Recommendation for a Council recommendation with a view to bringing an end to the situation of an excessive government deficit in the United Kingdom
Date: 2008-07-02
Institutions: European Commission
Subjects: United Kingdom, budget deficit, public debt, public finance

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 2.7.2008 
SEC(2008) 2189 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in the 
United Kingdom 

(presented by the Commission) 

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government 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(7) thereof; 

Having regard to the recommendation from the Commission; 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

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 in 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 union1. 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  Council  has  decided  on  8  July  2008,  in  accordance  with  Article  104(6)  of  the 
Treaty, that an excessive deficit exists in the United Kingdom.  

In accordance with Article 104(7) of  the Treaty and Article 3 of Council  Regulation 
(EC) No 1467/97 on speeding up and clarifying the implementation of the excessive 
deficit procedure2 (which is part of the Stability and Growth Pact), the Council is also 
required  to  make  recommendations  to  the  Member  State  concerned  with  a  view  to 
bringing  the  situation  of  excessive  deficit  to  an  end  within  a  given  period.  The 
recommendation  has  to  establish  a  deadline  of  six  months  at  the  most  for  effective 
action to be taken by the Member States concerned to correct the excessive deficit as 
well  as  a  deadline  for  the  correction  of  the  excessive  deficit,  which  should  be 

1 
2 

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). 

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(6) 

(7) 

(8) 

completed in the year (financial year in the case of the United Kingdom) following its 
identification  unless  there  are  special  circumstances.  In  deciding  whether  special 
circumstances exist, “relevant factors” as clarified in Article 2(3) of Regulation (EC) 
No  1467/97  should  be  given  due  consideration.  Article  3(4)  of  Regulation  (EC)  No 
1467/97  also  specifies  that  in  a  recommendation  to  a  Member  State  to  correct  an 
excessive  deficit  the  Council  should  request  the  achievement  of  a  minimum  annual 
improvement in the structural balance of 0.5% of GDP as a benchmark. 

The Commission, in its spring 2008 forecast, projected that on the basis of unchanged 
policies the general government deficit would rise from 2.9% of GDP in financial year 
2007/08  to  3.3%  in  2008/09,  and  to  remain  at  3.3%  in  2009/10.  Real  GDP  growth, 
following  an  outturn  of  3.0%  in  2007,  was  projected  to  slow  to  1.7%  in  2008  and 
further to 1.6% in 2009. Against the background of the cyclical position moving from 
a positive output gap in 2007 to a negative one in 2008, the cyclically-adjusted deficit 
was projected to increase from 3.0% of GDP in 2007/08 to 3.1% of GDP in 2008/09. 
Thereafter, the cyclically-adjusted deficit was projected to narrow to 2.9% of GDP in 
2009/10,  reflecting  the  combined  effects  of  discretionary  measures,  including  the 
higher taxes on alcohol and motor vehicles introduced in the 2008 Budget, and a small 
planned fall in the government expenditure  ratio. In  part due to  significant projected 
primary deficits, general government gross debt was forecast to increase from 43.2% 
of GDP in the 2007/08 financial year to reach 47½% of GDP in 2009/10.  

In  the  United  Kingdom's  2008  Budget,  the  authorities  presented  budgetary  plans 
showing a general government deficit of 3.2% of GDP in 2008/09, thereafter falling to 
2.8% in 2009/10. The deficit figure in the latter year is lower than the corresponding 
figure in the Commission services' spring 2008 forecast of 3.3% of GDP, mainly due 
to  differences  in  expected  GDP  growth  in  2009/10.  Subsequent  to  the  2008  Budget 
and  the  Commission  services’  spring  forecast,  the  United  Kingdom  announced 
additional fiscal measures on 13 May 2008 relating to changes in personal income tax 
bands  for  the  financial  year  2008/09.  The  changes  are  expected  to  reduce  personal 
income  tax  receipts  in  2008/09  and  will  be  financed  by  additional  government 
borrowing. Other things being equal, this will lead to an increase in the 2008/09 deficit 
ratio forecast by the Commission services by 0.2 percentage points3, to around 3.5% of 
GDP,  with  a  similar  impact  on  the  structural  deficit.  Furthermore,  the  UK 
government's statement implies a risk of a deficit overshoot also in 2009/10 relative to 
the deficit expected in the spring forecast.  

In the case of the United Kingdom, the consideration of relevant factors, as clarified in 
Article 2(3) of Regulation (EC) No 1467/97 and examined in the Commission’s report 
under  Article  104(3),  does  not  suggest  the  presence  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, 
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. 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 

3 

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. 

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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  the  headline  deficit  should  be 
brought  below  the  3%  of  GDP  reference  at  the  latest  by  financial  year  2009/10.  For 
this  correction  to  be  sustainable,  based  on  the  Commission  services'  spring  forecast, 
the UK authorities would have to achieve a structural improvement of at least 0.5% of 
GDP in 2009/10. 

(9) 

In general, in the view of the Council, budgetary consolidation measures should secure 
a lasting improvement in the general government balance, while being geared towards 
enhancing the quality of the public finances and reinforcing the growth potential of the 
economy.  A  budgetary  correction  in  the  United  Kingdom  should  be  consistent  with 
these objectives.  

HEREBY RECOMMENDS: 

–  The  United  Kingdom  authorities  should  put  an  end  to  the  excessive  deficit  situation  as 
soon as possible and by financial year 2009/10 at the latest, in accordance with Article 3(4) 
of Council Regulation (EC) No 1467/97, by bringing the general government deficit below 
3% of GDP in a credible and sustainable manner.  

–  To this end, on the basis of the Commission services' spring 2008 forecast, the authorities 

should ensure a structural improvement of at least 0.5% of GDP in 2009/10.  

The Council establishes the deadline of 8 January 2009 for the United Kingdom authorities to 
take effective action to this end. 

In  addition,  the  Council  invites  the  United  Kingdom  authorities  to  ensure  that,  after  the 
excessive deficit has been corrected, budgetary consolidation is sustained towards a medium-
term budgetary objective that (i) provides an adequate safety margin with respect to the 3% of 
GDP  deficit  limit;  (ii)  maintains  prudent  debt  ratios  taking  into  account  the  economic  and 
budgetary impact of ageing populations; and (iii) taking (i) and (ii) into account, allows room 
for budgetary manoeuvre, in particular considering the needs for public investment.  

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

Done at Brussels,  

For the Council 
The President 

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