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IP/08/915

Brussels, 11 June 2008

Commission initiates Excessive Deficit Procedure for the United Kingdom

The European Commission today has adopted a report under Article 104(3) of the EU Treaty following the UK authorities' notification, in March 2008, of a planned deficit of 3.2% of GDP in financial year 2008/09, i.e. above the 3% of GDP Treaty reference value. While the report accepts that the planned deficit remains close to the reference value, it concludes that it cannot be qualified as exceptional within the meaning of the Treaty and the Stability and Growth Pact; nor can it be considered temporary.

"The United Kingdom's budgetary position has deteriorated over the past year and is expected to rise above the 3% of GDP reference value in the financial year ending in March 2009. In line with the Treaty, the Commission has therefore initiated the excessive deficit procedure" said Joaquín Almunia, Economic and Monetary Affairs Commissioner.

In March 2008, the United Kingdom notified to the Commission a projected general government deficit in 2008/09[1] of 3.2% of GDP.

The planned figure for 2008/09 provides prima facie evidence of the existence of an excessive deficit in the UK. This was corroborated by the spring forecasts of the Commission which project a slightly higher deficit at 3.3% and, on a no-policy change assumption, also forecast a general government deficit in 2009/10 of 3.3% of GDP.

According to the Stability and Growth Pact, the notification of an excessive deficit requires the Commission to adopt a report under Article 104.3 of the Treaty. This report should examine the reasons for the breach of the reference value and in particular whether the planned excessive deficit is close to the 3% of GDP reference value, whether it is linked to exceptional circumstances and whether it is temporary

Having examined the budgetary developments as well as the short- and medium-term economic prospects and policy action taken by the UK government, the Commission concludes that the planned excess of the deficit over the reference value cannot be considered exceptional or temporary and suggests that the UK is not respecting the deficit criterion set in the Treaty.

Background

Since 2002/03, the United Kingdom has not built a sufficient "safety margin" for fiscal policy to operate freely and supportively during normal economic downturns without significant risk of breaching the reference value. Fiscal policy was expansionary in 2007/08, in spite of robust growth, leading to a deficit estimated to have increased slightly from 2.6% of GDP in 2006/07 to 2.9% of GDP in 2007/08.

Whilst general government gross debt is projected to remain below the 60% of GDP reference value set in the EU Treaty, debt has been on a rising trend since 2001 to reach an estimated 43.8% of GDP last year.

The EU Treaty requires the Commission to monitor that Member States do not run excessive deficits defined as in excess of 3% of GDP. In a separate decision today, the Commission proposed that the ECOFIN Council closes the EDP for Poland having concluded that Poland has corrected its budget deficit to below 3% in a sustainable way. Until today's decision regarding the United Kingdom, there was only one other EU country in the EDP, Hungary, which has been given until 2009 to correct the situation.

The related document can be found at:
http://ec.europa.eu/economy_finance/thematic_articles/article12722_en.htm


[1] The UK financial year runs from April to March.


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