Recommendation for a COUNCIL RECOMMENDATION on the United Kingdom’s 2013 national reform programme and delivering a Council opinion on the United Kingdom’s convergence programme for 2012-2017
Date: 2013-05-29
Institutions: European Commission
Subjects: United Kingdom, budget deficit, budgetary equilibrium, energy grid, property market, social integration, transport infrastructure, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 378 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the United Kingdom’s 2013 national reform programme  

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

{SWD(2013) 378 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the United Kingdom’s 2013 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 9(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) 

(2) 

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

On 13 July 2010, the Council, on the basis of the Commission's proposals, 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  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. 

1 
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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2013)378 final. 
P7_TA(2013)0052 and P7_TA(2013)0053. 
Council Decision 2013/208/EU of 22 April 2013. 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

On 29 June 2012, the Heads of State or Government decided on a Compact for Growth 
and  Jobs,  providing  a  coherent  framework  for  action  at  national,  EU  and  euro  area 
levels using all possible levers, instruments and policies. They decided on action to be 
taken  at  the  level  of  the  Member  States,  in  particular  expressing  full  commitment  to 
achieving the objectives of the Europe 2020 Strategy and to implementing the country-
specific recommendations. 

On  6  July  2012,  the  Council  adopted  a  recommendation  on  the  United  Kingdom’s 
national  reform  programme  for  2012  and  delivered  its  opinion  on  the  United 
Kingdom’s 2012 convergence programme for 2012-2017. 
On  28  November  2012,  the  Commission  adopted  the  Annual  Growth  Survey6, 
marking  the  start  of  the  2013  European  Semester  of  economic  policy  coordination. 
Also  on  28  November  2012,  the  Commission,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  adopted  the  Alert  Mechanism  Report7,  in  which  it  identified  the  United 
Kingdom as one of the Member States for which an in-depth review would be carried 
out. 

On  14  March  2013,  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 10 April 2013, the Commission published the results of its in-depth review8 for the 
United  Kingdom,  under  Article  5  of  Regulation  (EU)  No  1176/2011.  The 
Commission’s analysis leads it to conclude that the United Kingdom is experiencing 
macroeconomic  imbalances,  which  deserve  monitoring  and  policy  action.  In 
particular, macroeconomic developments in the area of household debt, linked to the 
high levels of mortgage debt and the characteristics of the housing market, as well as 
unfavourable  developments  in  external  competitiveness,  especially  as  regards  goods 
exports and weak productivity growth, continue to deserve attention.  

On  30  April  2013,  the  United  Kingdom  submitted  its  2013  convergence  programme 
covering  the  period  2012-2017  and  its  2013  national  reform  programme.  In  order  to 
take  account  of  their  interlinkages,  the  two  programmes  have  been  assessed  at  the 
same time. 

Pursuant to paragraph 4 of the Protocol (No 15) on certain provisions relating to the 
United  Kingdom  of  Great  Britain  and  Northern  Ireland,  the  obligation  in  Article 
126(1)  of  the  Treaty  on  the  Functioning  of  the  European  Union  to  avoid  excessive 
general  government  deficits  does  not  apply  to  the  UK.  Paragraph  5  of  the  Protocol 
provides that the UK is to endeavour to avoid an excessive government deficit. On 8 
July  2008  the  Council  decided,  in  accordance  with  Article  104(6)  of  the  Treaty 
establishing the European Community, that an excessive deficit exists in the UK.  

(10)  Based  on  the  assessment  of  the  2013  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  Convergence  Programme  is  to 

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COM(2012) 750 final. 
COM(2012) 751 final. 
SWD(2013) 125 final. 

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achieve  a  cyclically-adjusted  budget  of  close  to  balance  at  the  end  of  a  five-year 
rolling period. The general government deficit peaked at 11.5% of GDP in 2009-109 
and  was  reduced  to  5.6%  of  GDP  in  2012-13,  thanks  to  one-off  measures  that 
artificially  reduced  the  deficit  by  2  pp.  in  2012-13.  However,  the  Convergence 
Programme  shows  that  the  government  is  projected  to  miss  the  deadline  of  2014-15 
for correction of the excessive deficit set by the Council as the deficit is estimated at 
6.0%  of  GDP  that  year.  According  to  programme  projections,  the  year  in  which  the 
excessive deficit will be corrected is in 2017-18 at 2.3% of GDP, three years after the 
deadline set by the Council in December 2009. The programme foresees the structural 
general government deficit, as recalculated by the Commission, improving marginally 
from 5.6% of GDP in 2013-14 to 5.1% of GDP in 2014-15. Over the period 2010-11 
to 2012-13, the average adjusted fiscal effort is estimated at 1.0% of GDP, well below 
the  1¾%  of  GDP  recommended  by  the  Council.  The  main  risks  to  the  budgetary 
projections  stem  from  lower-than-expected  growth  due  to  persistently  high  inflation 
curtailing  private  consumption  and  a  potential  deterioration  in  the  international 
environment  that  could  affect  trade  and  investment.  The  Convergence  Programme 
does not include a medium-term budgetary objective as foreseen by the Stability and 
Growth Pact. The government has continued with its fiscal consolidation strategy but, 
because  of  higher-than-expected  expenditure  due  to  the  operation  of  automatic 
stabilisers  and  lower-than-expected  tax  revenues,  the  deficit  is  higher  than  forecast. 
Also, the consolidation measures taken so far have not been sufficient in attaining the 
required fiscal effort to correct the excessive deficit. Moreover, the potential revenue 
contribution  from  structural  reform,  e.g.  aiming  to  increase  the  efficiency  of  the  tax 
system  through  revisions  of  the  VAT  rate  structure,  remains  relatively  under-
exploited.  Government  debt  as  a  percentage  of  GDP  rose  from  56.1%  in  2008-09  to 
90.7% in 2012-13. According to the programme, the general government debt ratio is 
projected to increase to 100.8% in 2015-16 and 2016-17 before falling back 99.4% in 
2017-18.  

(11)  Household deleveraging continued in 2012, but at 96 % of GDP, UK household debt 
remains well above the euro area average and deleveraging may not be sustained once 
the economy improves and housing transactions return to more normal levels. House 
prices  remain  high  and  volatile  in  the  context  of  a  housing  shortage.  Because  of  a 
combination of high house prices and the widespread use of variable-rate mortgages, 
households  are  particularly  exposed  to  interest  rate  changes,  as  well  as  to  rises  in 
unemployment. The government has taken action to reform the spatial planning laws 
but residential construction remains at a low level and the planning system, including 
green  belt  restrictions,  continues  to  be  an  important  constraint  on  the  supply  of 
housing. Government interventions that stimulate housing demand more than supply, 
including  the  recently  announced  Help  to  Buy  scheme  could  potentially  exacerbate 
this  situation  by  increasing  house  prices  and  household  debt.  The  UK  property  tax 
system  combines  a  regressive  recurring  tax  (Council  Tax)  with  a  progressive 
transaction tax (Stamp Duty Land Tax). A combination of high house prices, stretched 
household  finances  and  more  responsible  lending  criteria  are  likely  to  continue  to 
prevent  many  middle-income  households  from  becoming  home  owners.  In  this 
context,  private  renting  could  be  made  a  more  attractive  and  viable  long-term 
alternative to home ownership. 

(12)  The UK faces the challenges of both unemployment and underemployment, especially 
among  the  young.  Unemployment  stood  at  7.8 %  at  the  beginning  of  2013  and  is 

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2009-10 refers to the financial year which starts on 1 April and ends on 31 March 

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expected to remain broadly flat through 2013 and 2014. Youth unemployment is much 
higher, at 20.7% and it has steadily increased since 2007, when it stood at 14.3 %. The 
proportion of young people not in education, employment or training is 14.0 %. Private 
sector employment has grown strongly in the last year, given the slow GDP growth, 
but productivity and wage growth have been weak. The UK also has an oversupply of 
low-skilled  workers  for  whom  demand  is  falling.  At  the  same  time  the  UK  has  a 
shortage of workers with high-quality vocational and technical skills which contributes 
to  a  lack  of  external  competitiveness.  Despite  some  progress  in  recent  years,  a 
significant  proportion  of  young  people  do  not  have  the  skills  and  qualifications  they 
need  to  compete  successfully  in  the  labour  market.  The  unemployment  rate  of  low 
skilled  15-25  year  olds  is  37.2%,  significantly  above  the  EU  average.  Existing 
vocational education and training policy has been too focused on basic skills and level 
increasingly  demands  more  advanced 
2  qualifications,  while 
qualifications. While there have been efforts to improve the quality of apprenticeship 
programmes,  further  efforts  are  needed.  In  particular,  the  qualifications  system 
remains  very  complex,  which  may  negatively  impact  on  businesses’  involvement  in 
apprenticeship  programmes.  The  UK  could  build  on  the  current  Youth  Contract  to 
implement  a  Youth  Guarantee  and  address  the  problem  of  youth  unemployment  and 
those not in education, employment or training. 

the  economy 

(13)  Weak work incentives have been a persistent problem in the UK. The authorities plan 
to  address  this  with  the  introduction  of  the  Universal  Credit,  which  will  allow 
individuals  to  keep  more  of  their  benefit  income  as  they  move  into  work.  Whilst 
Universal  Credit  could  have  a  positive  impact  on  employment  much  will  depend  on 
effective  implementation  and  support  services,  including  the  interaction  with  other 
benefits.  In  parallel,  many  working-age  benefits  and  tax  credits  will  be  increased  by 
1 %  a  year  until  2016  which  is  below  the  projected  inflation  rate.  A  range  of  other 
reforms  to  welfare  benefits  were  also  introduced  in  April  2013.  There  is  a  risk  of 
increased  poverty,  including  more  child  poverty  for  those  in  households  that  do  not 
find  employment.  In  contrast,  the  scope,  level  and  uprating  of  both  universal  and 
means-tested  payments  to  pensioners  have  been  largely  exempt  from  cuts.  Early 
results  from  the  Work  Programme  suggest  scope  to  improve  the  delivery  and 
outcomes. The UK also faces ongoing challenges to increase parental employment and 
improve access to high-quality, affordable childcare. At 17.3%, the proportion of UK 
children  living  in  workless  households  is  the  second  highest  in  the  EU.  Currently, 
childcare  costs  in  the  UK  are  among  the  highest  in  the  EU,  which  poses  particular 
problems for second  earners  in couples, and for single parents. In 2010, only  4 % of 
children  under  three  used  formal  childcare  on  a  full-time  basis,  well  below  the  EU 
average of 14 %.  

low 

investment  remains  at  very 

(14)  The  stock  of  UK  corporate  debt  is  fairly  high,  yet  some  firms  are  having  difficulty 
accessing  credit,  and  business 
levels.  An 
unprecedented  drop  in  business  investment  after  2007  caused  gross  fixed  capital 
formation to fall to 14.2 % of GDP in 2012. This is the third lowest level in the EU. 
The UK has a low level of business expenditure on R&D, which fell from 1.17 % of 
GDP in 2001 to 1.09 % in 2011. Business investment has started to pick up slightly, 
with  an  annual  increase  of  4.9 %  in  2012,  but  remains  low.  Net  lending  to  the 
corporate  sector  remained  negative  in  2012.  While  larger  firms  with  strong  balance 
sheets  are  able  to  borrow  at  a  historically  low  cost,  many  other  firms,  particularly 
SMEs,  are  having  difficulty  accessing  credit.  This  is  exacerbated  by  limited 
competition  in  the  banking  industry.  Proper  implementation  of  the  Financial  Policy 
Committee’s recommendations on prudent reckoning of bank capital requirements and 

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on  addressing  identified  capital  shortfalls  without  hindering  lending  to  the  economy 
should help reinforce the financial stability of the UK banking system. 

(15)  The UK has a challenge to renew and upgrade its energy and transport infrastructure. 
The UK needs substantial investment in new electricity generation capacity by 2020, 
both to replace old plants that are due to close, and to meet the renewables obligation 
and  tighter  carbon  emissions  standards.  At  3.8 %,  the  share  of  renewable  energy 
sources in final energy consumption ranks 25th out of 27 Member States (EU average 
13.0 %).  Regulatory  certainty  will  be  required  to  facilitate  adequate  and  timely 
investment. Shortcomings in the capacity and quality of the UK’s transport networks 
are a structural problem for the economy, especially for goods producers, distributors 
and exporters. There is currently a significant gap between committed funding, public 
and  private,  and  the  pipeline  of  transport  investment  needs  which  the  government  is 
seeking  to  address  by  prioritising  public  spending  towards  infrastructure  and  by 
attracting  additional  private  investment.  Unit  costs  in  transport  construction  and 
maintenance also remain high in the UK. 

(16) 

(17) 

(18) 

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. 

In  the  light  of  this  assessment,  the  Council  has  examined  the  United  Kingdom’s 
convergence programme, and its opinion10 is reflected in particular in recommendation 
(1) below. 

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

HEREBY  RECOMMENDS  that  the  United  Kingdom  should  take  action  within  the  period 
2013-2014 to: 

1. 

Implement  a  reinforced  budgetary  strategy,  supported  by  sufficiently  specified 
measures,  for  the  year  2013-14  and  beyond.  Ensure  the  correction  of  the  excessive 
deficit in a sustainable manner by 2014/15, and the achievement of the fiscal effort 
specified  in  the  Council  recommendations  under  the  EDP  and  set  the  high  public 
debt  ratio  on  a  sustained  downward  path.  A  durable  correction  of  the  fiscal 
imbalances  requires  the  credible  implementation  of  ambitious  structural  reforms 
which would increase the adjustment capacity and boost potential growth. Pursue a 
differentiated,  growth-friendly  approach  to  fiscal  tightening,  including  through 
prioritising  timely  capital  expenditure  with  high  economic  returns  and  through  a 
balanced  approach  to  the  composition  of  consolidation  measures  and  promoting 
medium  and  long-term  fiscal  sustainability.  In  order  to  raise  revenue,  make  greater 
use of the standard rate of VAT.  

10 

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

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2. 

3. 

4. 

5. 

6. 

to 

including 

Take  further  action 
through  further 
increase  housing  supply, 
liberalisation  of  spatial  planning  laws  and  an  efficient  operation  of  the  planning 
system.  Ensure  that  housing  policy,  including  the  Help  to  Buy  scheme  does  not 
encourage  excessive  mortgage  lending;  and  lead  to  higher  house  prices.  Pursue 
reforms  to  land  and  property  taxation  to  reduce  distortions  and  promote  timely 
residential  construction.  Take  steps  to  improve  the  legal  framework  of  rental 
markets, in particular by making longer rental terms more attractive to both tenants 
and landlords. 

Building on the Youth Contract, step up measures to address youth unemployment, 
for  example  through  a  Youth  Guarantee.  Increase  the  quality  and  duration  of 
apprenticeships, simplify the system of qualifications and strengthen the engagement 
of  employers,  particularly  in  the  provision  of  advanced  and  intermediate  technical 
skills.  Reduce  the  number  of  young  people  aged  18-24  who  have  very  poor  basic 
skills, including through effectively implementing the Traineeships programme. 

Enhance  efforts  to  support  low-income  households  and  reduce  child  poverty  by 
ensuring that the Universal Credit and other welfare reforms deliver a fair tax-benefit 
system  with  clearer  work 
the 
implementation of planned measures to reduce the costs of childcare and improve its 
quality and availability. 

incentives  and  support  services.  Accelerate 

Take further steps to improve the availability of bank and non-bank financing to the 
corporate sector, while ensuring that the measures primarily target viable companies, 
especially  SMEs.  Reduce  barriers  to  entry  in  the  banking  sector,  lower  switching 
costs  and  facilitate  the  emergence  of  challenger  banks  through  a  divestiture  of 
banking  assets.  Effectively 
the  Financial  Policy  Committee’s 
recommendations  on  prudent  assessment  of  bank  capital  requirements  and  on 
addressing identified capital shortfalls. 

implement 

Take  measures  to  facilitate  a  timely  increase  in  network  infrastructure  investment, 
especially  by  promoting  more  efficient  and  robust  planning  and  decision-making 
processes.  Provide  a  stable  regulatory  framework  for  investment  in  new  energy 
capacity,  including  in  renewable  energy.  Improve  the  capacity  and  quality  of 
transport networks by providing greater predictability and certainty on planning and 
funding  and  by  harnessing  the  most  effective  mix  of  public  and  private  capital 
sources. 

Done at Brussels,  

For the Council 
The President 

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