24 Stability and Growth Pact: excessive
deficit procedure
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7955/09
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(b)
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7956/09
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Council Decision establishing, in accordance with Article 104(8) of the Treaty, whether effective action has been taken by the United Kingdom in response to the council recommendation of 8 July 2008 pursuant to article 104(7)
Council Recommendation to the united Kingdom with a view to bringing an end to the situation of an excessive government deficit
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| Legal base | Article 104 EC; —; QMV
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| Deposited in Parliament | 30 April 2009
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| Department | HM Treasury |
| Basis of consideration | EM of 12 May 2009
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| Previous Committee Report | None
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| Discussed in Council | 27 April 2009
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
24.1 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%.[109]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[110]
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. This whole procedure
is essentially the Pact's preventative arm.
24.2 On the other hand, the Pact also endorsed a
dissuasive or corrective arm involving 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.
24.3 The UK entered into the excessive deficit procedure
following a Council Decision on 8 July 2008. At the same time
the Council issued a Recommendation that the Government should
bring the deficit below the 3% reference value by 2009/10 at the
latest and take effective action to this effect by 8 January 2009.[111]
The documents
24.4 These documents were endorsed politically at
an informal ECOFIN on 3-4 April 2009 and were formally adopted
at the GAERC Council on 27 April 2009. The UK did not have a vote
on either of them. The Council Decision, document (a):
- notes that the Pre-Budget Report
presented a downward revision to the medium-term macroeconomic
projections, due to the unexpectedly strong negative fallout from
the global financial crisis;
- states that the stimulus measures adopted at
the Pre-Budget Report, aimed at supporting the economy, were in
line with those envisaged in the European Economic Recovery Plan,
agreed by the European Council on 11 December 2008;[112]
- concludes that the combined effects of the weakening
economic conditions and the discretionary measures implemented
by the Government have led to a deterioration in the UK's budgetary
position projected for 2009/10; and
- states, in consequence, that the Government has
not taken effective action in line with the July 2008 Recommendation.
24.5 The Council Recommendation, document (b):
- notes that special circumstances
are deemed to exist in the case of the United Kingdom, which authorises
the Council to allow the correction of the excessive deficit over
the medium term; and
- on this basis the Government should put an end
to the excessive deficit situation by 2013/14 and strengthen the
foreseen average annual fiscal effort clearly beyond 1% of GDP,
starting in 2010/11.
24.6 At the same time as the Council Decision and
Council Recommendation were adopted for the UK, Council Decisions
and Recommendations were also adopted for France, Greece, Ireland
and Spain, entering these countries into the excessive deficit
procedure — we report on these separately.[113]
The Government's view
24.7 The Economic Secretary to the Treasury (Ian
Pearson) says:
"The financial crisis has caused a steep and
synchronised global downturn. Building on the strategy set out
at the 2008 Pre-Budget Report, the Budget announced further targeted
support for those most affected by the downturn, and significant
further measures to support fiscal consolidation from 2010-11,
when the economy is expected to be recovering and able to support
a reduction in borrowing.
"The Government believes in a prudent interpretation
of the Stability and Growth Pact. The European Council has agreed
that the flexibility provided for in the Stability and Growth
Pact should be used. This is important, not only in allowing space
for fiscal policy to support the economy in the short term, but
also in ensuring an appropriate pace of consolidation over the
medium term. The Council's Recommendations are based on the Commission
services' January 2009 interim forecast, which forecasts higher
GDP growth in 2009 than that which is foreseen by the Budget.
"The Government has taken a judgement on the
appropriate pace of consolidation of the public finances. This
judgement recognises the uncertainty around prospects for the
public finances given the exceptional nature and strength of the
synchronised global downturn, the need to support the economy
through the early stages of the recovery, and the need to deliver
sustainable public finances.
"Budget 2009 forecast Treaty deficit to peak
at 12.6% of GDP in 2009/10, before falling as the economy recovers
and the Government takes further action to ensure sustainability.
By 2013/14, Treaty deficit is forecast to be 5.8% of GDP."
24.8 The Minister also reminds us that the coercive
final stages of the excessive deficit procedure do not apply to
the UK.
Conclusion
24.9 These documents give a further Community
perspective of Government policy in relation to the Growth and
Stability Pact. We have no questions to ask and clear the documents.
However, we note that the Minister implies that the Government
does not expect to meet the deficit target set by the Council
Recommendation and we are sure the Treasury Committee, and Members
more generally, will wish to bear these documents in mind in any
consideration of the fiscal aspects of the current financial problems.
109 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
110
The 16 Member States (Austria, Belgium, Cyprus, Germany, Greece,
Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia and Spain) that have adopted the
euro have Stability Programmes, whereas the other 11 Member States
(including the UK) produce Convergence Programmes. Back
111
(29931) (29932) 11300/08 11302/08: see HC 16-xxxi (2007-08), chapter
13 (15 October 2008). Back
112
(30213) 16097/08): see HC 19-i (2008-09), chapter 4 (10 December
2008) and HC Deb, 20 January 2009, cols 626-49. Back
113
(30574)-(30581) 7897/09-7904/09: see chapter 23 in this Report. Back
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