EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 6.7.2010 
SEC(2010) 880 final 
  
COMMUNICATION FROM THE CO MMISSION TO THE COUNCIL 
Assessment of the action taken by the United Kingdom  
in response to the Council Recommendati ons of 2 December 2009 with a view to 
bringing an end to the situation of excessive government deficit  
EN 2   EN 1. THE  APPLICATION  OF THE  STABILITY  AND  GROWTH  PACT  IN THE  
CURRENT  CRISIS  SITUATION   
The vast majority of EU countries currently ha ve general government deficits above the 3% 
of GDP reference value set in the Treaty on the Functioning of  the European Union (TFEU). 
The origin of the often strong dete rioration in the deficit as well as the debt positions must be 
seen in the context of the unprecedented global  financial crisis and economic downturn in 
2008/09. Several factors are at play. First, the economic downturn brought about declining tax 
revenue and rising social benefit expend iture (e.g. unemployment benefits). Second, 
recognising that budgetary policies have an importan t role to play in the current extraordinary 
economic situation, the Commission called for a fiscal stimulus in its November 2008 European Economic Recovery Plan (EERP), e ndorsed by the European Council in December. 
The Plan stipulated that the stimulus should be  differentiated across Memb er States to reflect 
their different positions in terms of public fina nce sustainability and competitiveness. Finally, 
several countries took measures to  stabilise the financial sector, some of which have impacted 
on the debt position or constitute a risk of hi gher deficits and debt in the future, although 
some of the costs of the government suppor t could be recovered in the future.  
In October 2009, capitalizing on the first signs of  a recovery in sight, the European Council 
endorsed a fiscal exit strategy based on the following principles : (i) The exit strategy should 
be coordinated across countries in  the framework of consistent implementation of the Stability 
and Growth Pact. (ii) There is a need for timel y withdrawal of the fiscal stimulus. Provided 
that the Commission forecasts continue to indicate that the recovery is strengthening and becoming self-sustaining, fiscal consolidation in  all EU Member States  should start in 2011 at 
the latest. Specificities of count ry situations should be taken into account, and a number of 
countries need to consolidate before then. (iii) In view of the challenges, the planned pace of 
the fiscal consolidation should be ambitious, and will have to go well beyond the benchmark of 0.5% of GDP per annum in stru ctural terms in most Member States. (iv) Important flanking 
policies to the fiscal exit will include stre ngthened national budgeta ry frameworks for 
underpinning the credibility of consolidation strategies and measures to support long-term 
fiscal sustainability, as emphasi sed by the SGP. In addition, st ructural reform efforts should 
be strengthened to enhan ce productivity and to support long-term investment. These 
principles for fiscal exit have  been put into operation in the recommendations issued in the 
context of the excessive deficit procedures as well as in the latest round of annual assessment 
of Stability and Convergence Programmes. The deadlines for correction and required 
structural efforts have been differentiated acro ss Member States, taki ng into account country-
specific circumstances.  
The stimulus measures in the context of th e EERP coupled with th e measures taken to 
stabilise the financial sector have prevente d an economic meltdown and laid the foundation 
for a recovery. The Commission services' spring 2010 forecast confirms the outlook of gradual recovery consistent with  withdrawal of fiscal stimulu s. Indicators point towards a 
self-sustaining recovery at the end of 2010 and into 2011. Howe ver, significant risks remain 
linked to the situation in financial markets a nd the potential negative feedback loop between 
sovereign debt evolution and the banking sector. The followi ng assessment of action taken by 
the United Kingdom in response to the reco mmendations of 2 December 2009 takes place 
against the background outlined above. 
EN 3   EN 2. EXCESSIVE  DEFICIT  PROCEDURE  AND  MOST  RECENT  
RECOMMENDATIONS 
The Stability and Growth Pact requires the Commission to initiate the excessive deficit 
procedure (EDP) whenever the deficit of a Me mber State exceeds the 3% of GDP reference 
value. The amendments to the Stability and Gr owth Pact in 2005 aimed at ensuring that in 
particular the economic and budgetary background was taken into account fully in all steps in 
the EDP. In this way, the Stability and Growth Pact provides the framework supporting 
government policies for a prompt return to sound budgetary positions taking account of the economic situation, and thereby ensuring long -term sustainability of public finances.  
On 8 July 2008, the Council decided that an ex cessive deficit existed in the United Kingdom 
in accordance with Article 104(6) of the Treaty  establishing the Europ ean Community (TEC). 
The most recent Council Recommendation under Article 126(7) of the Treaty on the Functioning of the European Union (TFEU) was adopted on 2 December 2009
1.  
The Council recommended the United Kingdom to put an end to the pres ent excessive deficit 
situation by financial year 2014/152. According to the Council Recommendation, the United 
Kingdom authorities should bri ng the general government defi cit below 3% of GDP in a 
credible and sustainable manner by taking actio n in a medium-term framework. Specifically, 
to this end, the United Kingdom authorities sh ould: (a) implement the fiscal measures in 
2009/10 as planned in the 2009 Budget, avoidi ng further measures contributing to the 
deterioration of public finances, and start consolidation in 2010/11 in order to bring the deficit 
below the reference value by 2014/15; (b) to this end ensure an av erage annual fiscal effort of 
1¾% of GDP between 2010/11 and 2014/15, which should also contribute to bringing the 
government gross debt ratio back on a declining path that approaches the reference value at a 
satisfactory pace by restoring an adequate level of  the primary surplus; (c) further specify the 
additional measures that are necessary to achie ve the correction of th e excessive deficit by 
2014/15, cyclical conditions permitti ng, and accelerate the reduction of the deficit if economic 
or budgetary conditions turn out better than curre ntly expected. 
In addition, the United Kingdo m authorities were recommende d to seize opportunities beyond 
the fiscal effort, including from better economic  conditions, to accelerate  the reduction of the 
gross debt ratio back towards the reference va lue. The United Kingdom should ensure that its 
revised fiscal framework limits the risks to the adjustment and, after th e excessive deficit has 
been corrected, underpins sustai ned budgetary consolidation.  
The Council established the d eadline of 2 June 2010 for the United Kingdom government to 
implement the fiscal measures as planned in th e 2009 Budget and to outline in some detail the 
consolidation strategy that will be necessary  to progress towards the correction of the 
excessive deficit. The assessment of effec tive action will take into account economic 
developments compared to the economic outlo ok in the Commission services' autumn 2009 
forecast.  
                                                 
1 All EDP-related documents for the United Kingdom can be found at the following website: 
 http://ec.europa.eu/ec onomy_finance/sgp/defic it/countries/index_en.htm. 
2 The UK financial year runs from April to March. 
EN 4   EN According to Regulation (EC) No 1467/973 and the revised Code of Conduct4 a Member State 
should be considered to have taken effective action if it has acted in compliance with the 
Article 126(7) TFEU recommendation. The Code of  Conduct states that the assessment of 
effective action should in partic ular take into account whethe r the Member State concerned 
has achieved the annual improvement of its cyc lically adjusted balance, net of one-off and 
other temporary measures, initially recomm ended by the Council. In case the observed 
adjustment proves to be lower than recommended, a careful analysis of the reasons for the 
shortfall should be made. In cas e of a multi-annual adjustment, the Code of Conduct specifies 
that the assessment should mainly focus on the measures taken in order to ensure an adequate fiscal adjustment in the year following the identification of the excessive deficit.  
Following the general election of 6 May 2010, the new government quickly announced the 
intention to present an Emergency Budge t, which was adopted on 22 June 2010. This 
assessment also takes the latter into account. 
 
3. ASSESSMENT  OF ACTION  TAKEN 
The Commission services' latest macroeconomic  forecast, which wa s published on 5 May 
2010, is broadly similar to the economic outlo ok envisaged in autumn 2009, on which the 
December 2009 Council recommendations were based. In financial year 2009/10 output 
contracted by ½ pp. more than had been expected in autumn 2009, in part due to a negative impact from poor weather in the first quarter of 2010. By c ontrast, in 2010/11 the spring 2010 
forecast projects a stronger pick up in output. R eal output growth in 2010/11 is expected to 
reach 1¾%, up by ½ pp. when compared to the autumn forecast, primarily reflecting prospects for positive growth in household consumption expend iture. An upward revision in 
the forecast for consumer price inflation further contributed to an increase in the projection 
for nominal GDP growth in 2010/ 11 by ¾ percentage point, although inflation is estimated to 
have a broadly neutral impact on public fi nances in the UK. The spring 2010 forecast 
confirmed the autumn 2009 projection of an e xpansion in real activ ity in 2011/12 of 2¼%.  
The spring 2010 forecast projecte d a reduction in the government  deficit from an estimated 
12¼% of GDP in 2009/10 to 11½% in 2010/11. Th e reduction in the gove rnment deficit in 
2010/11 was driven by discretionary measures am ounting to around 1% of GDP. In particular, 
the increase in the standard VAT rate as from January 2010 to its pre-fiscal stimulus level was 
estimated to increase revenue  in 2010/11 by 0.6% of GDP, while a reduction in capital 
expenditure by 0.2% of GDP woul d compensate for the forward shifting of planned public 
investment from 2010/11 to 2008/09 and 2009/10 to support the economy during the 
recession. The spring 2010 forecast also took in to account planned expenditure efficiency 
savings of 0.3% of GDP in 2010/11, which had been announced in April 2009 and which 
primarily relate to health spending. It estima ted that the structural budget deficit in 2010/11 
would decline by only ¼% of GDP from 2009/10, in ter alia reflecting low revenue elasticity 
as a result of continued weak activity in the financial and housing markets, each of which had hitherto been major sources of revenue.  
                                                
 
3 OJ L 209, 2.8.1997, p. 6. 
4 “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 10 
November 2009, available at: 
 http://ec.europa.eu/economy_finance/sgp/deficit/legal_texts/index_en.htm. 
EN 5   EN Since the release of the spring 2010 for ecast, a new initiative was taken on 17 May 
concerning the provision of independent fo recasts in the UK, the UK government has 
published a significantly downwardl y revised estimate of the gove rnment deficit outcome for 
2009/10 on 21 May 2010, new measures reducing government expendit ure were announced 
on 24 May and 17 June 2010, and an Emergency B udget was presented to parliament on 22 
June.  
Following the formation of a new coalition gove rnment after the general elections, the UK 
authorities announced on 17 May 2010 the esta blishment of a new Office for Budget 
Responsibility (OBR) that will "provide independent forecasts for public finances and the 
economy to inform fiscal policy decisions". Th e Chancellor has said that he will use the 
forecasts to inform the government's policy decisions. The OBR will also "assess the prospects for achieving the fiscal policy mandate, to be determined by the Chancellor". 
On 24 May 2010 the government announced with immediate effect new spending cuts 
primarily consisting of lower budgets for seve ral government departments and a freeze on 
civil service recruitment. These cuts in disc retionary expenditure should reduce the deficit by 
0.4% of GDP in the current financial year 2010/ 11, while in 2011/12 will compensate for the 
non-implementation of the increase in social secu rity contribution rates that had been planned 
by the previous government. Also on 17 June, th e government announced that, as part of a 
review of spending decisions taken by the pr evious government since 1 January 2010, it was 
cancelling a number of projects costing 0.1% of GDP and susp ending projects, primarily 
related to defence and transport, which would have cost 0.6% of GDP over their lifetime.  
According to the public finances data publishe d on 18 June 2010, which were consistent with 
the data published by the UK statistical o ffice on 21 May 2010, the government deficit in 
2009/10 would amount to 11.3% of GDP. While this  is some 1¾ percentage points of GDP 
less than had been projected in the autumn  2009 forecast and almost 1 pp. lower than 
estimated in the spring 2010 forecast
5, the deficit remains amongst the highest in the EU. In 
turn, the better-than-expected deficit outturn, which was due to the economic contraction 
having a weaker-than-expected negative impact  on tax intakes, shoul d feed-through into a 
lower deficit in 2010/11.  
On 22 June 2010, the new government presented an "Emergency Budget". This announced 
substantial additional fiscal consolidation measures. The new measures are estimated by the OBR to reduce the government deficit by an additional 0.5% of GDP in the present financial year 2010/11, 1.0% of GDP in 2011/12, 1½% of GDP in 2012/13, a nd 2¼% of GDP by 
2014/15. Taking into account the measures alre ady announced in the March 2010 budget or 
earlier, which are estimated to total 4.0%  of GDP by 2014/15, and the new measures 
announced in the June 2010 Budget, the OBR projects a reduction in the deficit from 11.3% 
of GDP in 2009/10 to 10¼% in 2010/11 and 7¾% in 2011/12. By 2014/ 15 - the deadline set 
for the UK in the December 2009 Council Recomm endation - the deficit is projected by the 
OBR to reach 2¼% of GDP, compared to 4¼% of GDP based on policy as announced in the pre-election March 2010 Budget. The OBR consid ers the probability of  this target being 
achieved is higher than 50%. The government debt  ratio is plausibly projected by the OBR to 
peak at around 85% of GDP in 2012/13, before  falling to almost 80%  of GDP in 2015/16.  
                                                
 
5 The data were published subsequent to the publication on 22 April 2010 of government finance 
statistics. Thus, the latest deficit estimate for 2009/10 is based on data that have not yet been validated 
by Eurostat.  
EN 6   EN The new measures announced in the June 2010 Budget will contribute to an improvement in 
the estimated structural budget balance, as  re-estimated using the commonly-agreed 
methodology, in 2010/11 by ¾% of GDP and between 2010/11 and 2014/15 by an annual 
average of around 1½% of GDP. This is sligh tly lower than recomm ended by the Council in 
December 2009 (1¾% of GDP) but is nevertheless appropriate given that the effort is being 
pursued from a significantly lower-than-exp ected budget deficit in 2009/10 (11.3% of GDP 
compared to 13.0% in the autumn 2009 forecast) and is therefore consistent with reducing the 
headline deficit to well-below the reference value by 2014/15.  
Around three-quarters of the new fiscal tight ening is planned to be achieved through a 
reduction in discretionary expenditure, incl uding through a cut in departmental budgets - 
excluding those for health and overseas aid - of  25% in real terms on average over a four-year 
period, a two-year public sector pay freeze, and a reduction in welfare benefits. A Spending 
Review announced for 20 October 2010 will set out individual departmental spending limits for the whole term of the pres ent parliament. The additional re venues will come mostly from 
an increase in the main VAT rate as from  January 2011 from 17½% to 20%, raising 
government revenue by 0.2% of GDP in 2010/11 and by around 0.8% of GDP per annum 
thereafter. A new bank levy, to be introduced as from January  2011, will increase tax intakes 
by 0.1% of GDP in 2011/12. On the other hand, a relatively large incr ease in income tax 
personal allowances and reductions in employers ' social security contributions will lower 
revenue by a total of 0.4% of GDP as from 2011/12. The government also announced 
reductions in the main rate of corporation tax and in the tax rate for small companies, which are expected to reduce receipts from taxes on corporate profits by 0.2% of GDP from 
2012/13.  
Compared with both the January 2010 conve rgence programme and the 2010 Budget of 
March 2010, the macroeconomic projections in the June 2010 Emergency Budget, which 
were independently produced by the new Offi ce for Budget Responsibility, are significantly 
more in line with the Commission services' spring 2010 forecast for 2010/11 and 2011/12 and with current consensus estimates for the pe riod between 2012 and 2014. However, output 
growth may be weaker than expected in th e Budget, including possi bly as a result of a 
stronger demand impact of the additional measur es and from a weaker external environment, 
which would have second-round e ffects on public finances. In addition to the macroeconomic 
risks, the size of the planned spending cuts will  be a challenge to implement, which if not 
achieved would reduce the like lihood of compliance with th e Council recommendation in the 
absence of compensatory measures. Overall, while  risks are substantial, at this stage the UK 
appears to be on track to achieve a deficit below 3% of GDP by the recommended deadline, 
with the planned deficit of 2¼% of GDP in  2014/15 providing a buffer against slippages. 
In the June 2010 Budget, the UK authorities al so announced a new fiscal "mandate": "to 
achieve cyclically-adjusted curre nt (i.e. net of capital spendi ng) balance by th e end of the 
rolling, five-year forecast period". This is co mplemented by a target requiring a reduction in 
net debt as a percentage of GDP by 2015/16. With  a clearly identifiabl e end point and less 
scope for manipulation, the new mandate is a clear improvement over the previous golden 
rule. Although the definitions of the fiscal targ ets are not directly comparable as the deficit 
target does not take explicit account of capital spending and the debt target refers to net - 
rather than gross - debt, the approach in the new mandate should co ntribute to greater 
consistency with the EU framework. 
EN 7   EN 4. CONCLUSIONS 
On current information it appears that the United Kingdom has taken action representing 
adequate progress towards the correction of the excessive deficit within the time limits set by 
the Council. In particular, the measures a nnounced in the June 2010 Emergency Budget will 
further increase the size of fiscal consolidation in 2010/11 a nd also significantly strengthen 
the planned pace of deficit reduction over the medium-term.  
As a result of the measures announced in the June 2010 Budget, the deficit in 2014/15 - the 
deadline set for the UK in the December 2009 Council Recommendation - is forecast by the 
OBR to fall to 2¼% of GDP. Output growth in these forecasts is significantly more in line 
with the Commission services forecast than prev iously. The planned pace of consolidation is 
driven by lower discretionary expenditure. Th e publication of the Sp ending Review on 20 
October 2010, providing detailed departmental  spending limits to back-up the overall 
spending targets for the entire term of the present parliament, will be another important step in the efforts of the authorities to restore sustai nable public finances in the UK. The size of the 
planned spending cuts will be a challenge to implement, which, if not achieved, would reduce 
the likelihood of compliance with the C ouncil recommendation in the absence of 
compensatory measures. The new Office of Budg et Responsibility and the new fiscal mandate 
announced by the UK authorities should however co ntribute to improve the fiscal framework 
and limit the risks to the adjust ment. Although the definitions of  the fiscal targets are not 
directly comparable as the defi cit target does not take explic it account of cap ital spending and 
the debt target refers to net - rather than gross - debt, the a pproach in the new mandate should 
contribute to greater consistency with the EU framework. Overall, while there are risks, at this 
stage the UK appears to be on track to ac hieve a deficit below 3% of GDP by the 
recommended deadline.   
In view of the above assessment, the Commis sion considers that no further steps in the 
excessive deficit procedure of the United Ki ngdom are needed at present. The Commission 
will continue to closely monitor budgetary developments in the United Kingdom in accordance with the Treaty and the SGP. 
EN 8   EN Comparison of key macroeconomic and budgetary projections  
    2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 
June 2010 Budget -1.4 -3.7 1.8 2.4 2.9 2.8 2.7 2.7 
COM Spring 2010 -1.4 -3.7 1.7 2.2 - - - - Real GDP 
(% change) 
Jan 2010 CP -1.3 -3.5 2.0 3.3 3.3 3.3 3.3 - 
June 2010 Budget -1.0 -4.1 -3.7 -3.5 -2.8 -2.3 -1.6 -0.9 
COM Spring 2010 0.3 -4.0 -3.7 -2.8 - - - - Output gap 1 
(% of potential 
GDP) Jan 2010 CP 0.0 -4.6 -4.4 -2.8 -1.5 -0.4 0.5 - 
June 2010 Budget -6.8 -11.3 -10.2 -7.7 -5.7 -3.7 -2.3 -1.3 
COM Spring 2010 -6.8 -12.2 -11.5 -9.4 - - - - General 
government 
balance2  
(% of GDP) Jan 2010 CP -6.9 -12.7 -12.1 -9.2 -7.4 -5.6 -4.7 - 
June 2010 Budget -4.7 -9.1 -7.3 -4.7 -2.5 -0.3 1.2 2.2 
COM Spring 2010 -4.7 -10.0 -8.6 -6.4 - - - - Primary balance 
(% of GDP) Jan 2010 CP -4.7 -10.5 -9.1 -5.7 -3.7 -1.8 -0.9 - 
June 2010 Budget -6.4 -9.6 -8.6 -6.2 -4.5 -2.7 -1.6 -0.9 
COM Spring 2010 -6.9 -10.5 -10.0 -8.2 - - - - Cyclically-
adjusted balance1 
(% of GDP) Jan 2010 CP -6.9 -10.8 -10.3 -8.0 -6.8 -5.5 -4.9 - 
June 2010 Budget -5.7 -9.3 -8.6 -6.2 -4.5 -2.7 -1.6 -0.9 
COM Spring 2010 -6.2 -10.2 10.0 -8.2 - - - - Structural 
balance3 
(% of GDP) Jan 2010 CP -6.2 -10.5 -10.3 -8.0 -6.8 -5.5 -4.9 - 
June 2010 Budget 55.8 71.2 78.9 83.6 85.5 84.9 83.1 80.4 
COM Spring 2010 55.8 71.4 80.9 87.9 - - - - Government gross 
debt 
(% of GDP) Jan 2010 CP 55.5 72.9 82.1 88.0 90.9 91.6 91.2 - 
Notes :     
 1 Output gaps and cyclically-adj usted balances according to the programme/Budget as  recalculated by Commission services on the ba sis of the 
information in the programme/Budget. 
 2 General government deficit ad justed for UMTS receipts in line  with Eurostat decision. Typicall y, this increases the deficit fig ure by 0.1 percentage 
point compared to the figure publishe d in the official Budget documents. 
 3 Cyclically-adjusted balanc e excluding one-off and other temporary measures. 
 Source : 
 June 2010 Budget; Commission services' spri ng 2010 forecasts (COM); UK January 2010 Conv ergence Programme (CP); Commission ser vices' 
calculations