Recommendation for a Council decision on the existence of an excessive deficit in the United Kingdom
Date: 2008-07-02
Institutions: European Commission
Subjects: United Kingdom, budget deficit, public debt, public finance

EN 

EN 

   EN 

 
 
COMMISSION OF THE EUROPEAN 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 

   EN 

 
 
 
  
EXPLANATORY MEMORANDUM 

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.  The  EDP  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.  However,  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 provisions relating to the United Kingdom states that 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 
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  Kingdom  on  a  financial  year  basis  (running  from 
April to March). 

The  United  Kingdom  undertook  strong  fiscal  consolidation  efforts  during  the  late  1990s, 
which  led  to  an  improvement  in  the  general  government  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  explicit  policy  objective  to  raise 
expenditure  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  and  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 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 government 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  Article  104.3  and  on  24  January  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 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  October  2007,  ECOFIN  decided  to  abrogate  the 
EDP according to Article 104.12 of the Treaty. 

Over  the  course  of  2007/08  weak  revenue  growth,  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 budgetary 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 

2 
3 

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. 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12006E/PRO/25:EN:HTML 
Estimated by the Commission services, applying the common methodology on estimating output gaps. 

EN 

2 

   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  deficit  deteriorating  by  ¼%  of  GDP  in  a  still 
favourable economic context.5 

According  to  the  EDP  data  notified  by  the  UK  authorities  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  subsequent  policy  announcement  on  13  May 
reducing  personal  income  tax  in  2008/09,  financed  by  additional  borrowing,  results  in  an 
increase  in  the  planned  deficit  ratio  by  0.2  percentage  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 the deficit and the debt criteria.  

The report considered that, although above the 3% of GDP Treaty reference value, the deficit 
planned for 2008/09, as notified in March 2008, was close to it. The excess over the 3% of 
GDP 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. The Commission services’ spring 2008 forecast projects UK growth to 
slow in 2008 and 2009 to annual rates below potential. Nevertheless, 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 remain 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  risk  for  2009/10  of  a  deficit 

4  

5 

6 

7 

8 

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. 
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  non-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.  
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. 
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. 
Further policy announcements are expected in the autumn 2008 Pre-Budget Report.  

EN 

3 

   EN 

 
                                                 
 
overshoot, compared with the March 2008 budget plans, with a similar impact ceteris paribus 
on the spring forecast projection.  

The general government debt ratio remains well below the 60% reference  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  Treaty  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  deficit  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. 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  formulate  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 considered exceptional or temporary.  

The Commission, having taken into account its report and the opinion of the Economic and 
Financial Committee, is of the opinion that an excessive deficit exists in the United Kingdom. 
This  opinion,  adopted  by  the  Commission  on  2  July  2008,  is  herewith  addressed  to  the 
Council, according to Article 104(5) of the Treaty. The Commission 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  Council  recommendation  should  “establish  a 
deadline  for  the  correction  of  the  excessive  deficit,  which  should  be  completed  in  the  year 
following its identification unless 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 the 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 special 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 remain positive throughout 
the spring forecast horizon at annual rates above 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 consolidation in 2009/10 of at least an annual improvement 

9 

Using GDP adjusted for Financial Intermediation Services Indirectly Measured (FISIM).  

EN 

4 

   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  with  the  aforementioned 
Regulation, which envisages that the correction should be completed in the year following its 
identification. In the case of the United Kingdom, the identification took place in 2008 on the 
basis of a planned deficit in excess of the 3% of GDP reference value in 2008/09.  

Accordingly,  in  the  recommendation,  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 

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 

3.1 
-1.0 

3.5 
-1.4 

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 

- 

- 

- 

EN 

5 

   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  the  European  Community,  and  in  particular 
Article 104(6) thereof,  

Having regard to the recommendation from the Commission, 

Having regard to the observations made by the United Kingdom, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

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 union10. While 
in the second stage of economic and monetary union, the United Kingdom is required 
to endeavour to avoid excessive deficits, pursuant to Article 116(4) of the Treaty. 

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

The  excessive  deficit  procedure  under  Article  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  procedure  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 provision of the said Protocol. 

10 
11 

12 

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12006E/PRO/25:EN:HTML 
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). 
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 

6 

   EN 

 
                                                 
(5) 

(6) 

(7) 

(8) 

Article  104(5)  of  the  Treaty  requires  the  Commission  to  address  an  opinion  to  the 
Council if the Commission considers that an excessive deficit exists in a Member State 
or may occur. Having taken into account its 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  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 2 July 2008. 

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  exists.  In  the  case  of  the  United  Kingdom, 
this overall assessment leads to the following conclusions. 

The  United  Kingdom  undertook  strong  fiscal  consolidation  efforts  during  the  late 
1990s. Thereafter, the government adopted a looser fiscal stance, mainly as a result of 
an  explicit  policy  objective  to  raise  expenditure  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  and  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  GDP13  between  1999/00  and  2004/05. 
On 21 September 2005 the Commission initiated an EDP for the UK with the adoption 
of  a  report  under  Article  104.3  and  on  24  January  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  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 October 2007, ECOFIN 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 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  March  2008  budget,  which  also  presented 
budgetary  plans  showing  a  general  government  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.  Following  the  publication  of  the  March  2008 
budget, a policy announcement on 13 May reducing personal income tax in 2008/09, 
financed by additional borrowing, results in higher planned deficit 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 Commission services to around 3.5% of GDP.14 
Although  above  the  3%  of  GDP  Treaty  reference  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  particular,  it  does  not  result  from  an  unusual 
event  outside  the  control  of  the  United  Kingdom  authorities,  nor  is  it  the  result  of  a 

13 
14  

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

7 

   EN 

 
                                                 
severe  economic  downturn.  The  Commission  services’  spring  2008  forecast  projects 
UK  growth  to  slow  in  2008  and  2009  to  annual  rates  below  potential.  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  considered  not  temporary,  with  the  Commission 
services forecasting, on the basis of unchanged 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 remains well below the 60% reference value (the 
March  EDP  data  reported  a  ratio  of  43.0%  of  GDP15  in  the  2007/08  financial  year), 
although projected to be on a rising trend 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, “other 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  condition  is  not  met.  Therefore,  other  relevant 
factors are not taken into account in the steps leading to this decision. 

HAS ADOPTED THIS DECISION: 

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

Article 1 

Article 2 

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

Done at Brussels, […] 

For the Council 
The President 
[…] 

15 

Using GDP adjusted for Financial Intermediation Services Indirectly Measured (FISIM).  

EN 

8 

   EN