REPORT FROM THE COMMISSION

United Kingdom



Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union

1. Introduction

On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows countries to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

According to the Commission 2020 spring forecast, the general government deficit in the United Kingdom is expected to have been 2.5% of GDP in the financial year 2019-20, while general government debt is expected to have been 85.2%. However, final outturn data on the 2019-20 general government deficit and debt will only be available in autumn 2020. According to the Commission forecast, the United Kingdom’s deficit is expected to be 10.7% of GDP in 2020-21, while debt is expected to be 102.5% of GDP. All available evidence, including statements by the national authorities about the extent of the reaction of budgetary policy to the severe economic downturn associated with the COVID-19 pandemic, points to a deficit significantly in excess of the 3% of GDP threshold in 2020-21 and in 2021-22. In its letter of 7 May 2020, the Commission asked the UK to provide updated information on the estimated size of the deficit in 2020-21. The UK however did not provide the requested clarification, but referenced the COVID-19 scenario from the Office for Budget Responsibility, which expects a deficit significantly above 3% in 2020-21. Taking those factors into account, the Commission considers its current forecast of a deficit of 10.7% of GDP in 2020-21 as sufficiently compelling prima facie evidence of an excessive deficit as defined by Article 126(2)(a) of the Treaty.

Against this background, the Commission has therefore prepared this report, which analyses the United Kingdom’s compliance with the deficit and debt criteria of the Treaty. It takes into account all relevant factors and gives due consideration to the major economic shock linked to the COVID-19 pandemic.

Table 1. General government deficit and debt (% of GDP)

2016-17 2017-18 2018-19 2019-20 COM 2020-21 COM 2021-22 COM Deficit criterion General government balance -2.8 -2.7 -1.8 -2.5 -10.7 -6.2 Debt criterion General government gross debt 85.2 84.6 84.2 85.2 102.5 100.2

Note: Source: Eurostat, Commission 2020 spring forecast

2.Deficit criterion

Based on the Commission 2020 spring forecast the United Kingdom’s general government deficit in 2020-21 is expected to reach 10.7% of GDP, above and not close to the Treaty reference value of 3% of GDP. The forecast excess over the Treaty reference value in 2020-21 is exceptional, as it results from a severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the Commission 2020 spring forecast projects a contraction of real GDP in 2020 by 8.3%.

The forecast excess over the Treaty reference value is not temporary, based on the Commission 2020 spring forecast, which projects the deficit to remain above 3% of GDP in 2021-22.

In sum, the forecast deficit for 2020-21 is above and not close to the 3% of GDP Treaty reference value. The forecast excess is considered to be exceptional and not temporary as defined by the Treaty and the Stability and Growth Pact. All available evidence, including statements by the national authorities about the extent of the reaction of budgetary policy to the severe economic downturn associated with the COVID-19 pandemic, points to a deficit significantly in excess of the 3% of GDP threshold in 2020-21 and in 2021-22. In its letter of 7 May 2020, the Commission asked the UK to provide updated information on the estimated size of the deficit in 2020-21. The United Kingdom however did not provide the requested clarification, but referenced the COVID-19 scenario from the Office for Budget Responsibility, which expects a deficit significantly above 3% in 2020-21. Taking those factors into account, the Commission considers its current forecast of a deficit of 10.7% of GDP in 2020-21 as sufficiently compelling prima facie evidence of an excessive deficit as defined by Article 126(2)(a) of the Treaty. Hence, the analysis suggests that prima facie the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is not fulfilled.

3. Relevant factors

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements under one or both of those criteria, the Commission has to prepare a report. That report must also “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”.

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also provides that “any other factors which, in the opinion of the Member State concerned, are relevant in order to comprehensively assess compliance with the deficit and debt criteria and which the Member State has put forward to the Council and to the Commission” need to be given due consideration. As specified in Article 4 of Regulation (EC) No 1467/97, as regards the deficit criterion, since the government debt-to-GDP ratio exceeds the 60% reference value and the double condition is not met – i.e. that the deficit remains close to the reference value and that its excess over the reference value is temporary – those relevant factors cannot be taken into account in the steps leading to the decision on the existence of an excessive deficit on the basis of the deficit criterion for the United Kingdom.

In the current situation, a key additional factor to take into consideration regarding 2020 is the economic impact of the COVID-19 pandemic, which has a very substantial impact on the budgetary situation and results in a highly uncertain outlook. The pandemic has also led to the activation of the general escape clause.

3.1. COVID-19 pandemic