Council opinion of 10 February 2004 on the updated Convergence Programme of the United Kingdom, 2002-03 to 2008-09
Date: 2004-02-19
Institutions: Council of the European Union
Subjects: United Kingdom, stability programme

19.2.2004

EN

Official Journal of the European Union

C 43/9

The economic policies as reflected in the 2003 update are not
fully consistent with the recommendations
in the Broad
Economic Policy Guidelines, specifically those with budgetary
implications, including the request to improve the cyclically-
adjusted budget position by at least 0,5 % of GDP each year as

calculated according to the commonly agreed methodology.
Moreover, the projected decline in the debt ratio is subject to
the need for an effective control of
risk and there is
government current primary expenditure,
in particular of its
like the wage bill and social transfers.
inelastic components,

COUNCIL OPINION

of 10 February 2004

on the updated Convergence Programme of the United Kingdom, 2002-03 to 2008-09

(2004/C 43/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community,

Having regard to Council Regulation (EC) No 1466/97 of 7
July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and co-ordination of economic
policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,
after consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 10 February 2004,
the Council examined the United
Kingdom's updated Convergence Programme, which covers
the period financial years 2002-03 to 2008-09. The updated
programme largely complies with the data requirements of the
revised ‘code of conduct’ on the content and format of stability
and convergence programmes.

The budgetary strategy underlying the update continues to be
the maintenance of sustainable public finances as part of an
integrated strategy for achieving high and stable economic
growth. The projections
in the update would
set out
increase, over the programme period, both the revenue and
rise in the
the expenditure ratios to GDP with a slight
modest debt-to-GDP ratio. A significant programme of public
investment is being implemented.

The programme draws a distinction between its central macro-
economic projection and the GDP growth rates used for public
finance projections; for caution, the latter are set one quarter

(1) OJ L209, 2.8.1997

percentage point per annum lower. The update centrally
projects real GDP growth to accelerate from an estimated
2 % in 2003 to 3 to 3,5 % in 2004 and 2005. In 2006, the
final year for which detailed macroeconomic projections are
provided, growth falls back to trend at 2,5 to 3 % and the
present negative output gap is expected to close. Underlying
trend employment growth is estimated at 0,2 % per annum.
HICP inflation is forecast to rise gradually from 1,5 % in 2003
to 2 %, the recently recalibrated inflation target, in 2006. The
central macroeconomic scenario is close to the Commission's
evaluation and the slightly lower growth rates used for the
public
even closer.
However, projected growth in the latter is still slightly higher
than forecast by the Commission in the short term.

finance projections

in the update

In cyclically-adjusted terms,

The update projects a general government deficit of 2,6 % of
GDP in 2004-05, compared to an expected deficit of 3,3 % in
2003-04. For 2005-06, 2006-07, 2007-08 and 2008-09, the
projections are for headline deficits of 2,4 %, 2,1 %, 2,0 % and
1,8 % of GDP respectively.
the
update projects an improvement
in the deficit between
2003-04 and 2004-05 of 0,4 percentage points to 2,0 % of
In the following years, the deficits amount to 2,2 %,
GDP.
2,1 %, 2,0 % and 1,8 % of GDP. Commission calculations of
the cyclically-adjusted changes, according to the commonly-
agreed methodology, are similar. The gross debt
ratio is
projected to rise gradually, from 37,9 % of GDP in 2002-03
to stabilise at 41,5 % in 2008-09.

in 2003-04.

The budgetary stance in the programme is expected to rise
above the 3 % of GDP reference value on a financial year
basis
this could constitute an
If confirmed,
excessive deficit. Looking ahead,
the projection includes a
strong increase in the revenue-to-GDP ratio. Despite an
expected narrowing of the cyclically-adjusted deficit to 1,8 %
in 2008-09, in no year of the update period does it seem to
provide a sufficient safety margin according to Commission
calculations against rising above the 3 % of GDP reference
value with normal macroeconomic fluctuations. According to
the Stability and
the budgetary projections in the update,

C 43/10

EN

Official Journal of the European Union

19.2.2004

Growth Pact's medium-term objective of a budgetary position
of close to balance or in surplus will not be achieved within
the programme period. At the same time, however, it should
be noted that the projected balances reflect to a significant
the implementation of an intensive programme of
extent
public
investment, bringing the general government net
investment-to-GDP ratio up from 1,1 % in 2002-03 to 2,2 %
in 2005-06, compared to an EU-average of 1,5 % in 2002.
Moreover the gross debt to GDP ratio is well below 60 % of
GDP over the programme period. The United Kingdom auth-
orities are themselves committed to keeping net debt below
40 % of GDP.

is constantly
Long term sustainability of public finances
in the UK's
monitored and represents a key commitment
fiscal policy. A prudent budgetary position kept
in the
medium term would help avoid a risk of emerging budget
imbalances in the context of ageing populations. On the
basis of current policies, the United Kingdom seems to be on
a sustainable path but some risk due to an ageing population

may emerge in the long run. Indeed, quantitative indicators
estimated by the Commission show an upward trend in the
debt-to-GDP ratio in the long run. An additional element to be
considered is that much of the financial sustainability of the
pension system depends on the performance of private pension
providers,
produces
significantly less than the anticipated coverage or level of
pensions. Nevertheless, the low level of debt and the relatively
low level of taxation give room for manoeuvre.

particularly

provision

private

if

In the 2003 Broad Economic Policy Guidelines, the UK auth-
orities are recommended to ‘ensure that the public services
associated with the announced increases in public expenditure
infrastructure) are
(including investment
delivered efficiently and with a view to ensuring cost-effec-
tiveness’. The economic policies as reflected in the updated
programme are broadly consistent with the recommendations
in the Broad Economic Policy Guidelines, specifically those
with budgetary implications.

in the transport