COMMISSION STAFF WORKING DOCUMENT Analysis of the budgetary situation in the United Kingdom Accompanying the document COMMUNICATION FROM THE COMMISSION Assessment of action taken by THE UNITED KINGDOM in response to the Council Recommendation of 19 June 2015 with a view to bringing an end to the situation of excessive government deficit
Date: 2015-11-16
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: United Kingdom, budget deficit, budget estimate, budgetary equilibrium, economic forecasting, gross domestic product, public debt, stability pact

EUROPEAN 
COMMISSION 

Brussels, 16.11.2015  
SWD(2015) 615 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis of the budgetary situation in the United Kingdom 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION 

Assessment of action taken by THE UNITED KINGDOM 

in response to the Council Recommendation of 19 June 2015 with a view to bringing an 
end to the situation of excessive government deficit 

{COM(2015) 804 final} 

EN 

   EN 

 
 
 
 
  
 
 
TABLE OF CONTENTS 

1. 

INTRODUCTION....................................................................................................... 3 

2.  ECONOMIC DEVELOPMENTS AND OUTLOOK ................................................. 3 

3.  BUDGETARY  SITUATION  AND  UPDATED  PROJECTIONS  FOR  THE 

PERIOD 2015-16 – 2016-17....................................................................................... 5 

3.1.  General government deficit developments in 2014........................................... 5 

3.2.  Assessment of the measures included in the report on action taken ................. 6 

3.3.  Updated budgetary projections.......................................................................... 6 

3.4.  Risk assessment ................................................................................................. 6 

4.  COMPLIANCE  WITH  THE  PROVISIONS  OF  THE  STABILITY  AND 

GROWTH PACT ........................................................................................................ 7 

5.  CONCLUSION ........................................................................................................... 9 

2 

 
 
 
1. 

INTRODUCTION 

This  document  assesses  the  United  Kingdom's  report  on  action  taken  which  was 
submitted  to  the  Council  and  the  Commission  on  15  October  2015  as  foreseen  in  the 
Council recommendation of 19 June 2015 with a view to bringing an end to the excessive 
government  deficit  in  the  United  Kingdom.  It  does  so  taking  into  account  the 
Commission 2015 autumn forecast published on 5 November 2015.  

The  United  Kingdom  is  currently  subject  to  the  corrective  arm  of  the  Stability  and 
Growth Pact. The Council opened the Excessive Deficit Procedure for the UK on 8 July 
2008 with an initial deadline in the financial year 2009-10. This deadline was extended to 
2014-15 on 2 December 2009 based on the finding that effective action had been taken, 
but that unexpected adverse economic events with major unfavourable consequences for 
government  finances  had  occurred.  On  19  June  2015,  the  Council  considered  that  no 
effective action had been taken and extended once again the deadline for the UK to bring 
an  end  to  its  excessive  deficit  situation  to  2016-17.  It  also  established  a  deadline  of 
15 October 2015  for  the  UK  to  take  effective  action  and  to  report  on  the  consolidation 
strategy, in accordance with Article 3(4a) of Regulation (EC) No 1467/97. 

The Council recommendation of 19 June 2015 set budgetary targets both in nominal and 
in  structural  terms  to  be  complied  with  every  year  over  the  adjustment  period. 
Specifically, it was recommended that the headline deficit reach 4.1% of GDP in 2015-16 
and  2.7%  of  GDP  in  2016-17,  which  was  considered  consistent  with  delivering  an 
improvement in the structural balance of 0.5% of GDP in 2015-16 and 1.1% in 2016-17. 
Based  on  the  Commission's  updated  2015  spring  forecast,  the  Council  did  not  require 
additional  measures  other  than  those  already  incorporated  into  all  the  UK  government 
budgets and autumn statements up to and including the 2015 budget. 

This  document  provides  an  assessment  of  the  UK's  budgetary  strategy  since  the  new 
Council  recommendation  of  19  June  2015.  Section  2  presents  the  macroeconomic 
outlook  and  the  main  developments  which  took  place  since  the  publication  of  the 
Commission  2015  spring  forecast  on  5  May  2015.  Section  3  presents  the  recent  and 
planned  budgetary  developments.  In  particular,  it  provides  an  assessment  of  the 
budgetary strategy in the light of the information included in the report on action taken. 
Section 4 then assesses compliance with the Council recommendation of 19 June 2015, 
on the basis of the Commission's 2015 autumn forecast.  

2. 

ECONOMIC DEVELOPMENTS AND OUTLOOK  

The  macroeconomic  forecast  underpinning  the  report  on  action  taken  has  not  been 
updated since the summer budget, published on 8 July 2015. The Economic and Fiscal 
Outlook (EFO) published, alongside the budget, by the Office for Budget Responsibility 
(OBR) forecasts economic growth to reach 2.4% in 2015. Growth is then projected to fall 
marginally to 2.3% in 2016 before picking back up to 2.4% in 2017. Growth is mainly 
driven by domestic demand with net exports detracting from growth each year. Inflation 
is estimated at 0.1% in 2015, rising to 1.1% in 2016 and further to 1.6% in 2017.  

The  macroeconomic  scenario  of  the  OBR  appears  plausible.  The  Commission  autumn 
forecast  projects  slightly  stronger  GDP  growth  in  2015  and  2016,  2.5%  and  2.4%, 
respectively and slightly lower GDP growth in 2017 at 2.2% than the OBR. In 2015 and 
2016,  the  Commission  scenario  projects  a  somewhat  less  negative  detraction  from 
growth coming from net exports and in 2017, domestic demand is foreseen to be a little 

3 

 
weaker.  It  should  be  noted  that  historical  GDP  data  have  been  revised  since  the 
publication of the OBR's July EFO. Overall in 2014, GDP growth was revised down by 
0.1  pp  to  2.9%  but  the  contributions  from  the  components  changed  more.  The  main 
difference  was  that  the  contribution  to  growth  from  net  exports  was  less  negative  after 
the revision (from -0.6 pp to -0.3 pp) and it was offset by the change in inventories being 
revised down by 0.3 pp to zero.  

Table 1. Comparison of macroeconomic developments and forecasts 

2016

2014

2015
Outturn1 COM UK COM UK
2.3
2.5
5.6
3.8
4.6

2.9
2.6
7.5
1.8
2.8

2.5
2.9
4.9
2.2
3.0

2.4
3.0
5.6
3.8
5.1

2.4
2.6
5.9
3.1
4.0

3.3
0.0
-0.3
-0.7
2.3
6.1
1.5

1.7

0.5

-5.2

3.0
-0.1
-0.3
-0.6
1.7
5.4
0.1

1.3

2.8

3.1
-0.2
-0.5
0.1
1.6
5.4
0.1

1.1

n.a.

2.7
0.0
-0.3
-0.4
1.0
5.4
1.5

1.7

3.3

2.7
0.0
-0.4
0.5
1.0
5.1
1.1

1.6

n.a.

-4.5

-5.0

-4.0

-3.9

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
Output gap
Employment (% change)
Unemployment rate (%)
HICP inflation (%)

GDP deflator (% change)

Comp. of employees (per head, % change)

Net lending/borrowing vis-à-vis the rest of 
the world (% of GDP)

Note:
1Based on  data published on 30 September 2015

Source :

Commission 2015 autumn forecast (COM); UK's report on action taken - OBR EFO July 2015 (UK)

GDP  growth  in  the  first  two  quarters  of  2015  were  0.4%  and  0.7%,  respectively. 
Domestic  demand  was  the  main  source  of  growth  in  the  first  quarter  but  net  exports 
detracted  heavily  (-0.6  pp)  whereas  in  the  second  quarter,  net  exports  were  the  main 
driver of growth (1.4 pp) with the change in inventories offsetting this stimulus (-1.5 pp). 
The  first  estimate  of  GDP  growth  in  the  third  quarter  is  0.5%.  Despite  a  weakening  in 
some  forward-looking  indicators  of  activity,  such  as  the  purchasing  managers'  indices 
and  industrial  production  data,  other  indicators,  such  as  retail  sales,  are  more  robust 
hence GDP growth is forecast at 0.7% in the final quarter of the year. The Commission 
2015 autumn forecast for inflation is identical to that of the OBR for 2015 at 0.1% but 
higher in 2016 and 2017, where the Commission expects 1.5% and 1.7%, while the OBR 
foresees 1.1% and 1.6%, respectively.  

4 

 
 
 
The  labour  market  remains  robust  with  the  employment  rate  at  73.6%,  the  highest  rate 
since records began in 1971, in the 3-months to August 2015. The OBR forecast predicts 
the  unemployment  will  continue  to  fall  to  5.1%  in  2016  before  picking  up  to  5.2%  in 
2017.  According  to  the  Commission  2015  autumn  forecast,  the  unemployment  rate  is 
likely to plateau in 2015 and 2016 at 5.4% before picking up marginally to 5.5% in 2017. 
The difference is linked to the output gap projections which sees the gap already closed 
in  2015  under  the  Commission  forecast  but  only  closing  in  2018  under  the  OBR 
estimates. 

3. 

BUDGETARY SITUATION AND  UPDATED PROJECTIONS FOR  THE PERIOD 2015-16 – 
2016-17 

The  report  on  action  taken  confirms  the  budgetary  strategy  outlined  in  the  summer 
budget  which  aims  to  correct  the  excessive  deficit  by  2016-17,  the  deadline  set  by  the 
Council. Specifically, the OBR forecast the headline deficit at 4.0% of GDP in 2015-16 
and 2.3% of GDP in 2016-17.  

This section provides an update of the budgetary projections included in the Commission 
2015  autumn  forecast.  It  provides  an  assessment  of  measures  announced  in  the  July 
budget  and  the  additional  information  included  in  the  report  on  action  taken  and 
concludes  with  an  analysis  of  the  impacts  of  these  developments  on  the  government 
deficit in 2015-16 and 2016-17.  

3.1.  General government deficit developments in 2014-15 

Eurostat  published  validated  fiscal  data  on  20  October  2015  showing  a  general 
government  deficit  of  5.1%  of  GDP  in  2014-15,  0.1  pp  lower  than  at  the  time  of  the 
Council recommendation, but in line with the data in the OBR's forecast from July. 

Real GDP growth for the financial year was revised upwards by 0.1 pp to 2.9% in 2014-
15 in comparison with the outturn at the time of the Council recommendation. In nominal 
terms, GDP growth for 2014-15 increased by 4.4% compared to the 4.2% foreseen at the 
time of the Council recommendation. The OBR estimate real GDP growth at 3.0% and 
nominal GDP growth at 4.4% in 2014-15.  

Outturn data for 2014-15 show that revenues are slightly higher than at the time of the 
Council  recommendation,  but  slightly  lower  as  a  share  of  GDP;  now  38.5%  of  GDP 
compared  to  38.9%  of  GDP  at  the  time  of  the  recommendation.  Lower  VAT  receipts 
were more than outweighed by higher income tax. 

Total expenditure in 2014-15 has also been revised slightly up compared to the Council 
recommendation, but also lower as a share of GDP, i.e. from 44.1% of GDP to 43.6% of 
GDP. This was largely due to higher wage costs and social transfers, which were offset 
by much lower interest spending. 

5 

 
3.2.  Assessment of the measures included in the report on action taken 

The report on action taken submitted on 15 October 2015 does not include new measures 
since  the  budget  of  the  new  government,  published  on  8  July.  However,  it  presents  an 
overview of the measures that conform to the Council recommendation of 19 June 2015. 
Even  though  the  recommendation  did  not  require  additional  measures  to  bring  the 
excessive deficit to below 3% of GDP, further measures were announced in the budget to 
decrease the deficit more decisively in 2016-17 with GBP 5 billion (0.25% of GDP) of 
welfare savings and GBP 1 billion (0.05% of GDP) of net tax increases. In line with the 
recommendation,  the  government  will  announce  its  Spending  Review,  which  details 
departmental  expenditure  cuts,  on  25  November  2015  and  also  set  out  its  capital 
expenditure plans in this document. 

The  bulk  of  the  improvement  owing  to  the  welfare  savings  in  2016-17  stem  from  a 
reduction  in  income  thresholds  in  tax  credits  and  work  allowances  in  Universal  Credit 
(GBP 2.9 billion) and an increase in the tax credits taper rate to 48% (GBP 1.5 billion). 
The  main  new  tax  measure  presented  in  the  budget  is  an  increase  in  the  insurance 
premium tax from 6% to 9.5%. This takes effect from 1 November 2015 hence part of 
this is attributable to 2015-16 and the remainder to 2016-17; GBP 0.5 billion and GBP 1 
billion, respectively. 

3.3.  Updated budgetary projections 

Taking  into  account  the  information  included  in  the  report  on  action  taken,  the 
Commission 2015 autumn forecast projects a general government deficit of 3.9% of GDP 
in  2015-16  and  2.4%  of  GDP  in  2016-17,  with  an  underlying  improvement  in  the 
structural  balance  projected  at  0.7%  of  GDP  in  2015-16  and  1.3%  in  2016-17.  The 
difference  between  the  baseline  scenario  underpinning  the  recommendation  and  the 
autumn forecast is mainly due to a revision to historical data, some small consolidation 
measures in 2015-16 and the extra consolidation of 0.3% of GDP in 2016-17. 

3.4.  Risk assessment 

Risks to the budgetary outlook for 2015-16 and 2016-17, as projected in the Commission 
2015 autumn forecast, appear balanced overall barring some implementation risks. While 
no major expenditure slippages are expected, economic performance is exposed to both 
positive  and  negative  risks.  On  the  one  hand  stronger-than-expected  investment  could 
imply higher growth, while on the other hand a strong domestic currrency could curtail 
exports more than expected.  

The  OBR's  macroeconomic  forecast  laid  out  in  the  July  EFO,  which  is  close  to  the 
autumn forecast, remains plausible. The slightly lower estimate of growth in 2015 (2.4% 
compared to the Commission autumn forecast of 2.5%) stems from downwardly revised 
data from 2014 (3.0%  compared to the revised 2.9%). The labour market estimates are 
somewhat  more  positive  under  the  OBR  projections,  but  both  forecasts  highlight  a 
continuingly robust labour market (see Section 3.1).  

6 

 
4.  COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT 

Based  on  the  information  submitted  in  the  report  on  action  taken  along  with  the  July 
Budget and the OBR's EFO, the Commission 2015 autumn forecast expects the headline 
deficit to reach 3.9% of GDP in 2015-16 and 2.4% of GDP in 2016-17 in line with the 
recommended  targets.  According  to  the  report  on  action  taken,  the  July  Budget  and 
OBR's EFO, the government's headline deficit is estimated at 4.0% of GDP in 2015-16 
and 2.3% in 2016-17, thus below the general government deficit targets recommended by 
the Council.  

The structural adjustment based on the Commission autumn forecast is also expected to 
reach the target recommended by the Council in both 2015-16 and 2016-17. The autumn 
forecast expects the structural balance to improve by 0.7% of GDP in 2015-16 and 1.3% 
in  2016-17,  respecting  the  targets  recommended  by  the  Council  of  0.5%  and  1.1%, 
respectively.  

Table 2. Comparison of budgetary projections 

% of GDP

Commission 2015 autumn forecast
Report on action taken
Baseline scenario (updated 2015 spring forecast)*
EDP target
Notes : 

Headline budget balance

2015-16
-3.9%
-4.0%
-4.1%
-4.1%

2016-17
-2.4%
-2.3%
-2.7%
-2.7%

Adjustment in the 
structural balance
2015-16
2016-17
1.3%
0.7%
1.5%
0.7%
1.1%
0.5%
1.1%
0.5%

*Scena ri o underpi nni ng the Counci l  Recommenda ti on of 19 June 2015

Since the headline targets and the adjustment in the structural balance, set by the Council, 
are expected to be met in 2015-16 and 2016-17, a careful analysis of the fiscal effort is 
not necessary. Indeed, based on the agreed methodology, combined compliance with the 
nominal  deficit  target  and  the  underlying  improvement  in  the  structural  balance  is 
sufficient to determine compliance with the EDP recommendation. 

For  information  purposes  and  without  considering  them  in  the  final  assessment  since 
both the headline targets and the adjustment in the structural balance are expected to be 
met,  the  calculations  of  the  adjusted  change  of  the  structural  balance  (top-down 
approach)  and  the  fiscal  effort  based  on  the  bottom-up  are  included  in  Table  3  below. 
The  fiscal  effort,  as  measured  by  the  bottom-up  approach,  is  greater  than  zero  as  the 
summer  budget  introduced  extra  measures  in  both  years.  However,  the  impact  of  these 
measures  is  somewhat  offset  in  the  bottom-up  measurement  of  fiscal  effort  by  savings 
related to unemployment expenditure and interest payments. 

7 

 
 
Table 3. Assessment of the fiscal effort 

% of GDP

Adjusted change in the 
 structural balance 

Bottom-up effort

2015-16
0.4%
Commission 2015 autumn forecast
0.5%
EDP target
* Scena ri o underpi nni ng the Counci l  Recommenda ti on of 19 June 2015

2016-17
1.2%
1.1%

2015-16
0.1%
0.0%

2016-17
0.1%
0.0%

Box 1. Summary of the Council recommendation of 19 June 2015 

On 19 June 2015, under Article 126(7) of the Treaty, the Council recommended the UK 
to correct its excessive deficit by 2016-17 at the latest.  

(a) The United Kingdom should put an end to the present excessive deficit situation by 
2016-17 at the latest.  

(b) The United Kingdom should reach a headline deficit of 4.1 % of GDP in 2015-16 and 
2.7% of GDP in 2016-17, which should be consistent with delivering an improvement in 
the structural balance of 0.5% of GDP in 2015-16 and 1.1 % of GDP in 2016-17, based 
on the Commission's updated 2015 spring forecast.  

(c) The United Kingdom should fully implement the consolidation measures incorporated 
into all budgets and autumn statements up to and including the 2015 budget to achieve 
the  recommended  structural  effort,  with  any  modifications  being  fiscally-neutral  in 
relation to the current plans. The United Kingdom should further detail the expenditure 
cuts in the upcoming Spending Review. These are necessary to ensure the correction of 
the excessive deficit by 2016-17.  

(d) The United Kingdom should accelerate the reduction of the headline deficit in 2015-
16  and  2016-17  if  economic,  financial  or  budgetary  conditions  turn  out  better  than 
currently  expected.  Budgetary  consolidation  measures  should  secure  a 
lasting 
improvement in the general government structural balance in a growth-friendly manner. 
In particular, further cuts in capital expenditure should be avoided.  

(e) The Council sets the deadline of 15 October 2015 for the United Kingdom to (i) take 
effective action; and (ii) in accordance with Article 3(4a) of Regulation (EC) No 1467/97 
to report in detail the consolidation strategy that is envisaged to achieve the targets. 

8 

 
 
 
5.  CONCLUSION 

The  report  on  action  taken  submitted  by  the  United  Kingdom  on  19  October  2015 
confirms the plan of the UK government to correct the excessive deficit by 2016-17, the 
deadline  set  by  the  Council,  and  provides  details  on  the  measures  underpinning  the 
budgetary strategy. Additional measures were not necessary to comply with the Council 
recommendation, however, extra measures were announced at the July budget, which are 
also included in the report on action taken.  

Overall, based on the information available, the general government deficit is expected to 
reach  3.9%  of  GDP  in  2015-16  and  2.4%  in  2016-17,  in  line  with  the  targets 
recommended  by  the  Council  on  19  June  2015.  The  improvement  in  the  structural 
balance, as estimated by the Commission based on the autumn forecast of 0.7% of GDP 
in 2015-16 and 1.3% of GDP in 2016-17, also appears in line with the targets of 0.5% of 
GDP and 1.1% of GDP, respectively. Since the headline targets and the adjustment in the 
structural balance recommended by the Council are expected to be met in 2015-16 and 
2016-17,  a  careful  analysis  of  the  fiscal  effort  is  not  necessary  according  to  the  agreed 
methodology  to  assess  compliance  with  the  EDP  recommendation.The  consolidation 
strategy  pursued  by  the  UK  government  focusses  mainly  on  expenditure  cuts  over  tax 
increases  with  the  goal  of  having  a  budget  surplus  in  2019-20.  The  main  risks  to  the 
budgetary  strategy  are  on  implementation  but  expenditure  slippages  are  not  expected. 
The  upcoming  Spending  Review  will  detail  the  exact  departmental  expenditure  limits 
within  the  already  specified  envelope.  Commitment  to  the  budgetary  strategy  is  key  to 
ensuring a durable correction of the excessive deficit. 

9