9 Stability and Growth Pact
| (a) (27377) 7384/06 —
(b) (28003) 13074/06 — |
Council Opinion on the updated convergence programme of the United Kingdom
Commission Communication: Assessment of the action taken by the United Kingdom in response to the Council Recommendation of 24 January 2006 with a view to bringing an end to the situation of an excessive government deficit: Application of Article 104(7) of the Treaty
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| Legal base | (a) Articles 99(4) and 104 EC; — ; QMV
(b) Article 104(7) EC; —; QMV
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| Document originated | (b) 20 September 2006
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| Deposited in Parliament | (b) 13 November 2006
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| Department | HM Treasury |
| Basis of consideration | (a) Minister's letter of 29 November 2006
(b) EM of 1 December 2006
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| Previous Committee Report | (a) HC 34-xxv (2005-06), para 6 (19 April 2006) and HC 34-xxxiv (2005-06), para 4 (5 July 2006)
(b) None
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| Discussed in Council | (a) Adopted by ECOFIN Council 14 March 2006
(b) 10 October 2006
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
9.1 The Stability and Growth Pact adopted by the Amsterdam European
Council in June 1997 emphasised the obligation of Member States
to avoid excessive government deficits, defined as the ratio of
a planned or actual deficit to gross domestic product (GDP) at
market prices in excess of a "reference value" of 3%.[20]
Under the Pact's arrangements for
multilateral surveillance
of budget positions and the co-ordination of economic policies
the Council of Economic and Finance Ministers (ECOFIN) issues
an Opinion each year on the stability or convergence programme
of each Member State.[21]
These Opinions, which are not binding on Member States, are based
on a recommendation from the Commission. The economic content
of the programmes is assessed with reference to the Commission's
current economic forecasts. If a Member State's programme is found
wanting, it may be invited by ECOFIN, in a Recommendation, to
make adjustments to its economic policies, though such Recommendations
are likewise not binding on Member States.
9.2 In the first half of 2006 we considered the Council's
Opinions on the stability or convergence programmes of all Member
States, which were assessed in relation to the Commission's Autumn
2005 economic forecasts. We cleared the other documents. But in
relation to Opinion on the UK's programme, which suggested dissatisfaction
about data provided by the Government, we asked to hear about:
- the significance of the omissions
in the data, particularly compulsory data, presented;
- the reasons for some data being aggregated differently
from the harmonised measure;
- the reason for presenting UMTS[22]
licence income in a way contrary to the Eurostat view of how it
should be shown; and
- which data gaps the Government had been able
to agree to fill and which not.[23]
9.3 In July 2006 we reported a response from the
Government that addressed directly only the point related to UMTS
licences. So we reiterated our request to hear about the other
three points, noting that only with this information could we
consider what to make of the implied dissatisfaction with the
presentation of the UK programme in the Council Opinion —
an Opinion with which the Government had told us it agreed.[24]
9.4 The Growth and Stability Pact also endorsed action
in cases of an excessive government deficit — the excessive
deficit procedure provided for in Article 104 EC and the relevant
Protocol. This procedure consists of Commission reports followed
by a stepped series of Council Recommendations (the final two
steps do not apply to non-members of the eurozone). Failure to
comply with the final stage of Recommendations allows ECOFIN to
require publication of additional information by the Member State
concerned before issuing bonds and securities, to invite the European
Investment Bank to reconsider its lending policy for the Member
State concerned, to require a non-interest-bearing deposit from
the Member State concerned whilst its deficit remains uncorrected,
or to impose appropriate fines on the Member State concerned.
9.5 In January 2006 ECOFIN adopted a Decision under
Article 104(6) EC that an excessive deficit existed in the UK
and a Recommendation under Article 104(7) EC that the excess over
the reference value be corrected in a credible and sustainable
manner by 2006-07 with, to this end, an improvement in the cyclically-adjusted
deficit of 0.5% of GDP between 2005-06 and 2006-07. The Council
established a deadline of 24 July 2006 for the Government to take
effective action to this end. The Council also asked the Government
to ensure that, after the excessive deficit had been corrected,
budgetary consolidation would be sustained towards a medium-term
budgetary objective which would provide a safety margin with respect
to the 3% of GDP deficit limit and maintain prudent debt ratios,
taking into account the economic and budgetary impact of ageing
populations, but allowing room for budgetary manoeuvre, in particular
considering the need for public investment.[25]
The Minister's letter
9.6 The Economic Secretary to the Treasury (Ed Balls)
writes belatedly in response to our repeated request on points
related to document (a), the UK's convergence programme. First,
the Minister calls our attention again to the Guidelines on
the format and content of Stability and Convergence Programmes,
commonly referred to as the Code of Conduct, noting that the document
is to be considered as "a code of good practice", that
it acknowledges that "the programmes are the responsibility
of national authorities and that possibilities and practices differ
across countries" and that the Government is committed to
complying as far as practicable with the code. He says the Government
does "not regard the omissions in the data presented in the
UK's Convergence Programme, compared to the specifications outlined
in the Code of Conduct, as significant".
9.7 The Minister explains again that the content
of the UK's Convergence Programme is sourced from the Pre-Budget
Report (PBR) and elaborates that:
- the PBR gives an up-to-date
assessment of the economic and fiscal outlook, and outlines, so
far as reasonably practicable, any significant policy proposals
under consideration for introduction in the Budget;
- the Government's Code for Fiscal Stability
requires the PBR to include the key assumptions underlying
the fiscal and economic projections and information on the outlook
for key fiscal and economic aggregates;
- these projections incorporate as far as reasonably
practicable, all Government decisions and all other circumstances
that may have a material impact on the economic and fiscal outlook;
- the UK convergence programme therefore allows
a full analysis of the UK economy, the UK public finances and
the Government's policy position; and so
- the Government has followed the "good practice"
of the Code of Conduct by providing data, which in many cases
closely matches that requested, but is more relevant to the UK
context.
9.8 In relation to different aggregation of data
the Minister says that:
- the harmonised Eurostat measures
of total receipts and expenditure differ from those produced using
the UK's methods;
- both the UK and Eurostat classifications are
compatible with the European System of Accounts (ESA95);
- differing figures for total expenditure/receipts
are due to differences in the aggregation of ESA95 components;
but
- both methods produce the same figure for the
treaty deficit (i.e. general government net borrowing), the key
fiscal aggregate for the excessive deficits procedure.
9.9 As for data gaps filled by the Government the
Minister says that these result from bilateral technical discussions
to clarify, for example, methodological issues or different national
presentation of data and that no new forecasts or data that could
not be derived from the PBR are provided.
The new document
9.10 The Commission Communication, document (b),
reports its assessment of the Government's response to the January
2006 Recommendation under Article 104(7) EC that the excess deficit
over the reference value be corrected. The assessment is based
on the Commission services' spring 2006 forecasts, complemented
by macroeconomic and budgetary information made available after
the forecasts' cut off date, in particular outturns for GDP growth
for the first two quarters of 2006 and an update of the public
finances data for the early months of 2006/07.
9.11 The assessment concludes
"Overall […] the Commission considers that
no further steps in the excessive deficit procedure are needed
at present for the United Kingdom. However, the Commission highlights
the uncertainties in assessing current fiscal trends, meaning
that there is a possibility that the fiscal outlook may fail to
improve sufficiently on unchanged policies, which calls for surveillance
on short-term budgetary developments.
"Over the medium term, the fiscal consolidation
projected by the UK authorities depends on achieving a significant
moderation in expenditure growth. In this respect the medium-term
expenditure plans due to be announced in the 2007 Budget and the
subsequent Comprehensive Spending Review, covering the three financial
years starting in 2008/09, will be particularly important."
9.12 On 10 October 2006 ECOFIN endorsed the Commission's
view commenting that:
"In view of the uncertainties, fiscal policies
should be implemented to deliver safety margins against the reference
value in the current financial year, and to ensure that budgetary
consolidation is sustained in the years ahead towards a medium-term
budgetary objective…"
The Government's view
9.13 In relation to the Commission's Communication
the Minister reminds us that:
- the Government believes in
a prudent interpretation of the Stability and Growth Pact which
takes into account the economic cycle, the long-term sustainability
of public finances and the role of public investment; and
- the UK is required by Article 116(4) EC to "endeavour
to avoid excessive government deficits", but the coercive
requirements of Article 104 EC do not apply to the UK.
9.14 The Minister then says:
"The public finance projections set out in Budget
2006 show the Government is meeting its fiscal rules over the
cycle, that the public finances are sustainable and that the increases
in public investment are affordable. The projections are fully
consistent with a prudent interpretation of the Pact.
"UK public finances are set to continue improving,
with UK deficit (on Treaty definition) forecast to stand at 3.0%
in 2006/07, 2.4% in 2007/08 and 1.6% in 2010/11. The UK continues
to meet the EU Treaty reference value for general government gross
debt (60 per cent of GDP) by a considerable margin. Budget 2006
projects that government debt (on a Maastricht basis) in 2006/07
will be 43.9%.
"The Government welcomes the Commission's assessment
that no further steps in the excessive deficit procedure are needed
at present."
Conclusion
9.15 We note the further comments the Minister
makes now (and which we would have liked to have seen much more
promptly) in relation to the apparent dissatisfaction with the
Government's data expressed in the Council Opinion, document (a),
particularly the statement that the Government does not regard
the omissions in the data it presented as significant. We now
clear the document.
9.16 As for the Commission's Communication, document
(b), we note both the decision that no further steps are necessary
in the excessive deficit procedure and the cautionary words about
uncertainties as to current trends. We clear the document.
20 This obligation does not apply to Member States,
including the UK, whilst they remain outside the eurozone, but
they are required to endeavour to avoid excessive deficits. Back
21
The 13 Member States that have adopted the euro have Stability
Programmes, whereas the other 14 Member States (including the
UK) produce Convergence Programmes. Back
22
Universal mobile technology systems for delivering broadband information
through third generation (G3) mobile communications technology. Back
23
(27280) 6323/06 (27281) 6324/06 (26282) 6325/06 (27283) 6326/06
(27284) 6327/06 (27285) 6328/06: see HC 34-xxii (2005-06), para
13 (15 March 2006), (27224) 5612/06 (27225) 5613/06 (27226) 5614/06
(27227) 5615/06 (27228) 5616/06 (27229) 5617/07: see HC 34-xxiii,
para 23 (29 March 2006) and headnote. Back
24
See headnote. Back
25
(27236) 5366/06 (27237) 5367/06: see HC 34-xxiii (2005-06), para
24 (29 March 2006). Back
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