Brussels, 6 July 2010
Commission concludes UK took effective action in excessive deficit procedure
The European Commission today assessed the action taken by the United Kingdom in response to the Council recommendations of 2 December 2009 relating to the correction of the excessive government deficit. The Commission concluded that the authorities have acted in accordance with the recommendations.
"The current economic circumstances call for a decisive fiscal consolidation, while not suffocating the nascent economic recovery. The budgetary targets presented by the UK Government are in line with this strategy", said Economic and Monetary Affairs Commissioner Olli Rehn.
The UK was recommended to start consolidation in the fiscal year 2010/11 and outline a consolidation strategy that would correct the excessive deficit by 2014/15. The previous Administration had already started to implement in 2010/11 measures amounting to around 1% of GDP. In its Emergency Budget of 22 June, the new UK Government announced significant new fiscal tightening, which will reduce the structural deficit by an additional ½% of GDP in 2010/11 and by 2¼% of GDP by 2014/15. As a result, the UK authorities project the headline deficit to fall to 2.3% of GDP by 2014/15, the time limit recommended by the Council.
Around three-quarters of the overall reduction in the headline deficit is planned to take place through expenditure reduction. Implementing the planned spending cuts - including a 25% reduction in departmental budgets in real terms on average over a four-year period - will be challenging. The new Office of Budget Responsibility and the new fiscal rule announced by the UK authorities should however contribute to improve the fiscal framework and limit the risks to the adjustment.
The consolidation plan set out in the Emergency Budget of 22 June is closely in line with the December 2009 Council Recommendations. Provided they are implemented as planned, the measures announced will strengthen confidence in the UK's commitment to putting its public finances back on a sustainable path.
The Excessive Deficit Procedures deadline and fiscal effort were fixed in accordance with the fiscal exit strategy principles as agreed by the EU Council in October. The recommendations were framed in a medium-term framework due to the existence of exceptional economic circumstances and also in view of the sheer size of the consolidation needs. For the same reason, the fiscal effort was defined as an annual average.
In line with the Pact, the Council fixed a review clause to assess whether first progress were made towards consolidation on 2 June. Thus, on 15 June, the Commission assessed 12 Member States concerned. Due to the UK general elections on 6 May and the presentation of the Emergency Budget by the new UK government on 22 June, the Commission assessed the UK today.
Background: the excessive deficit procedure
The excessive deficit procedure, representing the corrective arm of the Stability and Growth Pact, is regulated by Article 126 of the Treaty and is further clarified in Council Regulation (EC) No 1467/97. Revised in 2005, the Pact allows the economic situation to be taken into account when making recommendations on the timetable for the correction.
When a Member State reports an actual or a planned deficit higher than 3% of GDP, the Commission addresses a report under Article 126(3) to the Economic and Financial Committee (EFC), which formulates an opinion on it under Article 126(4). Next, if the Commission considers that an excessive deficit exists or may occur, it addresses and opinion to the Member State under Article 126(5) and informs the Council. Simultaneously, the Commission will also propose to the Council to decide that an excessive deficit exists under Article 126(6) and recommend the Council under Article 126(7) to issue recommendations to correct the excessive deficit by a given deadline.
All documents relating to excessive deficit procedures are available at: http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm