73 Stability and Growth Pact: excessive
deficit procedure
| (31785)
12009/10
SEC (10) 880
| Commission Communication: Assessment of the action taken by the United Kingdom in response to the Council Recommendations of 2 December 2009 with a view to bringing an end to the situation of excessive government deficit
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| Legal base | —
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| Document originated | 6 July 2010
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| Deposited in Parliament | 12 July 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 26 July 2010
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| Previous Committee Report | None
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| Discussed in Council | 13 July 2010
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
73.1 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%.[314]
Each year the Council of Economic and Finance Ministers (ECOFIN)
issues an Opinion on the updated stability or convergence programme
of each Member State.[315]
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.
73.2 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 126 TFEU (formerly 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 — and they are required
merely to "endeavour" to avoid an excessive deficit).
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.
73.3 The UK was put into the excessive deficit procedure in July
2008 and received recommendations proposed by the Commission and
endorsed by Council Decision to reduce its deficit and received
a further round of revised recommendations in April 2009.[316]
On 2 December 2009 the Council adopted a further excessive deficit
procedure Recommendation for the UK. This Recommendation:
- asked the Government to put an end to the excessive deficit
by financial year 2014/15, bringing the general government deficit
below 3% of GDP in a credible and sustainable manner by taking
action in a medium term framework;
- recommended, specifically, that the Government
should implement the fiscal measures planned in its 2009 Budget
during 2009/10 and start consolidation in 2010/11 in order to
bring the deficit below the reference value by 2014/15;
- recommended, therefore, that the Government should
make an average annual fiscal effort of 1.75% of GDP between 2010/11
and 2014/15 (which would also contribute to bringing the government
gross debt ratio onto a satisfactory declining path);
- recommended the Government to seize opportunities
beyond the fiscal effort, including from better economic conditions,
to accelerate the reduction of the gross debt ratio back towards
the reference value;
- recommended that the UK's revised fiscal framework
should limit risks to correcting the excessive deficit and underpin
sustained budgetary consolidation thereafter; and
- established a deadline of 2 June 2010 for the
Government to implement the fiscal measures as planned in the
2009 Budget and to outline in some detail the consolidation strategy
that will be necessary to progress towards the correction of the
excessive deficit. [317]
The document
73.4 In this Communication the Commission presents
an assessment of the action taken by the UK in response to the
Recommendation of 2 December 2009, first commenting that most
Member States currently have general government deficits above
the 3% of GDP reference value required by the Stability and Growth
Pact. The assessment takes account of economic developments compared
to the Commission's autumn 2009 forecast and of whether the UK
has achieved the annual improvement of its cyclically adjusted
balance (net of one-off and other temporary measures) initially
recommended by the Council. Because of the general election and
the subsequent presentation of the new Government's Budget on
22 June 2010 the Commission assessed the UK on 6 July 2010, in
order to take these developments into account.
73.5 In its assessment of action taken the Commission
says that:
- in financial year 2009/10 output
contracted by 0.5% more than had been expected in autumn 2009,
in part due to a negative impact from poor weather;
- for 2010/11, however, the spring 2010 Commission
forecast projected real output growth of 1.75%, 0.5% higher than
the autumn 2009 forecast, primarily reflecting prospects for positive
growth in household consumption expenditure;
- the forecast for consumer price inflation was
revised upwards, contributing to a 0.75% increase in the projection
for nominal GDP growth in 2010/11;
- the spring 2010 forecast confirmed the autumn
2009 projection of an expansion in real activity in 2011/12 of
2.25%;
- the spring 2010 forecast projected a reduction
in the Government deficit from an estimated 12.25% of GDP in 2009/10
to 11.5% in 2010/11;
- it estimated that the structural budget deficit
in 2010/11 would decline by only 0.25% of GDP from 2009/10 reflecting
low revenue expenditure as a result of continued weak activity
in the financial and housing markets which had hitherto been major
sources of revenue;
- since the release of the Commission's spring
2010 forecast, the new Government has established an Office for
Budget Responsibility that "will provide independent forecasts
for public finances and the economy to inform fiscal policy decisions"
and which will additionally assess the likelihood of the Government's
fiscal policy mandate being achieved;
- additionally a significantly downwardly revised
estimate of the Government deficit for 2009/10 has been published
giving a figure of 11.3% of GDP, 1.75% lower than the autumn 2009
projection and almost 1% lower than the spring 2010 forecast (though
still one of the highest deficits in the EU);
- the new Government has announced immediate spending
cuts that will reduce the 2010/11 deficit by 0.4% of GDP (and
in 2011/12 will compensate for non-implementation of the previous
Government's planned increase in National Insurance contributions),
the cancellation of a number of projects costing 0.1% of GDP and
the suspension of projects which would have cost 0.6% of GDP over
their lifetime;
- the June 2010 Budget contained substantial additional
fiscal consolidation measures estimated by the Office for Budget
Responsibility to reduce the Government deficit by an additional
0.5% of GDP in 2010/11, 1.0% of GDP in 2011/12, 1.5% of GDP in
2012/13, and 2.25% of GDP by 2014/15;
- taking account of these and other measures already
announced in the March 2010 Budget, the Office for Budget Responsibility
projects a reduction in the deficit from 11.3% of GDP in 2009/10
to 10.25% in 2010/11 and 7.75% in 2011/12;
- by the Council's 2014/15 deadline the deficit
is projected by the Office for Budget Responsibility to reach
2.25% of GDP, compared to 4.25% of GDP based on the pre-election
March 2010 Budget announcement;
- the Government debt ratio is plausibly projected
by the Office for Budget Responsibility to peak at around 85%
of GDP in 2012/13, before falling to almost 80% of GDP in 2015/16;
- the new measures announced in June 2010 will
contribute to an improvement in the estimated structural budget
balance, as re-estimated using the commonly agreed methodology,
in 2010/11 by 0.75% of GDP and between 2010/11 and 2014/15 by
an annual average of around 1.5% of GDP;
- this is slightly lower than the 1.75% recommended
by the Council but this is nevertheless appropriate given the
significantly lower-than-expected budget deficit in 2009/10 (11.3%
of GDP compared to 13.0% in the autumn 2009 forecast) and is therefore
consistent with reducing the headline deficit to well below the
reference value by 2014/15;
- the June 2010 macroeconomic projections independently
produced by the Office for Budget Responsibility are significantly
more in line with the Commission services' spring 2010 forecast
for 2010/11 and 2011/12 than those set out in the UK Convergence
Programme or the March Budget and with current consensus estimates
beyond these to 2014;
- that output growth, however, may be weaker than
expected (possibly as a result of the stronger impact on demand
of the additional measures and possibly from a weaker external
environment);
- if output growth did turn out weaker than expected,
this could affect public finances;
- given their size, the implementation of the planned
spending cuts will be a challenge; and
- if these cuts are not achieved, this will reduce
the likelihood of compliance with the Council Recommendation unless
compensatory measures are taken.
73.6 The Commission concludes that:
- the Government has announced
a new fiscal mandate "to achieve cyclically-adjusted current
(that is net of capital spending) balance by the end of the rolling,
five-year forecast period", complemented by a target requiring
a reduction of net debt as a percentage of GDP by 2015/16;
- this new mandate is a clear improvement over
the previous golden rule given its clearly identifiable end point
and reduced scope for manipulation. Although the definitions of
the fiscal targets are not directly comparable (the deficit target
does not take explicit account of capital spending and the debt
target refers to net, rather than gross, debt) the new approach
should contribute to greater consistency with the EU framework;
- the June 2010 Budget measures will further increase
the size of fiscal consolidation in 2010/11 and significantly
strengthen the planned pace of deficit reduction over the medium-term;
- publication of the Spending Review on 20 October
2010, providing detailed departmental spending limits to back-up
the overall spending targets for the entire term of the present
Parliament, will be another important step in the efforts of the
authorities to restore sustainable public finances in the UK;
- the new Office for Budget Responsibility and
the new fiscal mandate announced by the Government should however
contribute to improve the fiscal framework and limit the risks
to the adjustment;
- while risks are substantial, at this stage the
UK appears to be on track to achieve a deficit below 3% of GDP
by the recommended deadline, with the planned deficit of 2.25%
of GDP in 2014/15 providing a buffer against slippages;
- overall the UK has taken action representing
adequate process towards the correction of its excessive deficit
within the Council's time limits (standard wording);
- thus the Commission considers that no further
steps in the excessive deficit procedure are needed at present;
and
- it will continue to closely monitor budgetary
developments in the UK in accordance with the Treaty and Stability
and Growth Pact.
The Government's view
73.7 The Financial Secretary to the Treasury (Mr
Mark Hoban) tells us that the Government believes that tackling
the deficit and continuing to ensure economic recovery is the
most urgent issue facing the UK. He comments further that:
"The Government has created a new and independent
OBR. Fiscal policy decisions will be based on independent forecasts
for the economy and public finances, prepared by the OBR. This
reform introduces independence, greater transparency and credibility
to the fiscal framework.
"The June Budget
set out a comprehensive set of policies to bring the public finances
back under control by setting (i) additional consolidation plans
to restore the public finances to a sustainable path, and (ii)
a clear and measurable fiscal mandate to guide fiscal policy decisions
over the medium term.
"The Budget announced the Government's forward-looking
fiscal mandate to achieve cyclically-adjusted current balance
by the end of the rolling, five-year forecast period, supplemented
by a target for public sector net debt as a percentage of GDP
to be falling at a fixed date of 2015/16. These targets will guide
fiscal policy decisions over the medium term, ensuring that the
Government sets plans consistent with accelerating the reduction
in the structural deficit so that debt as a percentage of GDP
is restored to a sustainable, downward path. The Government welcomes
the Commission's acknowledgment that its new fiscal mandate is
a clear improvement over the previous Golden Rule.
"The June Budget delivered additional consolidation
on top of the plans set in the March Budget for the period to
2014/15, predominantly through spending reductions of £40
billion for the period to 2014/15, on top of the plans set out
in the March Budget. This results in plans for total consolidation
of £128 billion per year by 2015/16.
"The greatest contribution to the Government's
fiscal consolidation will come from public spending reductions,
rather than tax increases. This approach is consistent with OECD
and IMF research, which suggests that fiscal consolidation efforts
that largely rely on spending restraint promote growth. The Government
welcomes the Commission's assessment that no further steps in
EDP are necessary at present.
"As a result of the action the Government is
taking, the OBR projects that public sector net borrowing will
decline from its peak of 11.0% of GDP in 2009/10 to 1.1% of GDP
in 2015/16. The Treaty deficit is projected to fall to 2.2% in
2014/15 and the Treaty debt ration will be set on a downward path
from 2013/14.
"The Budget announced the path of public spending
for the period until 2015/16 and the forthcoming Spending Review
on 20 October 2010. An engagement programme has been launched,
giving public sector workers and members of the public an opportunity
to feed in their ideas for how to reduce spending while protecting
the quality of public services."
Conclusion
73.8 We are grateful to the Minister for his full
description of the Commission's Communication. We have no questions
to raise and clear the document.
314 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
315
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
316
(29931) 11300/08 (29932) 11302/08: see HC 16-xxxi (2007-08), chapter
13 (15 October 2008) and (30582) 7955/09 (30583) 7956/09: see
HC 19-xviii (2008-09), chapter 24 (3 June 2009). Back
317
(31396) 15765/09: see HC 5-xviii (2009-10), chapter 8 (7 April
2010). Back
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