2006/125/EC: Council Decision of  24 January 2006  on the existence of an excessive deficit in the United Kingdom
Date: 2006-01-24
Institutions: Council of the European Union
Subjects: United Kingdom, budget deficit, public finance, stability pact

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II

(Acts whose publication is not obligatory)

COUNCIL

COUNCIL DECISION

of 24 January 2006

on the existence of an excessive deficit in the United Kingdom

(2006/125/EC)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty
Community, and in particular Article 104(6) thereof,

establishing the European

Having regard to the recommendation from the Commission,

Having regard to the observations made by the United
Kingdom,

Whereas:

(1)

(2)

Article 104 of the Treaty lays down an excessive deficit
procedure (EDP)
to ensure that Member States avoid
excessive government deficits or that they correct such
deficits when they occur.

Pursuant to point 5 of the Protocol on certain provisions
relating to the United Kingdom of Great Britain and
Northern Ireland, the obligation under Article 104(1) of
the Treaty to avoid excessive general government deficits
does not apply to the United Kingdom unless it moves to
the third stage of economic and monetary union. While
in the second stage, the United Kingdom is required to
endeavour
government deficits,
pursuant to Article 116(4) of the Treaty.

to avoid excessive

(3)

(4)

(5)

sound

government

The Stability and Growth Pact is based on the objective
of
of
strengthening the conditions for price stability and for
strong sustainable growth conducive to employment
creation.

a means

finances

as

The excessive deficit procedure under Article 104 of the
Treaty, as clarified by Council Regulation (EC) No
1467/97 of 7 July 1997 on speeding up and clarifying
the implementation of the excessive deficit procedure (1),
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 procedure annexed to
further provisions relating to the
the Treaty sets out
excessive deficit procedure.
implementation of
the
Council Regulation (EC) No 3605/93 (2)
lays down
detailed rules and definitions for the application of the
provision of the said Protocol.

Article 104(5) of the Treaty requires the Commission to
address an opinion to the Council
if the Commission
considers that an excessive deficit in a Member State
its
exists or may occur. Having taken into account
report in accordance with Article 104(3) of the Treaty
and having regard to the opinion of the Economic and
Financial Committee in accordance with Article 104(4),
the Commission services’ autumn 2005 forecast, as well
as the United Kingdom’s December 2005 Pre-Budget
Report,
the Commission concluded that an excessive
deficit exists in the United Kingdom. The Commission
therefore addressed such an opinion to the Council
in
respect of the United Kingdom on 11 January 2006.

(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).

(2) OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regu-

lation (EC) No 2103/2005 (OJ L 337, 22.12.2005, p. 1).

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(6)

(7)

(8)

the Treaty states that

the Council
Article 104(6) of
should consider any observations which the Member
State concerned may wish to make before deciding,
after an overall assessment, whether an excessive deficit
exists. In the case of the United Kingdom, this overall
assessment leads to the following conclusions.

In the period since the United Kingdom’s previous
excessive deficit procedure was abrogated in May 1998,
the UK general government balance moved from a
comfortable surplus position in the late 1990s to a
deficit of 3,2 % of GDP in 2003/04 (1). This development
was equivalent to a change in the structural fiscal balance
of around 4 percentage points of GDP in the period
between 1999/2000 and 2003/04. During these years,
the general government expenditure ratio increased from
In the same
less than 40 % to about 43 % of GDP.
period,
formation
increased from 1,2 % to 1,6 % of GDP; the government
ratio went down to 37,6 % of GDP in
gross debt
2002/03 but has been increasing since then. Such an
evolution, coupled with developments in interest rates,
led to interest payments having fallen from 2,9 % to
2,0 % of GDP in that period.

government

capital

gross

fixed

the deficit over

In the 2004/05 financial year, according to the EDP data
notified by the United Kingdom in August 2005, the
general government deficit remained at 3,2 % of GDP,
again above, but close to,
the 3 % of GDP Treaty
the 3 % of GDP
reference value. The excess over
reference value was not exceptional. In particular, it did
not result from an unusual event outside the control of
the United Kingdom authorities, nor was it the result of a
severe economic downturn. Growth of 3,2 % in 2004 is
estimated to have been above potential as was growth in
the financial year 2004/05. The output gap in 2004 is
estimated to have been positive, implying that the budget
deficit was by and large structural. Therefore, the excess
the reference value cannot be
of
considered
economic
downturn. The excess over the 3 % of GDP reference
value is also considered not temporary, based on the
Commission services’ autumn 2005 forecasts. In 2004
the general government gross fixed capital
to 2005,
formation continued to increase,
rising to 1,8 % of
GDP, and in the United Kingdom Pre-Budget Report is
set to reach 2,2 % in 2006/07 and 2,3 % in 2007/08.
Assuming United Kingdom fiscal policy remained as
hitherto announced, the deficit in these forecasts was
expected to widen to just below 3,5 % of GDP in
2005/06 and to remain over 3 % of GDP in 2006/07.
Based on these projections, the excess over the reference
value could not be considered either exceptional or
temporary within the meaning of the Treaty and the

resulting

from a

severe

as

represent

autumn forecasts),

taken into account

Stability and Growth Pact although the deficit is close
to the reference value. After the Commission services’
autumn forecasts had been published,
the United
Kingdom announced policy decisions in the Pre-Budget
Report presented to Parliament on 5 December. In net
terms, the United Kingdom authorities’ costings of these
measures, compared with the baseline of announced
in the Commission
policy (as
services’
an easing of
policy by 0,1 percentage points of GDP in the current
financial year
and a tightening of policy by 0,1
percentage points of GDP in 2006/07. Compared to an
unchanged policy
the Pre-Budget Report
foresees a tightening of 0,2 percentage points of GDP
in 2007/08 which is expected to be permanent. In the
Pre-Budget Report, the UK authorities expect the deficit
to be below 3 % in 2006/07 and to fall to 2,4 % in
2007/08. Taking into consideration these measures,
the Commission’s assessment
which are all structural,
nevertheless remains that
in 2006/07, at
around 3,1 % of GDP,
is expected to exceed 3 % of
GDP and is therefore not temporary. This indicates that
the Treaty requirement concerning the deficit criterion is
not fulfilled.

the deficit

scenario,

(9)

In contrast, the general government debt ratio remains
well below the 60 % reference value (the August EDP
data reporting a ratio of 40,8 % of GDP in the
2004/05 financial year) although, given the scale of
actual and projected primary deficits, on a rising trend.
In the Commission’s autumn forecasts the debt ratio is
projected to reach around 44,5 % of GDP in 2007/08.
This means that the Treaty requirement concerning the
debt criterion is respected by a large margin.

‘relevant

(10) According to Article 2(4) of Regulation (EC) No
factors’ can only be taken into
1467/97,
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
fully met. This double
value
condition is not met
the United
Kingdom. Therefore, other
factors are not
taken into account in this decision,

temporary — is

case of

relevant

in the

is

HAS ADOPTED THIS DECISION:

(1) August 2005 EDP notification, revised down from 3,3 % of GDP.
The United Kingdom August data were validated by Eurostat on
26 September 2005.

From an overall assessment it follows that an excessive deficit
exists in the United Kingdom.

Article 1

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This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland.

Article 2

Done at Brussels, 24 January 2006.

For the Council
The President

K.-H. GRASSER