CELEX: 52008SC2189
Language: en
Date: 2008-07-02 00:00:00
Title: Recommendation for a Council recommendation with a view to bringing an end to the situation of an excessive government deficit in the United Kingdom

EN
EN    EN
 ---pagebreak---                     COMMISSION OF THE EUROPEAN COMMUNITIES
                                                      Brussels, 2.7.2008
                                                      SEC(2008) 2189 final
                                    Recommendation for a
                             COUNCIL RECOMMENDATION
   with a view to bringing an end to the situation of an excessive government deficit in the
                                       United Kingdom
                                (presented by the Commission)
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 ---pagebreak---                                             Recommendation for a
                                     COUNCIL RECOMMENDATION
     with a view to bringing an end to the situation of an excessive government deficit in the
                                               United Kingdom
   THE COUNCIL OF THE EUROPEAN UNION,
   Having regard to the Treaty establishing the European Community, and in particular
   Article 104(7) thereof;
   Having regard to the recommendation from the Commission;
   Whereas:
   (1)     Article 104 of the Treaty lays down an excessive deficit procedure (EDP) to ensure
           that Member States avoid excessive government deficits or that they correct such
           deficits when they occur.
   (2)     Pursuant to point 5 of the Protocol on certain provisions relating to the United
           Kingdom of Great Britain and Northern Ireland, the obligation in Article 104(1) of the
           Treaty to avoid excessive general government deficits does not apply to the United
           Kingdom unless it moves to the third stage of economic and monetary union1. While
           in the second stage of economic and monetary union, the United Kingdom is required
           to endeavour to avoid excessive deficits, pursuant to Article 116(4) of the Treaty.
   (3)     The Stability and Growth Pact is based on the objective of sound government finances
           as a means of strengthening the conditions for price stability and for strong sustainable
           growth conducive to employment creation.
   (4)     The Council has decided on 8 July 2008, in accordance with Article 104(6) of the
           Treaty, that an excessive deficit exists in the United Kingdom.
   (5)     In accordance with Article 104(7) of the Treaty and Article 3 of Council Regulation
           (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive
           deficit procedure2 (which is part of the Stability and Growth Pact), the Council is also
           required to make recommendations to the Member State concerned with a view to
           bringing the situation of excessive deficit to an end within a given period. The
           recommendation has to establish a deadline of six months at the most for effective
           action to be taken by the Member States concerned to correct the excessive deficit as
           well as a deadline for the correction of the excessive deficit, which should be
   1
           http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12006E/PRO/25:EN:HTML
   2
           OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174,
           7.7.2005, p. 5).
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 ---pagebreak---        completed in the year (financial year in the case of the United Kingdom) following its
       identification unless there are special circumstances. In deciding whether special
       circumstances exist, “relevant factors” as clarified in Article 2(3) of Regulation (EC)
       No 1467/97 should be given due consideration. Article 3(4) of Regulation (EC) No
       1467/97 also specifies that in a recommendation to a Member State to correct an
       excessive deficit the Council should request the achievement of a minimum annual
       improvement in the structural balance of 0.5% of GDP as a benchmark.
   (6) The Commission, in its spring 2008 forecast, projected that on the basis of unchanged
       policies the general government deficit would rise from 2.9% of GDP in financial year
       2007/08 to 3.3% in 2008/09, and to remain at 3.3% in 2009/10. Real GDP growth,
       following an outturn of 3.0% in 2007, was projected to slow to 1.7% in 2008 and
       further to 1.6% in 2009. Against the background of the cyclical position moving from
       a positive output gap in 2007 to a negative one in 2008, the cyclically-adjusted deficit
       was projected to increase from 3.0% of GDP in 2007/08 to 3.1% of GDP in 2008/09.
       Thereafter, the cyclically-adjusted deficit was projected to narrow to 2.9% of GDP in
       2009/10, reflecting the combined effects of discretionary measures, including the
       higher taxes on alcohol and motor vehicles introduced in the 2008 Budget, and a small
       planned fall in the government expenditure ratio. In part due to significant projected
       primary deficits, general government gross debt was forecast to increase from 43.2%
       of GDP in the 2007/08 financial year to reach 47½% of GDP in 2009/10.
   (7) In the United Kingdom's 2008 Budget, the authorities presented budgetary plans
       showing a general government deficit of 3.2% of GDP in 2008/09, thereafter falling to
       2.8% in 2009/10. The deficit figure in the latter year is lower than the corresponding
       figure in the Commission services' spring 2008 forecast of 3.3% of GDP, mainly due
       to differences in expected GDP growth in 2009/10. Subsequent to the 2008 Budget
       and the Commission services’ spring forecast, the United Kingdom announced
       additional fiscal measures on 13 May 2008 relating to changes in personal income tax
       bands for the financial year 2008/09. The changes are expected to reduce personal
       income tax receipts in 2008/09 and will be financed by additional government
       borrowing. Other things being equal, this will lead to an increase in the 2008/09 deficit
       ratio forecast by the Commission services by 0.2 percentage points3, to around 3.5% of
       GDP, with a similar impact on the structural deficit. Furthermore, the UK
       government's statement implies a risk of a deficit overshoot also in 2009/10 relative to
       the deficit expected in the spring forecast.
   (8) In the case of the United Kingdom, the consideration of relevant factors, as clarified in
       Article 2(3) of Regulation (EC) No 1467/97 and examined in the Commission’s report
       under Article 104(3), does not suggest the presence of special circumstances
       warranting a departure from the standard deadline for correcting the deficit. While
       GDP growth is expected to slow in 2008 and 2009 relative to potential growth rates,
       leading to the emergence of a negative output gap, GDP growth is expected to remain
       positive throughout the spring forecast horizon at annual rates above 1.5% in 2008 and
       2009. A deadline for correction of an excessive deficit is to be set in accordance with
       the aforementioned Regulation, which envisages that the correction should be
   3
       In the UK government's income tax announcement published on 13 May 2008, the cost of the income
       tax reduction was stated to amount to £2.7bn in 2008/09, which is estimated by the Commission to be
       equivalent to 0.2% of GDP.
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 ---pagebreak---            completed in the year following its identification. In the case of the United Kingdom
           the identification took place in 2008 on the basis of a planned deficit in excess of the
           3% of GDP reference value in 2008/09. Accordingly the headline deficit should be
           brought below the 3% of GDP reference at the latest by financial year 2009/10. For
           this correction to be sustainable, based on the Commission services' spring forecast,
           the UK authorities would have to achieve a structural improvement of at least 0.5% of
           GDP in 2009/10.
   (9)     In general, in the view of the Council, budgetary consolidation measures should secure
           a lasting improvement in the general government balance, while being geared towards
           enhancing the quality of the public finances and reinforcing the growth potential of the
           economy. A budgetary correction in the United Kingdom should be consistent with
           these objectives.
   HEREBY RECOMMENDS:
   – The United Kingdom authorities should put an end to the excessive deficit situation as
       soon as possible and by financial year 2009/10 at the latest, in accordance with Article 3(4)
       of Council Regulation (EC) No 1467/97, by bringing the general government deficit below
       3% of GDP in a credible and sustainable manner.
   – To this end, on the basis of the Commission services' spring 2008 forecast, the authorities
       should ensure a structural improvement of at least 0.5% of GDP in 2009/10.
   The Council establishes the deadline of 8 January 2009 for the United Kingdom authorities to
   take effective action to this end.
   In addition, the Council invites the United Kingdom authorities to ensure that, after the
   excessive deficit has been corrected, budgetary consolidation is sustained towards a medium-
   term budgetary objective that (i) provides an adequate safety margin with respect to the 3% of
   GDP deficit limit; (ii) maintains prudent debt ratios taking into account the economic and
   budgetary impact of ageing populations; and (iii) taking (i) and (ii) into account, allows room
   for budgetary manoeuvre, in particular considering the needs for public investment.
   This recommendation is addressed to the United Kingdom of Great Britain and Northern
   Ireland
   Done at Brussels,
                                                 For the Council
                                                 The President
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