Report from the Commission - United Kingdom : report prepared in accordance with Article 104(3) of the Treaty {SEC(2008) 2016}
Date: 2008-06-11
Institutions: European Commission
Subjects: United Kingdom, budget deficit, budget estimate, budget policy, public debt, public finance, report

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 11.6.2008 
SEC(2008) 2014 final 

REPORT FROM THE COMMISSION 

United Kingdom 

Report prepared in accordance with Article 104(3) of the Treaty 

{SEC(2008) 2016} 

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REPORT FROM THE COMMISSION 

United Kingdom 

Report prepared in accordance with Article 104(3) of the Treaty 

1. INTRODUCTION 

This report assesses recent and current budgetary developments in the United Kingdom and 
reviews the short- and medium-term prospects in the light of overall economic conditions and 
policy  action  taken  by  the  government.  It  is  prepared  according  to  Article  104(3)  of  the 
Treaty and follows the United Kingdom's announcement of a  planned deficit exceeding the 
reference value. 

Article 104 of the Treaty lays down an excessive deficit procedure (EDP). This procedure is 
further specified in Council 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. While the provisions above apply to the UK in the same manner as to other countries 
not participating in the euro area, it should be recalled that under Article 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 EMU. Instead, as 
long  as  it  is  in  the  second  stage  of  EMU,  the  UK  is  committed  under  Article  116(4)  of  the 
Treaty to "endeavour to avoid excessive deficits". 

According to Article 104(2) of the Treaty, the Commission has to monitor compliance with 
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic product (GDP) exceeds the reference value of 
3%  (unless  either  the  ratio  has  declined  substantially  and  continuously  and  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 remains 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 diminishing and approaching the reference value at a satisfactory pace).  

Article 104(3) stipulates that, if a Member State does not fulfil the requirements under one or 
both  of  these  criteria,  the  Commission  has  to  prepare  a  report.  The  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 
budgetary position of the Member State”.  

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).  The  report  also  takes  into  account  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,  available  at 
http://ec.europa.eu/economy_finance/about/activities/sgp/main_en.htm. 

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The  preceding  EDP  in  respect  of  the  United  Kingdom  (its  third  such  procedure2)  was 
abrogated  in  October  2007.  This  was  initiated  in  September  2005  with  the  Commission's 
adoption of a report under Article 104(3) following the August 2005 EDP notification which 
reported a general government deficit ratio of 3.2% in the financial year 2004/053. In January 
2006,  the  Council  decided,  on  a  recommendation  from  the  Commission,  that  the  United 
Kingdom  was  in  excessive  deficit  according  to  Article  104(6)4.  At  the  same  time,  and  also 
based  on  a  Commission  recommendation,  the  Council  addressed  recommendations  under 
Article  104.7  to  the  UK  with  a  view  to  bringing  the  situation  of  an  excessive  government 
deficit to an end by 2006/07 at the latest. On 12 September 2007, the Commission adopted a 
recommendation  for  a  Council  decision  abrogating  the  procedure.  On  9  October  2007,  the 
Council decided to abrogate the EDP according to Article 104.12 of the Treaty. 
According  to  the  EDP  data  notified  by  the  UK  authorities  in  March  20085,  the  general 
government  deficit  in  the  United  Kingdom  was  planned  to  reach  3.2%  of  GDP  in  2008/09, 
thus exceeding the 3% of GDP reference value, while general government gross debt would 
be 43.0% of GDP6, below the 60% of GDP reference value but on a rising trend; these ratios 
are identical to those published in the United Kingdom's March 2008 budget. A subsequent 
policy  announcement  on  13  May  reducing  personal  income  tax  in  2008/09,  financed  by 
additional  borrowing  (see  Section  2)  results  in  higher  planned  deficit  and  debt  ratios  than 
those in the notification. 

Table 1: General government deficit and debt a 

2004/05  2005/06  2006/07 

2007/08 

2008/09 

2009/10 

3.1 

3.5 

General government balance 
General government gross 
debt 
Note: 
a In percent of GDP. 
b The projections notified in March 2008 are identical to those published in the 2008 budget. 
Source: Eurostat, Commission services’ spring 2008 forecasts and 2008 Budget 

42.5 

43.2 

46.2 

39.7 

41.7 

2.6 

2.9 

3.3 

COM 

2008 
budget b 

COM 

3.2 

3.3 

2008 
budget b 
2.8 

45.2 

47.5 

46.1 

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  additional  evidence.  The 
Commission  has  therefore  decided  to  initiate  the  excessive  deficit  procedure  for  the  United 
Kingdom  with  the  adoption  of  this  report.  Section  2  of  the  report  examines  the  deficit 
criterion  and  Section  3  the  debt  criterion.  Section  4  deals  with  public  investment  and  other 

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4 

5 

6 

The  first  EDP  vis-à-vis  the  United  Kingdom  was  abrogated  in  1998.  Following  a  deficit  outturn  of 
3.2% of GDP in 2002/03, in April 2004 the Commission initiated a second EDP with an Article 104.3 
report.  Given  expectations  that  the  excessive  deficit  would  revert  to  below  the  threshold  level  in  the 
following  year,  the  Commission  and  the  Economic  and  Financial  Committee  then  concluded  that  the 
United Kingdom could not be considered to be in an excessive deficit situation as defined in the Treaty. 
The UK financial year runs from April to March. The EDP applies to the UK on a financial year basis 
(annex to Regulation No 1467/97).  
All EDP-related documents for the United Kingdom can be found at the following website: 
http://ec.europa.eu/economy_finance/netstartsearch/pdfsearch/pdf.cfm?mode=_m2  
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?_pageid=2373,58110711&_dad=portal&_schema=portal. 
Using FISIM-adjusted version of GDP. 

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relevant factors. The technical analysis underpinning the conclusions of the report is provided 
in a more detailed Commission staff working document, which is released in parallel with this 
report7.  Both  documents  take  into  account  the  Commission  services’  spring  2008  forecasts, 
released on 28 April.  

2. DEFICIT CRITERION  

In 2008/09, the general government deficit was planned to reach 3.2% of GDP in the March 
2008 notification. 

•  Although  in  excess  of  3%  of  GDP,  the  planned  deficit  is  close  to  the  Treaty  reference 

value. 

•  The planned excess over the 3% of GDP reference value is not exceptional. In particular: 

i)  it  does  not  result  from  an  unusual  event  in  the  sense  of  the  Treaty  and  the  Stability  and 
Growth Pact; 
ii)  It  does  not  result  from  a  severe  economic  downturn  in  the  sense  of  the  Treaty  and  the 
Stability  and  Growth  Pact.  GDP  growth  in  2006  and  2007  was  above  potential,  with  an 
annual outturn of 2.9% and 3.0% respectively. For the years 2008 and 2009, the Commission 
services’  spring  2008  forecast  can  be  considered  as  an  up-to-date  assessment  of  the  UK’s 
economic  prospects.  This  forecast  projects  UK  growth  to  slow  in  2008  and  2009  to  annual 
rates  below  potential,  due  to  a  weakening  of  domestic  demand  driven  by  adverse  credit 
conditions as a result of the turmoil in financial markets, a weaker housing market and higher 
inflation weakening real disposable incomes. The spring 2008 forecast is more cautious than 
the UK's budget forecast regarding the speed of reversion to normal credit market conditions, 
including for secured and unsecured household borrowing, which the spring forecast expects 
to last into 2009. The expected improvement in net exports is not able to fully compensate for 
the shortfall in domestic demand. Nevertheless, quarterly GDP growth is expected to remain 
positive and annual GDP growth to reach 1.7% in 2008 and 1.6% in 2009. These growth rates 
are on a par with the average of independent forecasts in May 2008, as compiled by the UK 
Treasury.8  On  a  financial  year  basis,  the  spring  forecast  expects  GDP  growth  of  1.4%  in 
2008/9 and 1.8% in 2009/10.  

•  The planned excess over the 3% of GDP reference value is not temporary in the sense of 
the Treaty and  the Stability  and  Growth Pact. In 2009/10, assuming that the government 
will adhere to the non-cyclical primary expenditure plans that were announced in the 2008 
budget, the Commission services' spring 2008 forecast had projected the deficit to remain 
at  3.3%  of  GDP,  with  the  weak  economic  context  feeding-through  into  slow  revenue 
growth.  In  marked  contrast,  the  March  2008  budget  projection  is  of  a  2009/10  deficit  of 
2.8%  of  GDP,  with  the  government's  greater  optimism  based  on  an  earlier  and  stronger 
economic  recovery  than  in  the  Commission  services'  spring  forecast:  growth  of  1¾%  in 
2008/9 followed by a rebound to 2½ % in 2009/10. 

7 

8 

Technical  document  by  the  Commission  services  accompanying  the  report  on  the  United  Kingdom 
prepared in accordance with Article 104(3) of the Treaty [ECFIN/G1/2008/REP 52966]. 
HM  Treasury  (2008):  Forecasts  for  the  UK  economy  –  A  comparison  of  independent  forecasts,  May 
2008 (http://www.hm-treasury.gov.uk/media/0/C/200805forcomp.pdf). 

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Table 2: Macroeconomic and budgetary developments a 

2004/05 

2005/06 

2006/07 

2007/08 

2008/09 

2009/10 

COM 

COM 

2008 
Budget 
2.0 
2 ½ 

2008 
Budget 
2½ 
2 ½ 

- 

- 

- 

- 

0.3 

0.4 

0.0 

0.7 

0.6 

1.8 

-1.0 

-0.6 

-0.3 

-0.6 

-0.1 

1.7 
2.4 

1.6 
2.3 

2.9 
2.8 

3.0 
2.7 

1.8 
2.7 

3.3 
2.7 

2.9 
-0.7 

2.6 
-0.4 

3.5 
-1.4 

3.1 
-1.0 

3.3 
-1.2 

3.2 
-1.2 

3.3 
-1.1 

2.8 
-0.8 

Real GDP (% change) b 
Potential GDP (% change) b,c 
Output  gap  (%  of  potential 
GDP) b,c 
General government balance 
Primary balance 
One-off  and  other  temporary 
measures 
Government gross fixed capital 
formation 
Cyclically-adjusted balance c,d 
Cyclically-adjusted 
balance 
Structural balance d,e 
Structural primary balance 
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-adjusted  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 one-off and other temporary measures. 
Source: Eurostat and Commission services’ spring 2008 forecasts. 

-3.7 
-1.7 

-3.3 
-1.2 

-3.0 
-0.8 

-2.7 
-0.6 

-2.6 
-0.6 

-3.1 
-0.9 

-2.9 
-0.9 

-2.9 
-0.8 

primary 

-3.0 

-3.0 

-2.6 

-0.8 

-0.6 

-3.7 

-2.7 

-3.1 

-2.9 

-2.9 

-1.7 

-0.9 

-0.6 

-0.9 

-0.9 

-0.8 

1.8 

1.9 

2.0 

2.0 

1.9 

2.0 

- 

- 

- 

However, the Commission’s spring 2008 fiscal projections (and the 2008 budget report) pre-
dated  the  government's  statement  on  the  23  April  2008  that  it  now  envisaged  elements  of 
compensation  to  some  of  those  negatively  affected  by  the  removal  from  April  2008  of  the 
10% starting rate of income tax (one of the measures announced in the March 2007 budget). 
An  initial  measure  announced  on  13  May  2008  is  a  reduction  in  personal  income  tax  in 
2008/09  financed  by  additional  borrowing,  which  will  lead  to  an  increase  in  the  deficit  in 
2008/09 by 0.2 percentage points of GDP, increasing the deficit forecast by the Commission 
services to 3.5% of GDP. The government announced in its statement that for future years it 
aims to "continue the same level of support for those on lower incomes"9. The announcement 
does not commit the government to extend to 2009/10 the fully debt-financed compensation 
offered  in  2008/09  (thus  opening  the  possibility  of  offsetting  tax  and  expenditure 
measures10).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.  

In sum, the planned deficit is close to the 3% of GDP reference value but the planned excess 
over the reference value is neither exceptional nor temporary in the sense of the Treaty and 
the Stability and Growth Pact. This analysis suggests that the deficit criterion in the Treaty is 
not fulfilled. 

9 

10 

See paragraph 35 of the statement by the Chancellor:  
http://www.hm-
treasury.gov.uk/newsroom_and_speeches/speeches/statement/Speech_statement_130508.cfm 
Further policy announcements are expected in the autumn 2008 Pre-Budget Report.  

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3. DEBT CRITERION  

The UK’s general government gross debt ratio is set to remain under the reference value of 
60%  of  GDP  within  the  medium  term,  even  if  projected  to  be  on  a  rising  trend  up  to 
2009/2010.  The  spring  2008  forecast  estimates  that  the  gross  debt  at  end-2007/08  rose  to 
43.2% of GDP and forecasts a further increase in the debt ratio to 46.2% of GDP by 2008/09 
and 47½% by 2009/10 (see Table 1); following the 13 May announcement, prospects are for 
slightly higher ratios. The acceleration in the accumulation of government debt is in part due 
to  the  deterioration  in  the  primary  balance.  However,  in  2008/09  the  forecast  3-percentage 
point rise in the debt ratio over the preceding year also reflects the denominator-effect from 
lower growth in real GDP and the GDP deflator, as well as a stock-flow adjustment of almost 
1% of GDP due to the expected replacement of the Bank of England's loan to Northern Rock 
bank,  extended  progressively  from  September  2007,  by  direct  government  financing  (see 
Section 4.4 below). 

This analysis suggests that the debt criterion in the Treaty is fulfilled. 

4. RELEVANT FACTORS 

Article 104(3) of the Treaty provides that the Commission report “shall also take into account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 
account other relevant factors including the medium-term economic and budgetary position of 
the Member State”. These factors are further clarified in Article 2(3) of Council Regulation 
(EC)  No  1467/97,  which  also  specifies  that  “any  other  factors  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  view  of  the  above  provisions,  the  following  four  subsections  consider  in  turn  (1)  the 
medium-term  economic  position;  (2)  the  medium-term  budgetary  position  (including  public 
investment);  (3)  other  factors  put  forward  by  the  Member  State;  and  (4)  other  factors 
considered relevant by the Commission.  

4.1. Medium-term economic position 

Cyclical conditions and potential growth  

Having  grown  at  rates  slightly  above  potential  in  2006  and  2007,  the  spring  2008  forecast 
suggests that in 2008 and 2009 the UK economy will experience a period of weak economic 
growth relative to potential. This moderation is largely the result of a broad-based weakening 
of domestic demand, although accompanied by an improvement in external demand due to the 
sizeable  depreciation  of  sterling.  The  latter  will  help  to  correct  the  UK’s  current  account 
deficit which reached 4.2% of GDP in 2007. With potential growth rates estimated at slightly 
below 2½%, expected GDP growth of 1.7% and 1.6% in 2008 and 2009 respectively will lead 
to a negative output gap of around 1% of GDP by the end of the forecast horizon. This output 
gap profile is consistent with a downturn into bad economic times in the years 2008 and 2009, 
but does not constitute a severe economic downturn.  

Recent structural reforms 

Notwithstanding  a  relatively  strong  growth  performance  in  recent  years  and  very  flexible 
labour,  capital  and  product  markets,  the  UK  still  seems  to  face  a  productivity  challenge.  In 
2006, the UK's GDP per hour worked was 4% below the euro area average. However, the UK 
has been catching up, with average annual growth in labour productivity over 2001-2006 of 
2.1%  compared  to  1.0%  in  the  euro  area.  Structural  policy  measures  have  focused  on 

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improving skills,  R&D and innovation, the science base, regulation, the competition regime 
and  public  services  productivity,  in  line  with  the  priorities  put  forward  in  the  UK  national 
reform  programme  (including  the  latest  2007  implementation  report)  in  the  context  of  the 
Lisbon  strategy  for  growth  and  jobs.  According  to  the  2007  Comprehensive  Spending 
Review, UK science spending is expected to remain stable over the next three years at around 
0.4%  of  GDP.  If  implemented  fully,  the  long-term  impact  of  the  reform  efforts  on  growth 
(and thereby the budgetary position) is likely to be positive. 

4.2. Medium-term budgetary position 

Structural deficit and fiscal consolidation in good times 

Following the remarkable fiscal consolidation achievements during the late 1990s, the fiscal 
stance  eased  in  the  early  2000s,  mainly  on  account  of  an  explicit  policy  objective  to  raise 
significantly expenditure on public services. As a result, the UK general government balance 
moved  from  a  surplus  position  in  the  late  1990s  to  a  headline  deficit  of  3.5%  of  GDP  in 
2004/05,  equivalent  to  a  deterioration  of  the  structural  balance  of  4½  percentage  points  of 
GDP11  between  1999/00  and  2004/05.  In  2005/06  and  2006/07,  strong  growth  in  taxes  on 
corporate profits, boosted by higher tax intakes from the financial sector as a result of strong 
equity  market  performance  and  mergers  and  acquisition  activity,  contributed  to  an 
improvement  in  the  headline  and  structural  deficit  estimates.  However,  the  underlying 
budgetary situation in 2007/08 deteriorated, notwithstanding economic good times. As a result 
of pro-cyclical fiscal policy in 2007/08, the structural deficit in that year is estimated to have 
increased by ¼ percentage points, to 3% of GDP. Looking forward, the Commission services' 
spring 2008 forecast had projected a further weakening of the budgetary position in 2008/09, 
with  the  economic  slowdown  feeding  through  into  slower  revenue  growth.  However,  the 
fiscal  relaxation  announced  by  government  in  May  2008  implies  that  the  headline  deficit  is 
now  expected  to  reach  3.5%  of  GDP,  with  the  structural  deficit  ratio  set  to  increase  by  ¼ 
percentage points. The spring 2008 forecast had estimated the structural deficit in 2009/10 at 
around 3% of GDP, ⅓ percentage points less than the latest estimate of the structural deficit in 
2008/09. The latter in part reflects the combined effects of discretionary measures, including 
the higher taxes on alcohol and motor vehicles announced in the 2008 budget, and continued 
slower  growth  in  government  expenditure.  However,  the  government's  commitment  to 
continue  providing  an  unspecified  level  of  compensation  to  low-income  households  beyond 
2008/09  carries  a  significant  risk  that  the  reduction  in  the  structural  deficit  ratio  in  2009/10 
could actually fall short of this.  

Public investment  

General  government  gross  fixed  capital  formation  has  increased  from  1.2%  of  GDP  in 
2000/01  to  1.9%  in  2007/08,  mirroring  the  government's  policy  of  increasing  public 
investment from the relatively low levels seen in previous years. Since 2002/03, however, the 
general government deficit ratio has consistently exceeded the ratio of gross fixed investment 
to  GDP.  According  to  the  Commission  services'  forecasts,  the  general  government  deficit 
ratio will continue to exceed the gross fixed investment ratio throughout the forecast period. 
Between 2007/08 and 2008/09 the government investment ratio is forecast to increase by 0.1 
percentage  points,  to  2.0%  of  GDP,  while  the  headline  deficit  (prior  to  the  13  May 
announcement) was forecast to rise by 0.4 percentage points.  

11 

Estimated by the Commission services, applying the common methodology on estimating output gaps. 

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Quality of public finances  

In recent years the ratio of general government expenditure to GDP has risen by more than 5 
percentage  points  from  39%  in 1999/00 to  44%  in 2006/07. In comparison, the EU average 
was around 47% in both 1999 and 2006. Underpinning the rise in the United Kingdom is the 
government’s policy of increasing expenditure on public services, with a particular focus on 
increasing public investment from the relatively low levels seen in previous years. The 2007 
Comprehensive  Spending  Review  (CSR)  –  announced  together  with  the  2007  Pre  Budget 
Report  in  October  2007  –  set  departmental  spending  plans  and  priorities  for  the  years 
2008/09,  2009/10  and  2010/11.  The  spending  plans  over  the  2007  CSR  period  envisage 
sharply lower growth in comparison with previous spending reviews. Total public spending is 
expected  to  increase  by  an  average  of  2.1%  per  year  in  real  terms  in  the  2007  CSR  period, 
against an average of 4.0% for the spending reviews covering the period from April 1999 to 
March 2008. To support the departmental spending plans and enable the release of resources 
for priority areas, the government has also introduced a range of initiatives within the context 
of  the  2007  CSR  to  further  enhance  the  efficiency  and  effectiveness  of  public  spending, 
including a value for money programme and a performance management framework. It is still 
too early to judge whether the introduced measures will actually lead to a real improvement in 
the  efficiency  of  public  spending.  There  is  a  risk  that  some  of  the  declared  efficiency  gains 
could  represent  pure  cost-savings,  entailing  lower  public  service  quality  or  output. 
Furthermore, the targets are intrinsically hard to evaluate.  

Long-term sustainability of public finances 

The United Kingdom appears to be at medium risk with regard to the sustainability of public 
finances. The gross debt ratio, even if rising, is currently well below the 60% of GDP Treaty 
reference value. The long-term budgetary impact of ageing is close to the EU average, with 
public pension expenditure showing a somewhat more limited increase than on average in the 
EU,  in  part  as  a  result  of  the  fact  that  the  UK  relies  relatively  more  on  private  pension 
arrangements  than  do  other  EU  countries.  The  comprehensive  pension  system  reforms 
adopted in 2007, addressing the concern of potentially inadequate future provision, are likely 
to involve a somewhat higher increase in age-related expenditure. Commission analysis based 
on the budgetary position in calendar year 2007 indicates that sustainable public finances are 
at risk, a conclusion which is aggravated when the long-term budgetary impact of an ageing 
population is also taken into account. Achieving high primary surpluses would contribute to 
reducing risks to the sustainability of public finances. 

4.3. Other factors put forward by the Member State 

In a letter of 20 May 2008, the authorities of the United Kingdom listed some relevant factors 
in  accordance  with  Article  2(3)  of  Council  Regulation  (EC)  No  1467/97.  The  authorities 
noted  that  public  finance  projections  contained  in  Budget  2008  were  based  on  cautious, 
independently audited assumptions, an approach designed to build additional contingency into 
the  headline  fiscal  numbers  and  to  protect  against  unexpected  events. The  forecasts 
incorporate  negative  impacts  and  downward  revisions  in  a  range  of  areas  including  tax 
revenues from the financial sector, and from the property market. The authorities note that the 
increase  in  the  deficit  projected  in  Budget  2008  reflects  the  operation  of  the  automatic 
stabilisers  as  well  as  non-discretionary  factors,  in  the  short term,  resulting  from  exceptional 
disruption in global financial markets. The letter notes that UK forecasts indicate that the UK 
fiscal deficit will fall below the 3% reference value in 2009/10, highlighting the exceptional 
temporary  nature  of  the  excess  over  the  3%  reference  value.  The  authorities  also  highlight: 
debt levels well below the reference level, which in their view allow flexibility for sustained 
investment in public services; commitments made to improve efficiency and value for money 

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in  public  spending;  spending  plans  which  allow  for  improvements  in  public  services; 
significant commitments to implement the Lisbon Strategy for Jobs and Growth including on 
science  spending,  the  Technology  Programme  and  higher  education  teaching;  and  planned 
spending on Official Development Assistance (ODA).The analysis presented above covers the 
items  put  forward  by  the  authorities,  except  the  observation  by  the  authorities  on  the  UK's 
international  aid  commitments.  Under  the  latter  item,  the  authorities  record  the  UK's 
programme to increase its international development contributions, particularly in the context 
of the EU's collective commitment to provide an average of 0.56% of Gross National Income 
as Official Development Assistance by 2010. The UK plans to reach that level in 2010/11.  

In  2005  and  2006,  the  ratio  of  the  UK's  net  Official  Development  Assistance  to  Gross 
National Income (GNI) stood at 0.47% and 0.51% respectively12. The ODA figures for those 
two years included the debt relief given to Nigeria which was agreed by the Paris Club group 
of creditors. In 2007, ODA fell to 0.36%, of GNI reflecting the lower levels of debt relief.  

4.4. Other factors considered relevant by the Commission 

The  Commission  services’  spring  2008  forecast  assumes  that  the  non-cyclical  primary 
expenditure plans that were announced as part of the 2007 Comprehensive Spending Review 
will be adhered to. However, during the six years between 2002/03 and 2007/08, annual total 
expenditure  outturns  have  exceeded  the  original  total  spending  envelopes  that  had  been 
established  in  previous  Spending  Reviews.  Past  trends  show  nevertheless  that  typically 
expenditure  overruns  are  smaller  in  the  first  year  of  the  spending  review  period,  suggesting 
that  the  risks  from  higher  than  planned  expenditure  are  relatively  smaller  for  the  deficit 
forecast for 2008/09 but will increase in 2009/10.  

The nationalisation on the 22 February 2008 of Northern Rock bank, which had been facing 
severe liquidity problems since September 2007 as a result of the credit squeeze, did not have 
any direct effect on the general government accounts for the time being. However, it is not yet 
fully  clear  whether  the  Bank  of  England's  loan  to  the  bank,  which  stood  at  £24.1  billion  or 
1.7%  of  GDP  at  end-March  2008,  should  have  already  been  reported  as  government  debt, 
since it was granted on behalf of the State and with State guarantee. This is currently being 
discussed  between  the  UK’s  Office  for  National  Statistics  (ONS)  and  Eurostat.  Meanwhile, 
the  Bank  of  England's  liquidity  support  and  the  Treasury's  guarantees  to  the  bank's  other 
creditors (about £30 billion or 2.0% of GDP) remain a contingent liability.  

The accounting treatment of some Public-Private Partnership (PPP) contracts is subject to an 
ongoing discussion between Eurostat and the ONS13. The Commission is aware that the UK 
authorities aim to adopt International Financial Reporting Standards for the preparation of the 
annual financial statements of government departments and other public bodies from 2009/10. 
This move could see some of the current Private Finance Initiative (PFI) projects that are off-
balance-sheet  reclassified  onto  the  public  sector's  books.  Reclassifications  would  not 
necessarily  adversely  affect  the  general  government  accounts.  Nevertheless,  it  remains 
possible that the changes in the accounting treatment, including any changes to comply with 
Eurostat's guidance on the accounting of PPPs in general government accounts, could lead to 

12 

13 

EN 

1, 

2008 

section 

Annual 

Report, 

Annex 
http://www.dfid.gov.uk/pubs/files/departmental-report/2008/Annexes-bcov.pdf  
See 
http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_DS_GFS/PGE_DS_GFS_9/FINDINGS%2
0FROM%20THE%20MISSION%20TO%20THE%20UK%20ON%2025-
26%20JANUARY%202007_WEBSITE.PDF  

on  Eurostat's 

latest  EDP 

International 

Department 

report 

visit 

Development. 

the  UK: 

6.6 

the 

for 

of 

to 

9 

   EN 

 
                                                 
a small increase in the general government deficit estimate in 2009/10, depending inter alia 
on the share of off-balance sheet PPPs that would end up on the general government accounts. 
In  its  opinion  on  the  most  recent  update  of  the  convergence  programme14,  the  Council 
concluded that the programme confirmed a significant deterioration in the United Kingdom’s 
budgetary  position  that,  coupled  with  a  probably  weaker  macroeconomic  context  than 
envisaged, carried a clear risk that general government deficit would breach the 3% of GDP 
deficit reference value in the near term. The Council therefore invited the United Kingdom to 
implement measures necessary for the deficit not to exceed the reference value of 3% of GDP. 

5. CONCLUSIONS 

The  general  government  deficit  in  the  United  Kingdom  planned  for  2008/09  as  notified  in 
March 2008 is 3.2% of GDP, above but close to the 3% of GDP reference value. The fiscal 
relaxation announced by the government in May 2008 is expected to raise the deficit ratio by 
an additional 0.2 percentage points in 2008/09. The planned excess over the reference value 
cannot  be  qualified  as  exceptional  within  the  meaning  of  the  Treaty  and  the  Stability  and 
Growth  Pact.  Furthermore,  it  cannot  be  considered  temporary.  This  suggests  that  the  deficit 
criterion in the Treaty is not fulfilled. 

General  government  gross  debt  remains  below  the  60%  of  GDP  reference  value.  The  debt 
criterion in the Treaty is fulfilled. 

In line with the Treaty, this report has also examined "relevant factors". Given that the deficit 
does  not  satisfy  the  double  condition  of closeness  and  temporariness,  these  factors  cannot 
according to the Stability and Growth Pact be taken into account in the steps leading to the 
decision on the existence of an excessive deficit. 

14 

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:049:0025:0028:EN:PDF 

EN 

10 

   EN