Recommendation for a COUNCIL RECOMMENDATION on the United Kingdom’s 2012 national reform programme and delivering a Council opinion on the United Kingdom’s convergence programme for 2012-2017
Date: 2012-05-30
Institutions: European Commission
Subjects: United Kingdom, budget deficit, budgetary equilibrium, corporate finance, dropout, energy grid, job creation, property market, transport network, youth unemployment

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
COM(2012) 309 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the United Kingdom’s 2012 national reform programme  

and delivering a Council opinion on the United Kingdom’s convergence programme  
for 2012-2017 

{SWD(2012) 309 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the United Kingdom’s 2012 national reform programme  

and delivering a Council opinion on the United Kingdom’s convergence programme  
for 2012-2017 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 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 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 

Having regard to the recommendation of the European Commission3, 

Having regard to the resolutions of the European Parliament4, 

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) 

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 

(2) 

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 

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OJ L 209, 02.08.1997, p. 1 
OJ L 306, 23.11.2011, p. 25 
COM(2012)309 final 
P7_TA(2012)0048 and P7_TA(2012)0047 

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(3) 

(4) 

(5) 

(6) 

(7) 

October  2010,  adopted  a  decision  on  guidelines  for  the  employment  policies  of  the 
Member States5, which together form the ‘integrated guidelines’. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

On  12  July  2011,  the  Council  adopted  a  recommendation  on  the  United  Kingdom’s 
national  reform  programme  for  2011  and  delivered  its  opinion  on  the  United 
Kingdom’s updated convergence programme for 2011-2014. 

On 23 November 2011, the Commission adopted the second Annual Growth Survey, 
marking  the  start  of  the  second  European  semester  of  ex-ante  and  integrated  policy 
coordination,  which  is  anchored  in  the  Europe  2020  strategy.  On  14  February  2012, 
the  Commission,  on  the  basis  of  Regulation  (EU)  1176/2011,  adopted  the  Alert 
Mechanism Report6, in which it identified the United Kingdom as one of the Member 
States for which an in-depth review would be carried out. 

On 2 March 2012, the European Council endorsed the priorities for ensuring financial 
stability,  fiscal  consolidation  and  action  to  foster  growth.  It  underscored  the  need  to 
pursue  differentiated,  growth-friendly  fiscal  consolidation,  to  restore  normal  lending 
conditions  to  the  economy,  to  promote  growth  and  competitiveness,  to  tackle 
unemployment  and  the  social  consequences  of  the  crisis,  and  to  modernise  public 
administration. 

On  30  April  2012,  the  United  Kingdom  submitted  its  convergence  programme 
covering the period 2011-12 to 2016-17 and its national reform programme for 2012. 
In order to take account of their interlinkages, the two programmes have been assessed 
at  the  same  time.  The  Commission  has  also  assessed,  in  an  in-depth  review  under 
Article 5 of Regulation (EU) No 1176/2011, whether the United Kingdom is affected 
by  macroeconomic  imbalances.  The  Commission  concluded  in  its  in-depth  review7 
that  the  United  Kingdom  is  experiencing  an  internal  imbalance,  although  not 
excessive. 

Based  on  the  assessment  of  the  2012  convergence  programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that the  macroeconomic 
scenario  underpinning  the  budgetary  projections  in  the  programme  is  plausible.  The 
objective  of  the  budgetary  strategy  outlined  in  the  programme  is  to  implement  the 
necessary  fiscal  consolidation  to  achieve  the  government's  fiscal  targets  on  net  debt 
and cyclically-adjusted current balance. The convergence programme does not include 
a  medium-term  objective  (MTO)  as  foreseen  by  the  Stability  and  Growth  Pact. 
According to programme projections, the deadline to correct the excessive deficit set 
by the Council in its recommendation of 2 December 2010 is expected to be missed by 
one  year.  The  government  deficit  in  2014/15,  the  deadline  set  by  the  Council,  is 
estimated at 4.4% of GDP, implying, based on the (recalculated) structural deficit,8 an 
average fiscal effort of 1.25% of GDP between 2010/11 and 2014/15 which is below 

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Council Decision 2012/238/EU of 26 April 2012 
COM(2012) 68 final 
SWD(2012)161 final 
Cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
services  on  the  basis  of  the  information  provided  in  the  programme,  using  the  commonly  agreed 
methodology. 

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the  1¾%  effort  set  out  in  the  Council  recommendation  under  the  Excessive  Deficit 
Procedure.  Although  the  government  has  not  deviated  from  its  fiscal  consolidation 
strategy  which  initially,  based  on  previous  macroeconomic  projections,  appeared 
sufficient to comply with EDP targets, the fiscal performance and outlook have been 
affected  by  a  deterioration  of  economic  growth  prospects.  Revenue  measures  have 
been  significantly  front-loaded  in  the  adjustment  path  of  the  fiscal  consolidation. 
Almost 40% of the total annual fiscal consolidation planned for the 2010-11 to 2014-
15  period  has  been  achieved  by  the  end  of  2011-12,  including  30%  of  the  spending 
cuts and two-thirds of the net tax increases. The potential revenue contribution from an 
increased  efficiency  of  the  tax  system,  stemming  from  a  review  of  the  VAT  rate 
structure, 
the  convergence 
programme, the general government deficit is expected to be 8.3% of GDP in 2011-12, 
5.9% in 2012-13, 6.0% of GDP in 2013-14, 4.4% of GDP in 2014-15, 2.9% of GDP in 
2015-16 and 1.2% of GDP in 2016-17. These estimates are somewhat lower than those 
by Commission services, who in its 2012 spring forecast expect a deficit of 6.1% of 
GDP  in  2012-13  (which  would  be  7.9%  without  an  upcoming  one-off  pension  fund 
transfer)  and  6.5%  of  GDP  in  2013-14.  The  differences  stem  from  a  lower  growth 
forecast and amendments made by Eurostat to UK data. Some adjustments were made 
to  the  government’s  fiscal  plans  in  the  2011  Autumn  Statement  to  prioritise  growth-
enhancing expenditure, but public sector investment is still set to fall sharply by 2014-
15. Government debt, forecast at 94.7% in 2013-14, is expected to peak in 2014-15. 

relatively  underexploited.  According 

remains 

to 

(8) 

The run-up to the crisis saw the housing market overheat, with house price-to-income 
ratios  reaching  historic  highs  in  the  context  of  a  growing  housing  supply  shortage, 
leading  to  the  accumulation  of  high  levels  of  mortgage  debt.  According  to  the 
Commission’s in-depth review, high household debt constitutes an internal imbalance 
in  the  United  Kingdom's  economy.  Due  to  a  high  share  of  variable  interest  rate 
mortgages, household finances are vulnerable to interest rates rises, with a potentially 
destabilising  knock-on  effect  on  the  economy  as  a  whole  via  the  financial  sector.  A 
sustained  and  significant  fall  in  household  debt  is  only  likely  if  house  prices  fall 
relative to disposable income; however, if nominal house prices were to fall rapidly it 
would  risk  pushing  many  households  into  negative  equity.  Residential  construction 
remains  at  record  lows,  due  both  to  a  restrictive  planning  system  and  cyclical 
weakness,  and  wider  housing  market  activity is  also  still  muted.  In  November  2011, 
the government published its housing strategy for England, which aims to facilitate an 
increase  in  residential  construction,  but  significant  uncertainty  remains  about  the  net 
impact of the new system on housing development. Also, the housing strategy did not 
mention  the  issue  of  property  taxation,  where  the  UK  system  combines  a  regressive 
recurring  tax  (council  tax)  with  a  progressive  transaction  tax  (the  Stamp  Duty  Land 
Tax - SDLT), which may play a role in cyclical developments in budget revenues and 
financial  stability.  Some  adjustments  were  made  to  SDLT  rates  in  the  2012  Budget, 
but only minor changes have been made in this field overall. 

(9) 

The  UK  has  growing  challenges  of  unemployment  and  labour  market  participation. 
Unemployment  in  the  UK  currently  stands  at  8.4 %.  Youth  unemployment  is  much 
higher,  at  22.2 %,  and  more  than  38 %  of  the  unemployed  in  the  UK  are  under  25. 
17.7% of young people (16-24 year olds) are not in employment, education or training. 
Private  sector  employment  has  been  growing  modestly,  but  not  enough  to  offset 
reductions in public sector employment and the growth of the workforce. The UK has 
an oversupply of low-skilled workers, for whom demand is falling, and a shortage of 
workers with high-quality vocational and technical skills that are particularly needed 

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by goods producing and exporting sectors in which the UK's performance is relatively 
weak.  The  main  focus  in  vocational  education and training (VET) policy is  on  basic 
skills  and  level  2  qualifications,  while  the  economy  increasingly  demands  more 
advanced VET qualifications. The UK also continues to have a relatively high number 
of adults with very poor basic literacy and numeracy skills, who are not well placed to 
benefit  from  vocational  training.  Early  school-leaving  has  increased  by  3.3  pp.  since 
2005  and  is  above  the  EU  average  at  14.9 %;  continued  support  for  low-income 
families is crucial to prevent school drop-outs. 

(10)  The government has a welfare reform agenda to help more people get into work, while 
supporting  the  most  vulnerable.  The  Universal  Credit,  which  aims  to  simplify  the 
benefit system, has not yet been implemented, but considerable risks remain that the 
positive impact of new policies on employment and incomes will be more than offset 
by declining amounts available for benefits, so poverty, particularly for families with 
children,  risks  increasing.  Independent  estimates  forecast  that  in  2020-21  absolute 
child poverty will reach its highest level since 2001-02, and that the government will 
miss targets for reducing child poverty set down in the Child Poverty Act. Insufficient 
access to childcare, in particular for low earners, still causes significant problems and 
the government has not yet come up with adequate plans to tackle this challenge. Cuts 
to support for childcare also risk exacerbating the problem. 

(11)  Financing conditions remain tight, particularly for SMEs. Net lending to the corporate 
sector was negative in 2011, while survey evidence shows that a significant number of 
SMEs are credit constrained. Additionally, access to non-bank lending remains largely 
restricted  to  bigger  firms,  and  competition  in  the  banking  industry  is  limited. 
Notwithstanding  the  steps  taken  by  the  authorities  to  improve  the  situation,  the 
Breedon  task  force  on  alternative  debt  markets  estimated  a  substantial  ongoing 
financing gap over the next five years, especially for SMEs. 

(12)  The  UK  has  a  challenge  to  improve  its  energy  and  transport  infrastructure,  which  is 
linked  to  laying  the  foundations  for  long-term  growth  and  competitiveness,  and  to 
addressing  the  causes  of  the  UK's  lack  of  external  competiveness  in  manufacturing 
sectors.  The  UK  needs  substantial  investment  to  upgrade  its  electricity  generation 
capacity,  given  the  need  to  replace  a  large  part  of  the  existing  generating  capacity, 
which  will  close  over  the  next  decade,  and  the  need  to  meet  the  renewable  energy 
obligation  and  tighter  carbon  emissions  standards.  .  The  UK’s  transport  sector  faces 
shortcomings in the capacity and quality of its networks, which could work against the 
government’s  aim  of  rebalancing  the  UK  economy  towards  investment  and  exports. 
As part of the government’s fiscal consolidation strategy, public sector net investment 
will fall sharply by 2014-15, which risks exacerbating existing pressures on transport 
infrastructure unless alternative funding sources can be secured.  

(13) 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of the United Kingdom’s economic policy. It has assessed the 
convergence  programme  and  national  reform  programme,  and  presented  an  in-depth 
review.  It  has  taken  into  account  not  only  their  relevance  for  sustainable  fiscal  and 
socio-economic  policy  in  the  United  Kingdom,  but  also  their  compliance  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.  Its 
recommendations under the European Semester are reflected in recommendations (1) 
to (6) below.  

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(14) 

(15) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  United  Kingdom’s 
convergence programme, and its opinion9 is reflected in particular in recommendation 
(1) below. 

In  the  light  of  the  results  of  the  Commission’s  in-depth  review  under  Article  5  of 
Regulation  (EU)  No  1176/2011  and  this  assessment,  the  Council  has  examined  the 
United  Kingdom’s  national  reform  programme  for  2012  and  the  United  Kingdom’s 
convergence  programme  for  2012-17.  Its  recommendation  under  Article  6  of 
Regulation (EU) No 1176/2011 is reflected in particular in recommendations (2), (3) 
and (6) below, 

HEREBY  RECOMMENDS  that  the  United  Kingdom  should  take  action  within  the  period 
2012-2013 to: 

1. 

2. 

3. 

4. 

5. 

Fully implement the budgetary strategy for the financial year 2012/13 and reinforce 
the  budgetary  strategy  for  the  financial  year  2013/14  and  beyond,  supported  by 
sufficiently specified measures, to ensure a timely correction of the excessive deficit 
in  a  sustainable  manner  and  the  achievement  of  the  structural  adjustment  effort 
specified in the Council recommendations under the Excessive Deficit Procedure and 
to  set  the  high  public  debt  ratio  on  a  sustained  downward  path.  Prioritise  growth-
enhancing expenditure to avoid the risk that a further weakening of the medium-term 
outlook  for  growth  will  negatively  impact  on  the  long-term  sustainability  of  public 
finances.  

Address  the  destabilising  impact  of  high  and  volatile  house  prices  and  high 
household  debt  by  implementing  a  comprehensive  housing  reform  programme  to 
increase housing supply and alleviate problems of affordability and the need for state 
subsidy  of  housing.  Pursue  further  reforms  to  the  mortgage  and  rental  markets, 
financial  regulation  and  property  taxation  to  prevent  excessive  volatility  and 
distortions in the housing market. 

Continue  to  improve  the  employability  of  young  people,  in  particular  those  not  in 
education,  employment  or  training,  including  by  using  the  Youth  Contract.  Ensure 
that  apprenticeship  schemes  are  taken  up  by  more  young  people,  have  a  sufficient 
focus  on  advanced  and  higher-level  skills,  and  involve  more  small-  and  medium-
sized  businesses.  Take  measures  to  reduce  the  high  proportion  of  young  people 
leaving school with very poor basic skills. 

Step  up  measures  to  facilitate  the  labour  market  integration  of  people  from  jobless 
households. Ensure that planned welfare reforms do not translate into increased child 
poverty. Fully implement measures aiming at facilitating access to childcare services. 

Further improve the availability of bank and non-bank financing to the private sector, 
in  particular  to  SMEs.  Support  competition  within  the  banking  sector,  in  particular 
through  measures  to  reduce  barriers  to  entry,  increase  transparency  and  facilitate 
switching  between  banks  as  recommended  by  the  Independent  Commission  on 
Banking  and  explore  ways  to  improve  access  to  venture  and  risk  capital  and  other 
forms of non-bank lending. 

9 

Under Article 9(2) of Council Regulation (EC) No 1466/97. 

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6. 

Pursue  a  long-term  strategy  for  improving  the  capacity  and  quality  of  the  UK’s 
network  infrastructure,  including  measures  to  address  pressures  in  transport  and 
energy  networks  by  promoting  more  efficient  and  robust  planning  and  decision-
making processes, and harnessing appropriate public-private financing arrangements. 

Done at Brussels, 

For the Council 
The President 

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