Recommendation for a COUNCIL RECOMMENDATION on the United Kingdom's 2014 national reform programme and delivering a Council opinion on the United Kingdom's 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: United Kingdom, budget deficit, economic convergence, economic growth, economic reform, economic stabilisation, financial control, job creation, multilateral surveillance, social situation, stability programme













EUR-Lex - 52014DC0429 - EN











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52014DC0429

Recommendation for a COUNCIL RECOMMENDATION on the United Kingdom's 2014 national reform programme and delivering a Council opinion on the United Kingdom's 2014 convergence programme /* COM/2014/0429 final  - 2014/ () */









 
 
Recommendation for a
COUNCIL RECOMMENDATION
on the United Kingdom's 2014 national
reform programme
and delivering a Council opinion on the United Kingdom's 2014 convergence
programme

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 policies[1], 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 imbalances[2],
and in particular Article 6(1) thereof,
Having regard to the recommendation of the
European Commission[3],
Having regard to the resolutions of the
European Parliament[4],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the Employment
Committee,
Having regard to the opinion of the
Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy Committee,
Whereas:
(1)                   
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.
(2)                   
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 States, which together form the ‘integrated guidelines’.
Member States were invited to take the integrated guidelines into account in
their national economic and employment policies.
(3)                   
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.
(4)                   
On 9 July 2013, the Council adopted a
recommendation on the United Kingdom's national reform programme for 2013 and
delivered its opinion on the United Kingdom's updated convergence programme for
2012-13 to 2017-18. 
(5)                   
On 13 November 2013, the Commission adopted the
Annual Growth Survey[5],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[6],
in which it identified the United Kingdom as one of the Member States for which
an in-depth review would be carried out. 
(6)                    
On 20 December 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. 
(7)                   
On 5 March 2014, the Commission published the results
of its in-depth review for the United Kingdom[7],
under Article 5 of Regulation (EU) No 1176/2011. The Commission's analysis
leads it to conclude that the United Kingdom continues to experience
macroeconomic imbalances, which require monitoring and policy action. In
particular, developments in the areas of household debt, linked to the high
levels of mortgage debt and structural characteristics of the housing market,
as well as unfavourable developments in export market shares, continue to
warrant attention. The risks in the housing sector relate to a continuing
structural undersupply of housing; intrinsic supply constraints, particularly
in London, and the relatively slow response of supply to increases in demand
continues to drive house prices higher, particularly in London and the southeast,
and also leads to buyers taking on high mortgages. While the declining export
market share is unlikely to pose short-term risks, taken together with the
current account deficit, it still points to structural challenges. These are
related to skills gaps and infrastructure deficiencies. As regards public
finances, the United Kingdom has missed its headline deficit targets and its
structural adjustment targets.
(8)                   
On 30 April 2014, the United Kingdom submitted
its 2014 national reform programme and its 2014 convergence programme. In order
to take account of their interlinkages, the two programmes have been assessed
at the same time.
(9)                   
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 United Kingdom. Paragraph 5 of the Protocol
provides that the United Kingdom 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 United Kingdom.
(10)               
The objective of the budgetary strategy outlined
in the 2014 Convergence Programme is to balance the cyclically-adjusted current
budget by the end of a five-year rolling period, currently ending in 2018-19.
The Convergence Programme does not include a medium-term objective as foreseen
by the Stability and Growth Pact. The general government deficit is estimated
at 5.0% of GDP in 2014-15, having fallen from a peak of 11.4% of GDP in
2009-10. This does not comply with the deadline for correcting the excessive
deficit set by the Council. According to the programme, the excessive deficit
will be corrected in 2016-17 at 2.4% of GDP, two years after the deadline set
by the Council. The programme implies that the (recalculated) general
government structural deficit will improve by 0.3 pp. to 4.4% of GDP over the
year to 2014-15. The budgetary plans are not sufficient in attaining the annual
average fiscal effort recommended to correct the excessive deficit. Thereafter,
the programme foresees an annual improvement of the (recalculated) structural
balance of 0.8 pp. in 2015-16 and 1.3 pp. in 2016-17. Overall, the programme is
only partly in line with the requirements of the Stability and Growth Pact. The
consolidation has until now been heavily skewed towards expenditure cuts,
therefore the potential revenue contribution from a broadening of the tax base
could be considered. The United Kingdom has a high level of foregone taxes,
particularly with regard to indirect taxation. According to the Convergence
Programme, the debt-to-GDP ratio is projected to increase to 93.1% in 2015-16
before falling back to 86.6% in 2018-19. The United Kingdom’s macroeconomic
scenario underpinning the budgetary projections in the programme is plausible.
Potential risks to the budgetary projections stem from lower-than-expected
growth due to constrained wages curtailing private consumption and uncertainty
hindering investment. Nevertheless, the projections are consistent with the Commission
2014 spring forecast, which also does not foresee that the excessive deficit
will be corrected by the deadline set by the Council. Furthermore, based on the
Commission forecast, the (corrected) change in the structural balance over
2010-2014 falls short by on average 0.6% of GDP per year compared to the
requirement and is projected to fall short in 2015 as well. Based on its
assessment of the programme and the Commission forecast, pursuant to Council
Regulation (EC) No 1466/97, the Council is of the opinion that additional
measures are needed to ensure compliance with the recommendation under the
excessive deficit procedure. 
(11)               
The United Kingdom has taken both demand and
supply side measures in the area of housing. Although the supply of new
properties has risen, it remains low and has fallen short of demand by a
considerable margin. This has combined with low interest rates and easier terms
for mortgage lending (such as higher loan-to-income multiples) to push up house
prices in certain parts of the United Kingdom particularly in London. A
shortage of supply has long been a structural phenomenon and is likely to
extend into the medium term. Action is needed to further boost the supply of
houses - by creating appropriate incentives to raise supply at the local level.
The authorities should continue to monitor house prices and mortgage
indebtedness and stand ready to deploy appropriate measures, including
adjusting the Help to Buy 2 (loan guarantee) scheme, if deemed necessary. There
is a need to increase the transparency of the use and impact of the macro-prudential
regulation of the housing sector by the Financial Policy Committee that could
be deployed to address excessive house price rises and increases in mortgage
indebtedness. Reforms to the taxation of land and property should be considered
to alleviate distortions in the housing market. At the moment, increasing
property values are not translated into higher property taxes as the property
value roll has not been updated since 1991 and taxes on higher value property
are lower than on lower value property in relative terms due to the
regressivity of the current rates and bands within the council tax system.  
(12)               
The United Kingdom continues to address the
challenges of unemployment and underemployment as well as the specific issues
related to youth unemployment. There are important challenges with equipping
young people with the skills and work experience required by the labour market
and increasing the supply of apprenticeships. This helps to explain the fact
that the take-up of wage subsidies provided for by the Youth Contract remains
lower than forecast. The labour market suffers from skill mismatches and the
authorities are attempting to re-skill the workforce to address both
unemployment and a shortage of high-quality vocational and technical skills.
While there have been efforts to improve the quality of apprenticeship
programmes, further efforts are needed. Moreover, the qualifications system
remains complex and needs to be streamlined to facilitate universal recognition
and a higher level of engagement by employers.
(13)               
The authorities are addressing the problem of
weak work incentives, especially for recipients of social benefits 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. The focus on getting back into work has also been reflected in limiting
the annual adjustment to many working-age benefits and tax credits to 1% per
annum until 2016. 
(14)               
The United Kingdom continues to tackle
challenges to increasing parental employment by increasing access to
high-quality, affordable childcare. It continues to introduce schemes to make
childcare affordable for both part-time and full-time employed parents, taking
into account different levels of earnings. Childcare costs, however, remain
among the highest in the EU and continue to pose problems particularly for
second earners and for single parents.
(15)               
In terms of access to finance, while conditions
in credit markets have improved in 2013, credit growth remains weak and
existing policies need more time to show that they have been successful.
Particular challenges regarding access to credit remain for SMEs. While large
firms can finance themselves directly in wholesale markets and profit from the
well-developed financial services offer of the United Kingdom, SMEs largely
rely on banks to obtain their external funding. Good progress has been made to
address last year's recommendation on competition in banking by the creation of
new banks, referred to as challenger banks (one such example is TSB, which,
however, is not yet fully independent). 
(16)               
In December 2013, the United Kingdom published
an updated national infrastructure plan: a long-term and strategic approach to
the planning, funding, finance and delivery of infrastructure. The plan sets
out a 'pipeline' of forward-looking capital investment to 2020 and beyond of GBP
375 billion in total (approximately EUR 460 billion). A large proportion of the
'pipeline' (GBP 340 billion, i.e. approximately EUR 420 billion) concerns
investment in the energy and transport sectors. Around three-quarters of the
funding is projected to be privately-sourced, while the rest is projected to be
publicly funded. Although the plan is an appropriate initiative, there remain
concerns about the private sector element of financing, regulatory certainty
and timely planning permission. There is a need for stringent mechanisms to
mitigate financing and execution risks while ensuring transparency on projected
and actual expenditure on infrastructure. 
(17)               
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 the national
reform programme. 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.
(18)               
In the light of this assessment, the Council has
examined the United Kingdom's convergence programme, and its opinion[8] is reflected in
particular in recommendation (1) below.
(19)               
In the light of the Commission's in-depth review
and this assessment, the Council has examined the national reform programme and
the 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 take action within the period 2014-2015 to:
1.                      
Reinforce the budgetary strategy, endeavouring
to correct the excessive deficit in a sustainable manner in line with the
Council recommendation under the Excessive Deficit Procedure. Pursue a differentiated,
growth-friendly approach to fiscal tightening by prioritising capital
expenditure. To assist with fiscal consolidation, consideration should be given
to raising revenues through broadening the tax base. Address structural
bottlenecks related to infrastructure, skills mismatches and access to finance
for SMEs to boost growth in the export of both goods and services.
2.                      
Increase the transparency of the use and impact
of macro-prudential regulation in respect of the housing sector by the Bank of
England's Financial Policy Committee. Deploy appropriate measures to respond to
the rapid increases in property prices in areas that account for a substantial
share of economic growth in the United Kingdom, particularly London, for
example by adjusting the Help to Buy 2 scheme and mitigate risks related to
high mortgage indebtedness. Remove distortions in property taxation by
regularly updating the valuation of property and reduce the regressivity of the
band and rates within the council tax system. Continue efforts to increase the
supply of housing.
3.                      
Maintain commitment to the Youth Contract,
especially by improving skills that meet employer needs. Ensure employer
engagement by placing emphasis on addressing skills mismatches through more
advanced and higher level skills provision and furthering apprenticeship offers.
Reduce the number of young people with low basic skills. 
4.                      
Continue efforts to reduce child poverty in
low-income households, by ensuring that the Universal Credit and other welfare
reforms deliver adequate benefits with clear work incentives and support
services. Improve the availability of affordable quality childcare. 
5.                      
Continue efforts to improve the availability of
bank and non-bank financing to SMEs. Ensure the effective functioning of the
Business Bank and support an increased presence of challenger banks. 
6.                      
Follow up on the National Infrastructure Plan by
increasing the predictability of the planning processes as well as providing
clarity on funding commitments. Ensure transparency and accountability by
providing consistent and timely information on the implementation of the Plan. 
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               OJ L 306, 23.11.2011, p. 25.
[3]               COM(2014) 429 final.
[4]               P7_TA(2014)0128 and P7_TA(2014)0129.
[5]               COM(2013) 800 final.
[6]               COM(2013) 790 final.
[7]               SWD(2014) 91 final.
[8]               Under Article 9(2) of Council Regulation (EC) No
1466/97.