Commission Opinion 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

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 2.7.2008 
SEC(2008) 2194 final 

COMMISSION OPINION 

on the existence of an excessive deficit in the United Kingdom 

(presented by the Commission) 

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COMMISSION OPINION 

on the existence of an excessive deficit in the United Kingdom 

GENERAL CONSIDERATIONS 

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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). 

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.  This 
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” 
as  further  clarified  in  Article  2(3)  of  the  Regulation  mentioned  above.  The 
Regulation 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 the report. 

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  

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4. 

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On  the  basis  of  the  EDP  data  notified  by  the  UK  authorities  in  March  2008  and 
taking into account the Commission services' spring 2008 forecast, the Commission 
adopted a report under Article 104(3) for the United Kingdom on 11 June 2008.3 

Subsequently,  and  in  accordance  with  Article  104(4),  the  Economic  and  Financial 
Committee formulated an opinion on the report of the Commission on 25 June 2008. 

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 
exists or may occur. In order to reach a conclusion on whether an excessive deficit 
exists or may occur, the Commission considers that account should be taken of: (i) 
the  conclusions  of  its  report  under  Article  104(3),  and  (ii)  the  opinion  of  the 
Economic  and  Financial  Committee  on  this  report.  On  the  basis  of  these  elements, 
the Commission has established a number of considerations for the United Kingdom. 

CONSIDERATIONS CONCERNING THE UNITED KINGDOM 

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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 GDP4 between 1999/2000 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 was estimated to have risen to 2.9% of GDP in both the Commission 
services’  spring  2008  forecast  and  in  the  data  reported  by  the  UK  in  March  2008.5 

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

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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 context6. 

According to the EDP data notified by the UK authorities in March 20087, 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. A 
subsequent policy announcement on 13 May reduces personal income tax in 2008/09 
by  0.2%  of  GDP,  financed  by  additional  borrowing.  Other  things  being  equal,  this 
results  in  higher  planned  deficit  and  debt  ratios  than  those  in  the  notification,  and 
also implies a structural deficit higher by 0.2% of GDP.8 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,  quarterly  GDP  growth  is  expected  to 
remain positive and annual GDP growth 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 

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  2008  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.  

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2008/09.9 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.  

The  general  government  debt  ratio  remains  below  the  60%  reference  value  (the 
March  EDP  data  reported  a  ratio  of  43%  of  GDP10  in  the  2007/08  financial  year), 
although  projected  to  be  on  a  rising  trend  up  to  2009/10.  The  debt  criterion  in  the 
Treaty is fulfilled. 

In  accordance  with  the  provisions  in  the  Treaty  and  the  Stability  and  Growth  Pact, 
the Commission also analysed in its report “other relevant factors”. According to the 
Stability  and  Growth  Pact,  these  relevant  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.  

The  Economic  and  Financial  Committee  issued  its  opinion  in  accordance  with 
Article 104(4) 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 and temporary.  

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CONCLUSION 

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The monitoring of the budgetary situation in the United Kingdom and, in particular, 
the examination of compliance with the criteria laid down in Article 104(2) has led 
the Commission to prepare a report in accordance with Article 104(3) of the Treaty. 
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. 

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Further policy announcements are expected in the autumn 2008 Pre-Budget Report.  
Using GDP adjusted for Financial Intermediation Services Indirectly Measured (FISIM).  

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