EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 2.7.2008 
SEC(2008) 2201 final 
  
Recommendation for a 
COUNCIL DECISION 
on the existence of an excessive  deficit in the United Kingdom 
(presented by the Commission) 
 
EN 2   EN EXPLANATORY MEMORANDUM  
Article 104 of the Treaty lays down an excessi ve deficit procedure (EDP) to ensure that 
Member States avoid excessive government deficits  or that they correct such deficits when 
they occur. The EDP is further specified  in Council Regulati on (EC) No 1467/97 “on 
speeding up and clarifying the implementa tion of the excessive  deficit procedure”1, which is 
part of the Stability and Growth Pact. Howeve r, while most provisions apply to the United 
Kingdom in the same manner as to other countries not participating in the euro area, Article 5 
of the Protocol on certain provi sions relating to the United Kingdom  states that the obligation 
under Article 104(1) of the Treaty to avoid ex cessive general 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 stage 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 the United Ki ngdom on a financial year basis (running from 
April to March). 
The United Kingdom undertook str ong fiscal consolidation e fforts during the late 1990s, 
which led to an improvement in the general g overnment 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 
over 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 e xplicit policy objec tive to raise 
expenditure on public services. As a result, the general gover nment balance moved from a 
surplus position in the late 1990s to a de ficit of 3.2% of GDP in 2003/04 and 3.5% in 
2004/05. With the output gap remaining positive thr oughout this period, this was equivalent to 
a deterioration of the structural balance by 4¾ percentage points of GDP3 between 1999/00 
and 2004/05. During these years, the government  expenditure-to-GDP ratio increased by 
about 4½ percentage points, to 43.2%, with gov ernment 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 Ar ticle 104.3 and on 24 January 2006 the Council 
decided that an excessive deficit existe d in the United Kingdom. The budgetary position 
improved in 2005/06 and 2006/07, with the headline deficit in the latter year falling to 2.6% of GDP. On 12 September 2007, taking into account the 2006/07 deficit outturn and the spring 2007 forecast, the Commission adopted  a recommendation for a Council decision 
abrogating the EDP against the UK. On 9 Oc tober 2007, ECOFIN decided to abrogate the 
EDP according to Article 104.12 of the Treaty. 
Over the course of 2007/08 weak revenue growt h, especially due to higher repayments of 
corporate tax overpaid in previous years and lower revenues from oil and gas extraction 
activity, led to a worsening of the UK's budgeta ry position. The 2007/08 deficit is estimated 
to have risen to 2.9% of GDP in both the Commission services’ spring 2008 forecast and in 
                                                
 
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  
3 Estimated by the Commission services, applying the common methodology on estimating output gaps. 
 
EN 3   EN the data reported by the UK in March 2008.4 Fiscal policy was estimated to be again pro-
cyclical in 2007/08, with the structural defi cit deteriorating by ¼% of GDP in a still 
favourable economic context.5 
According to the EDP data notifie d by the UK authorit ies in March 20086, 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 March 2008 budget. A su bsequent policy announcement on 13 May 
reducing personal income tax in 2008/09, finan ced by additional borrowing, results in an 
increase in the planned defici t ratio by 0.2 pe rcentage points7 when compared to the 
notification, other things being equal. 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 
announcement 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 the fulfilment of 
the Treaty requirements concerning th e deficit and the debt criteria.  
The report considered th at, although above the 3% of GDP Tr eaty reference value, the deficit 
planned for 2008/09, as notified in March 2008, wa s close to it. The ex cess over the 3% of 
GDP reference value was not exceptional. In part icular, it did not result from an unusual event 
outside the control of the Un ited Kingdom authorities, nor wa s it the result of a severe 
economic downturn. The Commission services’ sp ring 2008 forecast projects UK growth to 
slow in 2008 and 2009 to  annual rates below potential. Ne vertheless, annual GDP growth is 
expected to reach 1.7% in 2008 and 1.6% in 2009. As regards the issue of temporariness, the 
Commission services expect the deficit ratio in 2009/10 to rema in above 3%, with the weak 
economic context feeding through into slower revenue growth. The government's statement 
on 13 May 2008 does not commit the government to extend to 2009/10 the same 
compensation offered in 2008/09.8 It nevertheless carries a ri sk for 2009/10 of a deficit 
                                                 
4  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 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. 
5 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 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 n on-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.  
6 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
. 
7 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. 
8 Further policy announcements are expected in the autumn 2008 Pre-Budget Report.  
 
EN 4   EN overshoot, compared with the Ma rch 2008 budget plans, with a similar impact ceteris paribus 
on the spring forecast projection.  
The general government debt ratio remains we ll below the 60% refere nce value (the March 
EDP data reported a ratio of 43.0% of GDP9 in the 2007/08 financial year), although projected 
to be on a rising trend up to 2009/10. 
In accordance with the provisions in the Trea ty and the Stability and Growth Pact, the 
Commission also analysed in its report all “other  relevant factors”. According to the Stability 
and Growth Pact, these factors can only be taken into account in the steps leading to the decision on the existence of an excessive defi cit if the double condi tion - that the deficit 
remains close to the reference value and that its  excess over the reference value is temporary - 
is fully met. In this case the double condition is not met.  
Therefore, the Commission's analysis implies that  the deficit criterion in the Treaty is not 
fulfilled, whereas the debt criterion is met.  
Article 104(4) of the Treaty states that “the Committee provided for in Article 114 [i.e. the 
Economic and Financial Committee] shall fo rmulate an opinion on the report of the 
Commission”. The Committee issued its opinion 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 cons idered exceptional or temporary.  
The Commission, having taken into account its report and the opinion of the Economic and 
Financial Committee, is of the op inion that an excessive deficit exists in the United Kingdom. 
This opinion, adopted by the Commission on 2 Ju ly 2008, is herewith addressed to the 
Council, according to Article 104( 5) of the Treaty. The Commi ssion is recommending that the 
Council shall decide accordingly, in conformity with Article 104(6).  
In addition, the Commission is submitting to  the Council a recommendation for a Council 
recommendation to be addressed to the United Kingdom with a view to bringing the situation 
of an excessive deficit to an  end, according to Article 104(7)  of the Treaty. According to 
Council Regulation (EC) No 1467/97, the C ouncil recommendation should “establish a 
deadline for the correction of the excessive defi cit, which should be completed in the year 
following its identification unle ss there are special circumstances. In the recommendation, the 
Council shall request that the Member State achieves a minimum annual improvement of 
0.5% of GDP as a benchmark, in its cyclically adjusted balance net of one-off and temporary 
measures, in order to ensure the correction of th e excessive deficit within the deadline set in 
the recommendation”.  
In the case of the United Kingdom, the overall assessment of the factors mentioned in the 
report under Article 104(3) does not  suggest the existence of sp ecial circumstances warranting 
a departure from the standard deadline for correcting the deficit. While GDP growth is expected to slow in 2008 and 2009 relative to potential growth  rates, thus leading to the 
emergence of a negative output gap, GDP growth  is expected to re main positive throughout 
the spring forecast horizon at annual rates ab ove 1.5% in 2008 and 2009. In order to reduce 
the headline deficit to below the 3% of GDP  reference value in 2009/10, the UK authorities 
would have to achieve structural consolidati on in 2009/10 of at least an annual improvement 
                                                
 
9 Using GDP adjusted for Financial Intermediati on Services Indirectly Measured (FISIM).  
 
EN 5   EN of 0.5% of GDP expected under Article 3(4) of Regulation (EC) No 1467/97. A deadline for 
correction of an excessive deficit is to be  set in accordance wi th the aforementioned 
Regulation, which envisages that the correction should be complete d in the year following its 
identification. In the case of the United Ki ngdom, the identification took place in 2008 on the 
basis of a planned deficit in excess of th e 3% of GDP reference value in 2008/09.  
Accordingly, in the recomme ndation, the budgetary correction should be completed at the 
latest by financial year 2009/10. 
United Kingdom : 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. 
 
EN 6   EN Recommendation for a 
COUNCIL DECISION 
on the existence of an excessive  deficit in the United Kingdom 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing th e European Community, and in particular 
Article 104(6) thereof,  
Having regard to the recomm endation from the Commission, 
Having regard to the observati ons made by the United Kingdom, 
Whereas: (1) Article 104 of the Treaty lays down an ex cessive deficit procedure (EDP) to ensure 
that Member States avoid excessive government deficits or that they correct such deficits when they occur. 
(2) Pursuant to point 5 of the Protocol on certain provisions relating to the United 
Kingdom of Great Britain and Northern Irel and, the obligation unde r Article 104(1) of 
the Treaty to avoid excessive general governme nt deficits does not apply to the United 
Kingdom unless it moves to the third st age of economic and monetary union
10. While 
in the second stage of economic and mone tary union, the United Kingdom is required 
to endeavour to avoid excessive deficits, pu rsuant to Article 116(4) of the Treaty. 
(3) The Stability and Growth Pact is base d on the objective of sound government finances 
as a means of strengthening the conditions fo r price stability and for strong sustainable 
growth conducive to employment creation. 
(4) The excessive deficit procedure under Ar ticle 104 of the Treaty, as clarified by 
Council Regulation (EC) No 1467/97 on  speeding up and clarifying the 
implementation of the excessive deficit procedure11, which is part of the Stability and 
Growth Pact, provides for a decision on the existence of an excessive deficit. The 
Protocol on the excessive deficit procedur e annexed to the Treaty sets out further 
provisions relating to the implementation of  the excessive deficit procedure. Council 
Regulation (EC) No 3605/9312 lays down detailed rules and definitions for the 
application of the provisi on of the said Protocol. 
                                                 
10 http://eur-lex.europa.eu/Lex UriServ/LexUriServ.do?uri= CELEX:12006E/PRO/25:EN:HTML  
11 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). 
12 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1).  
 
EN 7   EN (5) Article 104(5) of the Treaty requires th e Commission to address an opinion to the 
Council if the Commission considers that an ex cessive deficit exists  in a Member State 
or may occur. Having taken into account it s report in accordance with Article 104(3) 
of the Treaty and having regard to th e opinion of the Economic and Financial 
Committee in accordance with  Article 104(4), the Commissi on concluded that an 
excessive deficit exists in the United Ki ngdom. The Commission therefore addressed 
such an opinion to the Council in resp ect of the United Kingdom on 2 July 2008. 
(6) Article 104(6) of the Treaty states that the Council should consider any observations 
which the Member State concerned may wish to make before deciding, after an overall 
assessment, whether an excessive deficit ex ists. In the case of the United Kingdom, 
this overall assessment leads to the following conclusions. 
(7) The United Kingdom undertook strong fiscal consolidati on efforts during the late 
1990s. Thereafter, the government adopted a loos er fiscal stance, mainly as a result of 
an explicit policy objective to raise expend iture on public services. As a result, the 
general government balance moved from a surplus position in the late 1990s to a deficit of 3.2% of GDP in 2003/04 a nd 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
13 between 1999/00 and 2004/05. 
On 21 September 2005 the Commission initiate d an EDP for the UK with the adoption 
of a report under Article 104.3 and on 24 Ja nuary 2006 the Council decided that an 
excessive deficit existed in  the United Kingdom. The budgetary position improved in 
2005/06 and 2006/07, with the headlin e deficit in the latter year falling to 2.6% of 
GDP. On 12 September 2007, taking into acc ount the 2006/07 deficit outturn 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) According to the EDP data notified by the UK authorities in March 2008, 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. 
The deficit figure in the latter year is  lower than the corresponding figure in the 
Commission services' spring forecast of 3.3% of GDP, mainly due to differences in 
expected GDP growth in 2009/10. Followi ng the publication of the March 2008 
budget, a policy announcement on 13 May redu cing personal income tax in 2008/09, 
financed by additional borrowing, results in higher planned de ficit and debt ratios than 
those in the notification. Other things being equal, this will lead to an increase in the 
2008/09 deficit ratio forecast by the Comm ission services to around 3.5% of GDP.
14 
Although above the 3% of GDP Treaty refe rence value, the deficit planned for 
2008/09, as notified in March 2008, is close to it. The excess over the 3% of GDP 
reference value is not exceptional. In part icular, it does not result from an unusual 
event outside the control of the United Kingdo m authorities, nor is it the result of a 
                                                 
13 Estimated by the Commission services, applying the common methodology on estimating output gaps. 
14  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. Adding this to the 2008/09 deficit figure from the Commission services'' 
spring forecast produces a deficit of 3.5% of GDP. 
 
EN 8   EN severe economic downturn. The Commission se rvices’ spring 2008 forecast projects 
UK growth to slow in 2008 and 2009 to a nnual rates below poten tial. Nevertheless, 
GDP growth is expected to reach 1.7% in 2008 and 1.6% in 2009. The excess over the 3% of GDP reference value is also consid ered not temporary, w ith the Commission 
services forecasting, on the basis of unchange d policies, a deficit ratio in 2009/10 still 
higher than 3% (at 3.3%). This  indicates that the Treaty  requirement concerning the 
deficit criterion is not fulfilled.  
(9) The general government debt ratio remain s well below the 60% reference value (the 
March EDP data reported  a ratio of 43.0% of GDP
15 in the 2007/08 financial year), 
although projected to be on a rising tren d up to 2009/10. In the Commission services' 
forecast, the debt ratio is projected to reach around 47½% of GDP in 2009/10. 
(10) According to Article 2(4)  of Regulation (EC) No 1467/97, “o ther relevant factors” can 
only be taken into account in the Council decision on the existence of an excessive 
deficit in accordance with Article 104(6)  if the double condition - that the deficit 
remains close to the reference value and that its excess over the reference value is temporary - is fully met. This double conditio n is not met. Therefore, other relevant 
factors are not taken into account in the steps leading to this decision. 
HAS ADOPTED THIS DECISION: 
Article 1 
From an overall assessment it follows that an  excessive deficit exists  in the United Kingdom. 
Article 2 
This decision is addressed to the United Ki ngdom of Great Britain and Northern Ireland. 
Done at Brussels, […] 
 For the Council 
 The President  […] 
                                                
 
15 Using GDP adjusted for Financial Intermediati on Services Indirectly Measured (FISIM).