Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of the United Kingdomand delivering a Council opinionon the updated Convergence Programme of the United Kingdom, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: EU programme, United Kingdom, budget policy, economic growth, employment policy

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 827 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of the United Kingdom 

and delivering a Council opinion 

on the updated Convergence Programme of the United Kingdom, 2011-2014 

{SEC(2011) 736 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of the United Kingdom 

and delivering a Council opinion 

on the updated Convergence Programme of the United Kingdom, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and on 21 
October  2010,  adopted  a  decision  on  Guidelines  for  the  employment  policies  of  the 
Member States3, which together form the “Integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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OJ L 209, 2.8.1997, p. 1. 
OJ C , , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On  28  April  2011,  the  United  Kingdom  submitted  its  updated  2011  Convergence 
Programme covering the period 2011-2014 and its 2011 National Reform Programme. 
In order to take account of interlinkages, the two programmes have been assessed at 
the same time.  

The  UK  was  particularly  exposed  to  the  international  financial  crisis  because  of  its 
large, globally-integrated financial sector and high levels of household debt. GDP fell 
by  0.1%  in  2008  and  4.9%  in  2009.  The  UK  government  intervened  massively  to 
support  the  banking  sector,  and  provided  extraordinary  additional  liquidity  to  the 
whole  sector.  The  government  deficit  rose  by  8.5  percentage  points  in  two  years  to 
11.2%  of  GDP  in  2009.  Unemployment  rose  from  5.3%  in  2007  to  7.6%  in  2009. 
Quarterly growth returned in the fourth quarter of 2009 although output remains below 
its  pre-crisis  peak.  The  short-term  outlook  is  for  moderate  growth  driven  by  strong 
corporate  investment  and  an  exchange-rate  driven  rebound  in  net  exports.  However, 
growth  will  be  held  back  by  weak  or  negative  growth  in  household  and  government 
consumption. Inflation is expected to remain well above the 2% official target during 
2011,  reflecting  increases  in  value  added  tax  and  higher  import  and  energy  prices, 
before falling in 2012. High inflation is likely to erode real incomes as wage growth 
remains  low.  The  main  downside  risks  to  the  forecast  are  that  the  rebounds  in 
corporate  investment  or  net  exports  may  not  materialise  and  that  persistent  high 
inflation may prevent the use of monetary policy to offset lower government spending. 

Based on the assessment of the updated convergence programme pursuant to Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario underpinning the budgetary projections is plausible except for 2012 when it is 
slightly  too  favourable.  The  programme  does  not  include  a  Medium  Term  Objective 
(MTO)  as  foreseen  by  the  code  of  conduct  although  it  can  be  derived  from  targets 
therein. The objective of the budgetary strategy is to bring down the deficit from 9.9% 
in 2010-11 to 1.7% in 2015-16, mainly based on expenditure restraint. The programme 
plans to bring the deficit below the 3% reference value by 2014-15, the deadline set by 
the Council. Starting from a debt ratio of 78.7% in 2010-11, the budgetary projections 
in  the  programme  foresee  the  debt  ratio  increasing  to  87.2%  by  2013-14  before 
beginning to fall slowly. The average annual fiscal effort over the period of 2010-11 to 
2014-15  is  1.6%.  This  is  slightly  below  that  recommended  by  the  Council  in 
December 2009 (1.75% of GDP) but is nevertheless appropriate given that the effort is 
being pursued from a significantly lower-than-expected budget deficit in 2009-10 and 
is therefore consistent with reducing the headline deficit to below the reference value 

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(8) 

(9) 

by  2014-15.  The  UK  appears  to  be  at  high  risk  with  regard  to  the  long-term 
sustainability of public finances. The long-term cost of ageing is above the EU average 
and the current budgetary position compounds the cost of ageing. Based on the current 
fiscal  position,  debt  would  increase  to  128%  of  GDP  by  2020.  However,  the  full 
implementation of the programme would be enough to put debt on a downward path 
but would still be above 80% by 2020. 

Implementing  the proposed  fiscal consolidation  remains  a  major  challenge.  Ensuring 
no slippage from published spending plans will be vital to re-establishing a sustainable 
fiscal  position.  Subject  to  this,  the  historically  low  rates  of  public  infrastructure 
investments,  particularly  as 
that  growth-enhancing 
expenditure  should  be  prioritised.  Ensuring  sufficient  primary  surpluses  over  the 
the 
in 
medium-term,  as  already  envisaged 
sustainability of public finances. 

the  Programme,  would 

transport,  mean 

improve 

regards 

The  UK's  flexible  labour  market  allowed  it  to  cope  reasonably  well  with  the  large 
contraction  in  GDP  during  the  crisis.  However,  increases  in  unemployment  were 
heavily concentrated on young people: between 2008 and 2010 youth unemployment 
increased  from  15%  to  almost  20%.  Poor  labour  market  outcomes  for  young  people 
are  linked  to  more  general  and  structural  shortcomings  in  skills  provision.  The 
proportion of UK 18-24-year-olds who are early leavers from education and training, 
at 15.7%, is higher than the EU average of 14.4%. While the share of people aged 25-
64  having  attained  high  skill  levels  is  particularly  high  in  the  UK,  there  are 
weaknesses at intermediate skills level, with the share of people in this group currently 
below  the  EU  average.  A  further  key  challenge  for  the  UK  labour  market  is  the 
significant  proportion  of  children  living  in  jobless  households:  at  17.5%  this  is  the 
highest  level  in  the  EU,  where  the  overall  average  is  10.2%.  The  problem  is 
specifically acute for single parent households, reflecting poor financial incentives and 
lack  of  viable  childcare  options:  over  32%  of  people  with  care  responsibilities  are 
inactive  or  work  part-time  due  to  lack  of  care  services  (this  is  4  percentage  points 
higher than the EU average).  

(10)  The  UK  experienced  a  house  price  boom  in  the  decade  before  the  crisis.  Prices  fell 
sharply after the crisis hit but have since recovered partially and remain at historically 
high levels. Transaction levels collapsed and have remained very low. The house price 
boom contributed to the large increases in household indebtedness and unsustainable 
growth  in  household  consumption  in  the  pre-crisis  decade.  The  collapse  in  housing 
transactions  drove  corresponding  falls  in  receipts  on  housing  transaction  taxes, 
contributing  to  the  worsening  of  the  UK  fiscal  position.  Weaknesses  in  the  housing 
market also help explain the UK's high expenditure on housing benefits and high share 
of the population in state-subsidised housing. The UK has announced initial reforms to 
its  planning  system  and  to  mortgage  regulation.  Reflecting  the  importance  of  this 
challenge to all sectors of the UK economy, there is a case to build on these measures 
to  develop  a  more  comprehensive  package  of  reforms  including  in  the  mortgage 
market and property taxation to address these issues. 

(11)  A  recovery  in  private  investment  would  be  an  essential  component  of  the  necessary 
rebalancing  of  the  economy  away  from  domestic  consumption  and  help  drive 
productivity  gains.  Surveys  suggest  that  credit  availability  and  cost  is  a  significant 
constraint on investment and expansion plans in the private sector, notably for smaller 
firms  reliant  on  bank  financing.  The  annual  rate  of  growth  in  lending  to  SMEs  has 

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been negative since late 2009, with lending to small businesses contracting even more 
steeply.  Moreover,  whilst  spreads  over  reference  rates  seem  to  have  stabilised  for 
medium-sized  businesses,  they  have  increased  somewhat  for  small  businesses.  The 
UK has recently put in place a number of measures to improve SME access to finance 
including  state  sponsored  investment  vehicles  and  reaching  an  agreement  with  UK 
banks requiring them to increase their gross lending to SMEs. To develop a solution 
which can continue to work without regular government intervention, there is a case 
for  further  reform  with  the  aim  of  improving  competition  in  the  banking  sector  and 
facilitating  the  development  of  markets  for  non-bank  finance  accessible  to  smaller 
firms. 

(12)  The  Commission  has  assessed  the  Convergence  Programme  and  National  Reform 
Programme4.  It  has  taken  into  account  not  only  their  relevance  for  sustainable  fiscal 
and socio-economic policy in the UK but also conformity with EU rules and guidance, 
given the need to reinforce the overall economic governance of the European Union by 
providing  EU  level  input  into  future  national  decisions.  It  considers  that  the 
programmes  set  out  ambitious  measures  to  reduce  the  deficit  and  encourages  the 
government  to  proceed  as  planned.  Further  steps  should  also  be  taken  to  reform  the 
housing  market,  reduce  youth  unemployment,  early  school  leaving,  address  the 
situation of children living in workless households and improve credit availability to 
the private sector. 

(13) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) of the Treaty on the Functioning of the European Union of 2 June 
2010,  the  Council  has  examined  the  2011  update  of  the  Convergence  Programme  of 
the United Kingdom and its opinion5 is reflected in particular in recommendation (1) 
and  (2)  below.  Taking  into  account  the  European  Council  conclusions  of  25  March 
2011,  the  Council  has  examined  the  National  Reform  Programme  of  the  United 
Kingdom, 

HEREBY  RECOMMENDS  that  the  United  Kingdom  should  take  action  within  the  period 
2011-2012 to: 

(1) 

(2) 

Implement  the  planned  fiscal  consolidation  aiming  at  a  deficit  of  6.2%  of  GDP  in 
2012-13,  ensuring  no  slippage  from  the  ambitious  spending  reduction  targets, 
thereby  strengthening  long-term  sustainability;  subject  to  this,  prioritise  growth-
enhancing  expenditure  including  research  and  innovation,  and  infrastructure 
investment. 

Develop  a  programme  of  reform  which  addresses  the  destabilising  impact  of  the 
house  price  cycle  on  public  finances,  the  financial  sector  and  the  economy,  with  a 
view  to  alleviating  problems  of  affordability  and  the  need  for  state  subsidy  for 
housing. This should include reforms to the mortgage market, property taxation and 
the planning system.  

(3) 

Take  steps  to  tackle  youth  unemployment  by  adopting  a  comprehensive  strategy  to 
reduce  early  school  leaving,  by  the  end  of  2012.  Address  skill  shortages  by 

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SEC(2011) 736. 
Foreseen in Article 9(3) of Council Regulation (EC) No 1466/97. 

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(4) 

(5) 

increasing  the  numbers  attaining  intermediate  skills,  in  line  with  labour  market 
needs.  

Take measures to reduce the high proportion of jobless households by increasing the 
supply of child care provision to facilitate single parents' and second earners' labour 
market participation.  

Significantly improve the availability of bank and non-bank financing to the private 
sector  and  in  particular  to  SMEs.  Encourage  competition  within  the  banking  sector 
and explore ways to improve access to non-bank financing such as venture and risk 
capital and publicly-issued debt.  

Done at Brussels, 

For the Council 
The President 

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