REPORT FROM THE COMMISSION United Kingdom Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: United Kingdom, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 557 final  REPORT FROM THE COMMISSION United Kingdom  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

United Kingdom 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.    The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
countries  to  depart  from  the  budgetary  requirements  that  would  normally  apply  while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

According  to  the  Commission  2020  spring  forecast,  the  general  government  deficit  in  the 
United Kingdom1 is expected to have been 2.5% of GDP in the financial year 2019-20, while 
general government debt is expected to have been 85.2%. However, final outturn data on the 
2019-20  general  government  deficit  and  debt  will  only  be  available  in  autumn  2020. 
According to the Commission forecast, the United Kingdom’s deficit is expected to be 10.7% 
of  GDP  in  2020-21,  while  debt  is  expected  to  be  102.5%  of  GDP.  All  available  evidence, 
including statements by the national authorities about the extent of the reaction of budgetary 
policy to the severe economic downturn associated with the COVID-19 pandemic, points to a 
deficit significantly in excess of the 3% of GDP threshold in 2020-21 and in 2021-22. In its 
letter of 7 May 2020, the Commission asked the UK to provide updated information on the 

1  The  United  Kingdom  withdrew  from  the  European  Union  as  of  1  February  2020.  The  Agreement  on  the 
withdrawal  of  the  United  Kingdom  of  Great  Britain  and  Northern  Ireland  from  the  European  Union  and 
European Atomic Energy Community (OJ L 29, 31.1.2020, p. 7) entered into force on 1 February 2020, when 
the United Kingdom withdrew from the EU. It provides for a transition period during which Union law, with a 
few exceptions, is applicable to and in the United Kingdom. As defined by Union law applicable to it during the 
transition period, the United Kingdom is treated as an EU Member State, but will not participate in EU decision-
making and decision-shaping. 

1 

 
 
 
 
                                                           
estimated  size  of  the  deficit  in  2020-21.  The  UK  however  did  not  provide  the  requested 
clarification,  but  referenced 
the  Office  for  Budget 
Responsibility,  which  expects  a  deficit  significantly  above  3%  in  2020-21.  Taking  those 
factors into account,  the Commission  considers its  current  forecast  of a deficit of 10.7% of 
GDP  in  2020-21  as  sufficiently  compelling  prima  facie  evidence  of  an  excessive  deficit  as 
defined by Article 126(2)(a) of the Treaty. 

the  COVID-19  scenario  from 

Against this background, the Commission has therefore prepared this report, which analyses 
the United Kingdom’s compliance with the deficit and debt criteria of the Treaty. It takes into 
account all relevant factors and gives due consideration to the major economic shock linked 
to the COVID-19 pandemic.  

Table 1. General government deficit and debt (% of GDP)   

2016-17 

2017-18 

2018-19 

2019-20 
COM 

2020-21 
COM 

2021-22 
COM 

-2.8 

-2.7 

-1.8 

-2.5 

-10.7 

-6.2 

85.2 

84.6 

84.2 

85.2 

102.5 

100.2 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 

Note: Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION  

Based  on  the  Commission  2020  spring  forecast  the  United  Kingdom’s  general  government 
deficit  in  2020-21  is  expected  to  reach  10.7%  of  GDP,  above  and  not  close  to  the  Treaty 
reference value of 3% of GDP. The forecast excess over the Treaty reference value in 2020-
21  is  exceptional,  as  it  results  from  a  severe  economic  downturn.  Taking  into  account  the 
impact  of  the  COVID-19  pandemic,  the  Commission  2020  spring  forecast  projects  a 
contraction of real GDP in 2020 by 8.3%. 

The  forecast  excess  over  the  Treaty  reference  value  is  not  temporary,  based  on  the 
Commission 2020 spring forecast, which projects the deficit to remain above 3% of GDP in 
2021-22. 

In  sum,  the  forecast  deficit  for  2020-21  is  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference  value.  The  forecast  excess  is  considered  to  be  exceptional  and  not  temporary  as 
defined  by  the  Treaty  and  the  Stability  and  Growth  Pact.  All  available  evidence,  including 
statements by the national authorities about the extent of the reaction of budgetary policy to 
the severe economic downturn associated with  the COVID-19 pandemic, points to  a deficit 
significantly in excess of the 3% of GDP threshold in 2020-21 and in 2021-22. In its letter of 
7 May 2020, the Commission asked the UK to provide updated information on the estimated 
size of the deficit in  2020-21. The United  Kingdom  however did  not  provide the requested 
clarification,  but  referenced 
the  Office  for  Budget 
Responsibility,  which  expects  a  deficit  significantly  above  3%  in  2020-21.  Taking  those 
factors into account,  the Commission  considers its  current  forecast  of a deficit of 10.7% of 
GDP  in  2020-21  as  sufficiently  compelling  prima  facie  evidence  of  an  excessive  deficit  as 

the  COVID-19  scenario  from 

2 

 
 
 
 
defined by Article 126(2)(a) of the Treaty. Hence, the analysis suggests that prima facie the 
deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. As specified in Article 4 of Regulation (EC) No 1467/97, as regards 
the deficit criterion, since the government debt-to-GDP ratio exceeds the 60% reference value 
and the double condition is not met – i.e. that the deficit remains close to the reference value 
and that its excess  over  the reference value is  temporary  – those relevant  factors  cannot  be 
taken into account in the steps leading to the decision on the existence of an excessive deficit 
on the basis of the deficit criterion for the United Kingdom. 

In the current situation, a key additional factor to take into consideration regarding 2020   is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results  in  a highly  uncertain outlook. The pandemic has  also  led to 
the activation of the general escape clause.  

3.1. 

 COVID-19 pandemic 

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Countries  have  already  adopted  or  are  adopting  budgetary 
measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those  individuals 
and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures  and  other 
guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the  competent 
statistical authorities are to examine whether those measures entail an immediate impact on 
the  general  government  balance  or  not.  Together  with  the  fall  in  economic  activity,  those 
measures will contribute to substantially higher government deficit and debt positions. 

3.2  Medium-term economic position  

Acording  to  the  Commission  2020  spring  forecast,  the  United  Kingdom’s  real  GDP  is 
expected  to  fall  steeply  in  the  first  half  of  2020.  The  lockdown  measures  that  were 
implemented  in  late  March  to  contain  the  spread  of  COVID-19  have  led  to  a  sharp  fall  in 
economic  activity  across  many  sectors  of  the  economy.  As  the  containment  measures  are 
eased,  the  economy  should  start  to  recover.  Overall,  the  United  Kingdom’s  real  GDP  is 

3 

 
 
 
expected to fall by 8.3% in 2020. This is a mitigating factor in the assessment of the United 
Kingdom’s compliance with the deficit criterion in 2020. 

There is an exceptional high degree of uncertainty surrounding the macroeconomic outlook. 
Changes  to  the  assumptions  about  the  length  of  the  COVID-19  pandemic  and  related 
lockdown measures would significantly change the forecast outlook.  

3.3 

 Medium-term budgetary position 

The United Kingdom was recommended on 13 July 2018 to ensure that the nominal growth 
rate of primary government expenditure, net of discretionary revenue measures and one-offs, 
did not exceed 1.6% in 2019-20 (‘the expenditure benchmark’), corresponding to a structural 
adjustment of 0.6% of GDP2. The overall assessment points to a risk of significant deviation 
from  the  recommended  adjustment  path  towards  the  medium-term  budgetary  objective  in 
2019-20  and  over  2018-19  and  2019-20  taken  together.  A  final  assessment  can,  however, 
only be made in autumn 2020 when outturn data for 2019-20 have become available. 

Over  the  medium-term,  according  to  the  Commission  2020  spring  forecast,  the  general 
government deficit is expected to increase significantly. This is due to the expected economic 
downturn in combination with several fiscal measures announced by the UK government to 
deal with the consequences of COVID-19, such as support for employees and self-employed 
workers, support for businesses and an increase in welfare spending. The general government 
deficit is expected to increase to 10.7% in 2020-21, before falling to 6.2% in 2021-22. The 
general government debt is expected to increase from 85.2% in 2019-20 to 102.5% of GDP in 
2020-21, before falling slightly to 100.2% of GDP in 2021-22.  

Those forecast numbers are subject to a high degree of uncertainty. For instance, the costs of 
the  fiscal  measures  are  dependent  on  levels  of  take-up  and  the  duration  of  the  lockdown 
measures.  Changes  to  the  macroeconomic  outlook  would  also  significantly  affect  the  fiscal 
outlook.  

3.4.  Medium-term government debt position  

According to the Commission 2020 spring forecast, general government debt is expected to 
rise from 85.2% of GDP in 2019-20 to 102.5% by 2020-21. 

The debt sustainability analysis has been updated with the Commission 2020 spring forecast. 
Overall,  the  debt  sustainability  assessment  indicates  that  notwithstanding  risks,  the  debt 
position  remains  sustainable  over  the  medium-term,  which  takes  into  account  important 
mitigating  factors  (including  the  debt  profile).  In  particular,  while  the  government  debt 
position deteriorates as a result of the COVID-19 crisis, the debt-to-GDP ratio in the baseline 
is expected to be on a sustainable (slightly declining) trajectory over the medium term. 3 

2 Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of the United Kingdom 
and  delivering  a  Council  opinion  on  the  2018  Convergence  Programme  of  the  United  Kingdom;  OJ  C  320, 
10.9.2018, p. 119.  
3 The baseline is based on the Commission Spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy is assumed, consistent with the EU economic and fiscal coordination and surveillance frameworks. Real 
GDP growth is projected according to the so-called EPC/OGWG T+10 methodology. In particular, (real) actual 
GDP  growth  is  driven  by  its  potential  growth  and  affected  by  any  additional  fiscal  adjustment  considered 
(through the fiscal multiplier). Inflation is assumed to converge gradually to 2%. Interest rates assumptions are 

4 

 
 
                                                           
 
Graph 1: Government debt-to-GDP ratio, United-Kingdom, % of GDP 

125

115

105

95

85

75

65

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Baseline

Adverse scenario

Source: Commission services. 

3.5 

Other factors put forward by the United Kingdom  

On 12 May 2020, the United Kingdom authorities transmitted a letter with relevant factors in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous sections already broadly covers the key factors put forward by the authorities.  

4. 

CONCLUSIONS 

According  to  the  Commission  2020  spring  forecast  the  United  Kingdom’s  general 
government deficit in 2020-21 is forecast to increase to 10.7% of GDP, above and not close 
the  3%  of  GDP  Treaty  reference  value.  The  forecast  excess  over  the  reference  value  is 
considered to be exceptional but not temporary.  

All available evidence, including statements by the national authorities about the extent of the 
reaction of budgetary policy to the severe economic downturn associated with the COVID-19 
pandemic, points to a deficit significantly in excess of the 3% of GDP threshold in 2020-21 
and in 2021-22. In its letter of 7 May 2020, the Commission asked the UK to provide updated 
information on the estimated size of the deficit in 2020-21. The UK however did not provide 
the requested clarification, but referenced the COVID-19 scenario from the Office for Budget 
Responsibility,  which  expects  a  deficit  significantly  above  3%  in  2020-21.  Taking  those 
factors into account,  the Commission  considers its  current  forecast  of a deficit of 10.7% of 
GDP  in  2020-21  as  sufficiently  compelling  prima  facie  evidence  of  an  excessive  deficit  as 
defined by Article 126(2)(a) of the Treaty. 

The general government gross debt is expected to have been 85.2% of GDP at the end of the 
financial year 2019-20, above the 60% of GDP Treaty reference value. The United Kingdom 
is  not  expected  to  have  made  sufficient  progress  towards  meeting  the  debt  reduction 
benchmark in 2019-20. Final outturn data will, however, only be available in autumn 2020. 

set in line with financial market expectations. Under the adverse scenario, higher interest rates (by 500 bps.) and 
lower GDP growth (by -0.5 pp.), with respect to the baseline, are assumed (throughout the projection horizon). 

5 

 
 
 
 
                                                                                                                                                                                     
In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors.  As  regards  compliance  with  the  deficit  criterion  in  2020-21,  however  since  the 
government debt-to-GDP ratio exceeds the 60% reference value and the double condition is 
not met – i.e. that the deficit remains close to the reference value and that its excess over the 
reference value is temporary – those relevant factors cannot be taken into account in the steps 
leading  to  the  decision  on  the  existence  of  an  excessive  deficit  on  the  basis  of  the  deficit 
criterion for the United Kingdom.  

Overall,  the  analysis  suggests  that  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation (EC) No 1467/1997 is not fulfilled. 

6