EN    EN EN 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 2.7.2008 
SEC(2008) 2194 final 
  
COMMISSION OPINION 
on the existence of an excessive  deficit in the United Kingdom 
(presented by the Commission) 
EN 2   EN COMMISSION OPINION 
on the existence of an excessive  deficit in the United Kingdom 
GENERAL CONSIDERATIONS 
1. Article 104 of the Treaty lays down an exces sive deficit procedure (EDP) to ensure 
that Member States avoid excessive governme nt deficits or that they correct such 
deficits when they occur. The EDP is fu rther specified in C ouncil Regulation (EC) 
No 1467/97 “on speeding up and clarifying the implementation of the excessive 
deficit procedure”1, which is part of the Stability and Growth Pact. However, while 
most provisions apply to the United Ki ngdom in the same manner as to other 
countries not participating in the euro ar ea, Article 5 of the Protocol on certain 
provisions relating to the Un ited Kingdom states that th e obligation under Article 
104(1) of the Treaty to avoid excessive gene ral government deficits does not apply to 
the United Kingdom unless it moves to the third stage of economic and monetary 
union2. Instead, while in the second stag e of economic and monetary union, the 
United Kingdom shall, pursuant to Article 116(4) of the Treaty, “endeavour to avoid excessive deficits”. The EDP applies to th e United Kingdom on a fi nancial year basis 
(running from April to March). 
2. According to Article 104(2) of the Treaty, the Commission has to monitor 
compliance with budgetary discipline on th e basis of two criteria, namely: (a) 
whether the ratio of the planned or act ual government deficit to gross domestic 
product (GDP) exceeds the reference value of 3% (unless either the ratio has 
declined substantially and continuously a nd 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 remain s close to the reference value); and (b) 
whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the ratio is sufficiently diminishi ng and approaching the reference value at a 
satisfactory pace). 
3. Article 104(3) stipulates that, if a Me mber State does not fulfil the requirements 
under one or both of these criteria, the Co mmission has to prepare a report. This 
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 budge tary position of the Member State” 
as further clarified in Article 2(3) of the Regul ation mentioned above. The 
Regulation also specifies that “any other f actors 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 the report. 
                                                
 
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). Account is also taken of the Opinion of the Economic and Financial Committee on 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. 
2 http://eur-lex.europa.eu/Lex UriServ/LexUriServ.do?uri= CELEX:12006E/PRO/25:EN:HTML   
EN 3   EN 4. On the basis of the EDP data notifie d by the UK authorities in March 2008 and 
taking into account the Commission servi ces' spring 2008 forecast, the Commission 
adopted a report under Article 104(3) for the United Kingdom on 11 June 2008.3 
5. Subsequently, and in accordance with Ar ticle 104(4), the Economic and Financial 
Committee formulated an opinion on the report of the Commission on 25 June 2008.  
6. Article 104(5) of the Treaty requires th e Commission to address an opinion to the 
Council if the Commission considers that an  excessive deficit in a Member State 
exists or may occur. In order to reach a conclusion on whether an excessive deficit 
exists or may occur, the Commission cons iders that account shoul d be taken of: (i) 
the conclusions of its report under Articl e 104(3), and (ii) the opinion of the 
Economic and Financial Committee on this re port. On the basis of these elements, 
the Commission has established a number of  considerations for the United Kingdom.  
CONSIDERATIONS CONCERNI NG THE UNITED KINGDOM 
7. The United Kingdom undertook st rong fiscal consolidation efforts during the late 
1990s, which led to an improvement in the general government balance from a 
deficit of 3.8% of GDP in 1996/97 to a surplus of 1.3%  in 1999/00. Gross 
government debt also declined from ove r 50% of GDP in 1996/97 to a low of 36.8% 
in 2002/03. Thereafter, the government adopted a looser fiscal stance, mainly as a result of an explicit polic y objective to raise expenditu re on public services. As a 
result, the general government balance move d from a surplus pos ition in the late 
1990s to a deficit of 3.2% of GDP in 2003/04 and 3.5% in 2004/05. With the output 
gap remaining positive throughout this period, this was equivalent to a deterioration 
of the structural balance by 4¾ percentage points of GDP
4 between 1999/2000 and 
2004/05. During these years, the government  expenditure-to-GDP ratio increased by 
about 4½ percentage points, to 43.2%, with government gross fixed capital formation rising from 1.3% of GDP to 1.8%. On 21 September 2005 the Commission initiated 
an EDP for the UK with the adoption of a report under Arti cle 104.3 and on 24 
January 2006 the Council deci ded that an excessive deficit existed in the United 
Kingdom. The budgetary position impr oved in 2005/06 and 2006/07, with the 
headline deficit in the latter year falli ng to 2.6% of GDP. On 12 September 2007, 
taking into account the 2006/07 deficit out turn and the spring 2007 forecast, the 
Commission adopted a recommendation for a Council decision abrogating the EDP 
against the UK. On 9 October 2007, ECOFIN  decided to abrogate the EDP according 
to Article 104.12 of the Treaty. 
8. Over the course of 2007/08 weak reve nue growth, especia lly due to higher 
repayments of corporate tax overpaid in pr evious years and lower revenues from oil 
and gas extraction activity, led to a worsening of the UK's budgetary position. The 2007/08 deficit was estimated to have risen to 2.9% of GDP in both the Commission 
services’ spring 2008 forecast and in the data reported by the UK in March 2008.
5 
                                                 
3 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  
4 Estimated by the Commission services, applying the common methodology on estimating output gaps. 
5  The data notified by the United Kingdom in March 2008 indicates a general government deficit of 2.8% 
of GDP in 2007/08. However, data for annual general government net borrowing as reported by the 
EN 4   EN Fiscal policy was estimated to  be again pro-cyclical in 2007/08, with the structural 
deficit deteriorating by ¼% of GDP in  a still favourable economic context6. 
9. According to the EDP data notifie d by the UK authorities in March 20087, the United 
Kingdom's general government deficit in 2008/09 was planned to reach 3.2% of 
GDP, thus exceeding the 3% of GDP reference value; this ratio was identical to that 
published in the United Kingdom's Marc h 2008 budget, which also presented 
budgetary plans showing a general governme nt deficit of 2.8% of GDP in 2009/10. A 
subsequent policy announcement on 13 May reduces personal income tax in 2008/09 by 0.2% of GDP, financed by additional borro wing. Other things being equal, this 
results in higher planned deficit and debt ratios than those in the notification, and 
also implies a structural de ficit higher by 0.2% of GDP.
8 The figure for the 2008/09 
deficit in the notification provides prima facie  evidence of a planned excessive 
deficit in the United Kingdom in the sense of the Treaty and the Stability and Growth 
Pact, while the more recent policy announcem ent is to be considered additional 
evidence. The Commission therefore adopted a report on 11 June 2008 according to Article 104(3) of the Treaty assessing th e fulfilment of the Treaty requirements 
concerning the deficit and the debt criteria.  
10. The report considered that , although above the 3% of GDP Treaty reference value, 
the deficit planned for 2008/09, as notifie d in March 2008, was close to it. The 
excess over the 3% of GDP reference value wa s not exceptional. In particular, it did 
not result from an unusual event out side the control of the United Kingdom 
authorities, nor was it the result of a severe economic downt urn. The Commission 
services’ spring 2008 forecast projects UK growth to slow in 2008 and 2009 to 
annual rates below potential. Nevertheless, quarterly GDP growth  is expected to 
remain positive and annual GDP growth to reach 1.7% in 2008 and 1.6% in 2009. As regards the issue of temporariness, the Co mmission services expect the deficit ratio 
in 2009/10 to remain above 3%, with the weak economic context feeding through 
into slower revenue growth. The govern ment's statement on 13 May 2008 does not 
commit the government to extend to 2009/ 10 the same compensation offered in 
                                                                                                                                                        
 
United Kingdom are increased by £1.0bn by the Commission services to ensure consistency of 
recording of UMTS licence proceeds . This increases the deficit ratio to 2.9% of GDP in 2007/08. 
6 The provisional public sector finances' data for May 2008 published on 19 June 2008 and the national 
accounts' data published on 27 June 2008 imply a headline 2007/08 general government deficit on an 
EDP basis of 2.8% of GDP, 0.1 p.p. less than estimated in the 2008 Budget and in the 2008 spring forecast. The slightly better-than -expected outturn was primarily due  to a downward revision to 
previously-published figures for central government current expenditure, which ceteris paribus  also 
implies a lower structural deficit in 2007/08 by 0.1% of GDP. Under a no-policy-change assumption, the spring 2008 forecast assumes that the government will adhere  to the non-cyclical primary 
expenditure plans announced in the 2008 budget, which were practically unchanged from those in the 
2007 Comprehensive Spending Review. Lower departmental spending in 2007/08 would not pass through into the expenditure planned in 2008/09 and 2009/10, since the departmental spending limits 
for those years were established in the 2007 Comprehensive Spending Review. Indeed, under the End-
year Flexibility (EYF) scheme, departments are allowed to carry forward under-spends on their departmental allocations from one year to the next.  
7 According to Council Regulation (EC) No 3605/93, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. 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 . 
8 In the UK government's income tax announcement  published on 13 May 2008, the cost of the income 
tax reduction was stated to amount to £2.7bn in 2008/09, which is estimated by the Commission to be 
equivalent to 0.2% of GDP.  
EN 5   EN 2008/09.9 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.  
11. The general government debt ratio rema ins below the 60% reference value (the 
March EDP data reported a ratio of 43% of GDP10 in the 2007/08 fi nancial year), 
although projected to be on a rising tre nd up to 2009/10. The debt criterion in the 
Treaty is fulfilled. 
12. In accordance with the provisions in the Treaty and the Stability and Growth Pact, 
the Commission also analysed in its report “o ther relevant factor s”. According to the 
Stability and Growth Pact, these relevant factors can only be taken into account in 
the steps leading to the decision on the exis tence of an excessive deficit if the double 
condition - that the deficit remains close to the reference value and that its excess over the reference value is te mporary - is fully met. In this case the double condition 
is not met.  
13. The Economic and Financial Committee issued its opinion in accordance with 
Article 104(4) on 25 June 2008; this opinion is consistent with the assessment made 
by the Commission in its report and confirms  that the excess over the reference value 
cannot be considered exceptional and temporary.  
CONCLUSION 14. The monitoring of the budgetary situati on in the United Kingdom and, in particular, 
the examination of compliance with the criteria laid down in Article 104(2) has led the Commission to prepare a report in accordance with Article 104(3) of the Treaty. The Commission, having taken into account its report and the opinion of the Economic and Financial Committee, is of the opinion that an excessive deficit exists 
in the United Kingdom. 
                                                
 
9 Further policy announcements are expected in the autumn 2008 Pre-Budget Report.  
10 Using GDP adjusted for Financial Intermediati on Services Indirectly Measured (FISIM).