European Scrutiny Committee Contents

73 Stability and Growth Pact: excessive deficit procedure



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

Legal base
Document originated6 July 2010
Deposited in Parliament12 July 2010
DepartmentHM Treasury
Basis of considerationEM of 26 July 2010
Previous Committee ReportNone
Discussed in Council13 July 2010
Committee's assessmentPolitically important
Committee's decisionCleared


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."


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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