). 
An initial measure announced on 13 May 2008 is a reduction in personal income tax in 
2008/09 financed by additional borrowing, which will lead to an increase in the deficit in 
2008/09 by 0.2 percentage points of GDP, increasi ng the deficit forecast by the Commission 
services to 3.5% of GDP. The government announced in its statement that for future years it 
aims to " continue the same level of support for those on lower incomes "9. The announcement 
does not commit the government to extend to 2009/10 the fully debt-financed compensation 
offered in 2008/09 (thus opening the possibil ity of offsetting tax and expenditure 
measures10).It nevertheless carries a significant risk for 2009/ 10 of a deficit overshoot, 
compared with the March 2008 budget plans, with  a similar impact ceteris paribus on the 
spring forecast projection.  
In sum, the planned deficit is close to the 3%  of GDP reference value but the planned excess 
over the reference value is neither exceptional nor temporary in the sense of the Treaty and the Stability and Growth Pact. This analysis sugg ests that the deficit criterion in the Treaty is 
not fulfilled.
 
                                                 
9 See paragraph 35 of the statement by the Chancellor:  
http://www.hm-
treasury.gov.uk/newsroom_and_s peeches/speeches/sta tement/Speech_stat ement_130508.cfm 
10 Further policy announcements are expected in the autumn 2008 Pre-Budget Report.  
 
EN 6   EN 3. DEBT CRITERION  
The UK’s general government gross debt ratio is set to remain  under the reference value of 
60% of GDP within the medium term, even if projected to be on a rising trend up to 
2009/2010. The spring 2008 forecast es timates that the gross debt  at end-2007/08 rose to 
43.2% of GDP and forecasts a further increase in the debt ratio to 46.2% of GDP by 2008/09 
and 47½% by 2009/10 (see Table 1) ; following the 13 May announ cement, prospects are for 
slightly higher ratios. The acceleration in the accumulation of government debt is in part due 
to the deterioration in the primary balance.  However, in 2008/09 the forecast 3-percentage 
point rise in the debt ratio over the preceding y ear also reflects the denominator-effect from 
lower growth in real GDP and the GDP deflator, as well as a stock-flow adjustment of almost 
1% of GDP due to the expected replacement of the Bank of England's loan to Northern Rock 
bank, extended progressively from Septem ber 2007, by direct govern ment financing (see 
Section 4.4 below). 
This analysis suggests that the debt  criterion in the Treaty is fulfilled. 
4. RELEVANT FACTORS  
Article 104(3) of the Treaty provides that the Commission report “shall also take into account 
whether the government deficit exceeds governme nt investment expenditure and take into 
account other relevant factors including the medium-term economic and budgetary position of 
the Member State”. These factors are further cl arified in Article 2(3)  of Council Regulation 
(EC) No 1467/97, which also spec ifies that “any other factors which, in the opinion of the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need to be given due consideration.  
In view of the above provision s, the following four subsections consider in turn (1) the 
medium-term economic position; (2) the medi um-term budgetary position (including public 
investment); (3) other factors put forward by the Member State; and (4) other factors 
considered relevant by the Commission.  
4.1. Medium-term economic position 
Cyclical conditions and potential growth   
Having grown at rates slightly above poten tial in 2006 and 2007, the spring 2008 forecast 
suggests that in 2008 and 2009 the UK economy will experience a period of weak economic 
growth relative to potential. This moderation is  largely the result of a broad-based weakening 
of domestic demand, although accompanied by an im provement in external demand due to the 
sizeable depreciation of sterling. The latter wi ll help to correct the UK’s current account 
deficit which reached 4.2% of GDP in 2007. With potential growth rates estimated at slightly 
below 2½%, expected GDP growth of 1.7% an d 1.6% in 2008 and 2009 respectively will lead 
to a negative output gap of around 1% of GDP by  the end of the forecast horizon. This output 
gap profile is consistent with a downturn in to bad economic times in the years 2008 and 2009, 
but does not constitute a severe economic downturn.  
Recent structural reforms 
Notwithstanding a relatively str ong growth performance in rece nt years and very flexible 
labour, capital and product markets, the UK stil l seems to face a productivity challenge. In 
2006, the UK's GDP per hour worked was 4% below the euro area average. However, the UK has been catching up, with av erage annual growth in labou r productivity over 2001-2006 of 
2.1% compared to 1.0% in the euro area. Structural policy measures have focused on 
 
EN 7   EN improving skills, R&D and innovation, the science base, regulation, the competition regime 
and public services productivity, in line with the pr iorities put forward in the UK national 
reform programme (including th e latest 2007 implementation repor t) in the context of the 
Lisbon strategy for growth and jobs. Acco rding to the 2007 Comprehensive Spending 
Review, UK science spending is expected to rema in stable over the next three years at around 
0.4% of GDP. If implemented fully, the long-ter m impact of the reform efforts on growth 
(and thereby the budgetary positi on) is likely to be positive.  
4.2. Medium-term budgetary position 
Structural deficit a nd fiscal consolidation in good times 
Following the remarkable fiscal consolidation achievements during the late 1990s, the fiscal 
stance eased in the early 2000s, mainly on account  of an explicit policy objective to raise 
significantly expenditure on public  services. As a result, the UK general government balance 
moved from a surplus position in the late 1990s  to a headline deficit of 3.5% of GDP in 
2004/05, equivalent to a deterioration of the st ructural balance of 4½ percentage points of 
GDP11 between 1999/00 and 2004/05. In 2005/06 and 2006/07, strong grow th in taxes on 
corporate profits, boosted by higher ta x intakes from the financial se ctor as a result of strong 
equity market performance and mergers a nd acquisition activity, contributed to an 
improvement in the headline and structural deficit estimates. However, the underlying 
budgetary situation in 2007/08 deteriorated, no twithstanding economic good times. As a result 
of pro-cyclical fiscal policy in 2007/08, the structural deficit in th at year is estimated to have 
increased by ¼ percentage poi nts, to 3% of GDP. Looking fo rward, the Commission services' 
spring 2008 forecast had projected a further we akening of the budgetary position in 2008/09, 
with the economic slowdown feed ing through into slower re venue growth. However, the 
fiscal relaxation announced by gov ernment in May 2008 implies that  the headline deficit is 
now expected to reach 3.5% of GDP, with the structural deficit ratio set to increase by ¼ 
percentage points. The spring 2008 forecast had es timated the structural deficit in 2009/10 at 
around 3% of GDP, ⅓ percentage points less than the latest estimate of the structural deficit in 
2008/09. The latter in part reflects the combined effects of discretionary measures, including 
the higher taxes on alcohol and motor vehicles  announced in the 2008 budget, and continued 
slower growth in government expenditure. However, the government's commitment to continue providing an unspecifi ed level of compensation to low-income households beyond 
2008/09 carries a significant risk that the reducti on in the structural deficit ratio in 2009/10 
could actually fall short of this.  
Public investment   
General government gross fixed capital form ation has increased from 1.2% of GDP in 
2000/01 to 1.9% in 2007/08, mirroring the govern ment's policy of increasing public 
investment from the relatively low levels seen  in previous years. Since 2002/03, however, the 
general government deficit ratio has consistently  exceeded the ratio of gross fixed investment 
to GDP. According to the Commission services ' forecasts, the general government deficit 
ratio will continue to exceed the gross fixed investment ratio throughout the forecast period. 
Between 2007/08 and 2008/09 the government invest ment ratio is forecast to increase by 0.1 
percentage points, to 2.0% of GDP, while the headline deficit (prior to the 13 May 
announcement) was forecast to rise by 0.4 percentage points.  
                                                
 
11 Estimated by the Commission services, applying the common methodology on estimating output gaps. 
 
EN 8   EN Quality of public finances   
In recent years the ratio of general government expenditure to GDP has risen by more than 5 
percentage points from 39% in  1999/00 to 44% in 2006/07. In comparison, the EU average 
was around 47% in both 1999 and 2006. Underpinning the rise in  the United Kingdom is the 
government’s policy of increasing expenditure on  public services, with a particular focus on 
increasing public investment from  the relatively low levels seen in previous years. The 2007 
Comprehensive Spending Review (CSR) – announced together with the 2007 Pre Budget 
Report in October 2007 – set departmental sp ending plans and priorities for the years 
2008/09, 2009/10 and 2010/11. The spending pl ans over the 2007 CSR period envisage 
sharply lower growth in compar ison with previous spending revi ews. Total public  spending is 
expected to increase by an av erage of 2.1% per year in real  terms in the 2007 CSR period, 
against an average of 4.0% for the spending re views covering the peri od from April 1999 to 
March 2008. To support the departmental spending plans and enable the release of resources 
for priority areas, the government has also intr oduced a range of initiatives within the context 
of the 2007 CSR to further enhance the effici ency and effectiveness of public spending, 
including a value for money programme and a perf ormance management framework. It is still 
too early to judge whether the in troduced measures will actually lead to a real improvement in 
the efficiency of public spending. There is a risk that some of the declared efficiency gains 
could represent pure cost-savings, entailing lower public service quality or output. Furthermore, the targets are intr insically hard to evaluate.  
Long-term sustainabilit y of public finances  
The United Kingdom appears to be at  medium risk with regard to  the sustainability of public 
finances. The gross debt ratio, even if rising,  is currently well below the 60% of GDP Treaty 
reference value. The long-term budgetary impact of ageing is close to the EU average, with 
public pension expenditure showing a somewhat more limited increase than on average in the 
EU, in part as a result of the fact that the UK relies relatively more on private pension 
arrangements than do other EU countries. The comprehens ive pension system reforms 
adopted in 2007, addressing the c oncern of potentially inadequate future provision, are likely 
to involve a somewhat higher increase in age- related expenditure. Co mmission analysis based 
on the budgetary position in calendar year 2007 indi cates that sustainable public finances are 
at risk, a conclusion which is aggravated when  the long-term budgetary impact of an ageing 
population is also taken into account. Achievin g high primary surpluses would contribute to 
reducing risks to the sustaina bility of public finances. 
4.3. Other factors put forward by the Member State 
In a letter of 20 May 2008, the authorities of the United Kingdom listed some relevant factors 
in accordance with Article 2(3) of Council Regulation (EC) No 1467/97. The authorities 
noted that public finance pr ojections contained in Budget 2008 were based on cautious, 
independently audited assumptions, an approach designed to build additio nal contingency into 
the headline fiscal numbers and to protect against unexpected events. The forecasts 
incorporate negative impacts and downward revisions in a range of areas including tax 
revenues from the financial sector, and from the property market. The aut horities note that the 
increase in the deficit proj ected in Budget 2008 reflects th e operation of the automatic 
stabilisers as well as non-discre tionary factors, in the short term, resulting from exceptional 
disruption in global financial markets. The lette r notes that UK forecasts indicate that the UK 
fiscal deficit will fall below the 3% referen ce value in 2009/10, highlighting the exceptional 
temporary nature of the excess over the 3% refe rence value. The authorities also highlight: 
debt levels well below the reference level, whic h in their view allow flexibility for sustained 
investment in public services; commitments made  to improve efficiency and value for money 
 
EN 9   EN in public spending; spending plans which al low for improvements in public services; 
significant commitments to implement the Lisbon  Strategy for Jobs and Growth including on 
science spending, the Technology Programme a nd higher education teaching; and planned 
spending on Official Development Assistance (ODA) .The analysis presented above covers the 
items put forward by the authorities, except th e observation by the authorities on the UK's 
international aid commitments. Under the la tter item, the authorities record the UK's 
programme to increase its international developm ent contributions, partic ularly in the context 
of the EU's collective commitment to provide an average of 0.56% of Gross National Income 
as Official Development Assi stance by 2010. The UK plans to r each that level in 2010/11.  
In 2005 and 2006, the ratio of the UK's net Offi cial Development Assistance to Gross 
National Income (GNI) stood at 0.47% and 0.51% respectively12. The ODA figures for those 
two years included the debt relief given to Ni geria which was agreed by the Paris Club group 
of creditors. In 2007, ODA fell to 0.3 6%, of GNI reflecting the lowe r levels of debt relief.  
4.4. Other factors considered relevant by the Commission 
The Commission services’ spring 2008 forecas t assumes that the non-cyclical primary 
expenditure plans that were announced as part of the 2007 Comprehensive Spending Review 
will be adhered to. However, during the six years between 2002/03 and 2007/08, annual total 
expenditure outturns have exceeded the original  total spending envel opes that had been 
established in previous Spending Reviews. Pa st trends show nevert heless that typically 
expenditure overruns are smaller in the first year of the spending review period, suggesting 
that the risks from higher than planned expe nditure are relatively smaller for the deficit 
forecast for 2008/09 but w ill increase in 2009/10.  
The nationalisation on the 22 February 2008 of Northern Rock bank, which had been facing 
severe liquidity problems since September 2007 as  a result of the credit squeeze, did not have 
any direct effect on the general government accoun ts for the time being. However, it is not yet 
fully clear whether the Bank of England's loan  to the bank, which st ood at £24.1 billion or 
1.7% of GDP at end-March 2008, should have already been reported as government debt, 
since it was granted on behalf of the State and with State guarantee. This is currently being 
discussed between the UK’s Office for National Statistics (ONS) and Eurostat. Meanwhile, 
the Bank of England's liquidity support and th e Treasury's guarantees to the bank's other 
creditors (about £30 billion or 2.0% of GDP) remain a contingent liability.  
The accounting treatment of some Public-Private Partnership (PPP) contra cts is subject to an 
ongoing discussion between Eurostat and the ONS13. The Commission is aware that the UK 
authorities aim to adopt International Financia l Reporting Standards for the preparation of the 
annual financial statements of government de partments and other pub lic bodies from 2009/10. 
This move could see some of the current Private Finance Initiative (PFI) projects that are off-
balance-sheet reclassified onto the public s ector's books. Reclassi fications would not 
necessarily adversely affect  the general government account s. Nevertheless, it remains 
possible that the changes in the accounting treat ment, including any changes to comply with 
Eurostat's guidance on the accounting of PPPs in  general government acc ounts, could lead to 
                                                 
12 Annex 1, 2008 Annual Report, Department for International Development. 
http://www.dfid.gov.uk/pubs/files/depart mental-report/2008/Annexes-bcov.pdf  
13 See section 6.6 of the report on Eurostat's latest EDP visit to the UK: 
http://epp.eurostat.ec.europa.eu/pls/portal/doc s/PAGE/PGP_DS_GFS/PGE_ DS_GFS_9/FINDINGS%2
0FROM%20THE%20MISSION%20TO%20THE%20UK%20ON%2025-
26%20JANUARY%202007_WEBSITE.PDF  
 
EN 10   EN a small increase in the gene ral government deficit estim ate in 2009/10, depending inter alia  
on the share of off-balance shee t PPPs that would end up on the general government accounts. 
In its opinion on the most recent update of the convergence programme14, the Council 
concluded that the programme confirmed a si gnificant deterioration in the United Kingdom’s 
budgetary position that, coupled with a prob ably weaker macroeconomic context than 
envisaged, carried a clear risk that general gove rnment deficit would breach the 3% of GDP 
deficit reference value in the near term. The Council therefore invite d the United Kingdom to 
implement measures necessary for the deficit not to exceed the reference value of 3% of GDP.  
5. CONCLUSIONS  
The general government deficit in the Unite d Kingdom planned for 2008/09 as notified in 
March 2008 is 3.2% of GDP, above but close to the 3% of GDP reference value. The fiscal 
relaxation announced by the government in May 2008 is  expected to raise the deficit ratio by 
an additional 0.2 percentage points in 2008/09. The planned excess over the reference value cannot be qualified as exceptional within the meaning of the Treaty and the Stability and 
Growth Pact. Furthermore, it cannot be consider ed temporary. This sugg ests that the deficit 
criterion in the Treaty is not fulfilled. 
General government gross debt remains below the 60% of GDP reference value. The debt 
criterion in the Treaty is fulfilled. 
In line with the Treaty, this report has also exam ined "relevant factors". Given that the deficit 
does not satisfy the double cond ition of closeness and tempor ariness, these factors cannot 
according to the Stability and Growth Pact be ta ken into account in the steps leading to the 
decision on the existence of an excessive deficit. 
                                                
 
14 http://eur-lex.europa.eu/LexUriServ/LexUri Serv.do?uri=OJ:C:2008:049:0025:0028:EN:PDF