Documents considered by the Committee on 21 July 2015 - European Scrutiny Contents


79 European Semester 2015: the UK

Committee's assessment Politically important
Committee's decisionCleared from scrutiny
Document details(a) Draft Council Recommendation about the UK's excessive government deficit (b) Draft Council Recommendation about the UK's National Reform and Convergence Programmes for 2015 (c) Draft Council Recommendation about the UK's excessive government deficit
Legal base(a) Article 126(7) TFEU; —; QMV of all Member States bar the UK; (b) Article 121(2) and 148(4) TFEU; —; QMV; (c) Article 126(8) TFEU; —; QMV of all Member States bar the UK
Department

Document numbers

HM Treasury

(a) (36859), 8908/15 + ADD 1, COM(15) 245;

(b) (36873), 8943/15, COM(15) 277; (c) (36878), 8976/15, COM(15) 244

Summary and Committee's conclusions

79.1 The annual European Semester is an EU-level system for coordinating and assessing Member States' structural reforms and fiscal/budgetary policy and for monitoring and addressing macroeconomic imbalances. On the previous Committee's recommendation the four documents for the first stage of the 2015 European Semester, the Annual Growth Survey, the draft Joint Employment Report, the EU Autumn Forecast, an economic report, and the Alert Mechanism Report, the first stage of the Macroeconomic Imbalance Procedure, were debated in European Committee B on 4 March, prior to their consideration by the European Council on 19-20 March.[ 519]

79.2 In March, as the second stage of the 2015 European Semester, the Commission published its Communication about an assessment of growth challenges, prevention and correction of macroeconomic imbalances, and results of in-depth reviews of Member State economies. It was accompanied by Commission Staff Working Documents giving Country Reports for all Member States (including the UK) apart from Greece. The Commission Staff Working Document for the UK comprised an assessment of the general UK economic situation and its outlook, an in-depth review of possible macroeconomic imbalances identified in the Alert Mechanism Report and a statement of the UK progress regarding the completion of 2014 Country Specific Recommendations. The Commission's view was that the UK was experiencing macroeconomic imbalances, which required policy action and monitoring.

79.3 The Commission also published in March a draft Council Recommendation on broad guidelines for economic policies of Member States and the EU and a draft Council Decision on guidelines for the employment policies of Member states and the EU.

79.4 These four documents, together with a package of recommended Country Specific Recommendations reflecting the analysis in the Country Reports and material submitted by Member States in their National Reform Plans, which the Commission was expected to present in May, were to be considered by the June European Council. The previous Committee recommended that these documents be debated in European Committee B together with, once available, the Commission's draft 2015 Country Specific Recommendations. It suggested that these debates should take place before the documents were considered at the June European Council.[ 520]

79.5 The Stability and Growth Pact is an EU agreement to ensure that Member States pursue sound public finances and coordinate their fiscal policies. In July 2008 the Council placed the UK in the Pact's corrective arm, the excessive deficit procedure. In December 2009 it revised its Recommendations to the UK.[ 521]

79.6 In May the Commission published the 2015 Country Specific Recommendations for the UK and also two draft Council Recommendations about revising the UK's excessive deficit procedure, in the light of the Commission's assessment that the UK had not taken effective action under the procedure. The UK's 2015 Country Specific Recommendations were endorsed by the European Council on 25-26 June and the two draft Council Recommendations were adopted by the ECOFIN Council on 19 June.

79.7 In commenting on the three new documents the Government has given us its somewhat upbeat view of the Commission's draft Recommendations and implied criticisms of UK policies.

79.8 In normal circumstances we would recommend the UK's 2015 Country Specific Recommendations for inclusion in the European Semester debate, as suggested by the predecessor Committee. We would also recommend, given their close connection to the Commission's views of the UK in its European Semester assessments, the two draft Council Recommendations for inclusion in that debate.

79.9 However, consideration of these documents, together with the Commission Communication reviewing Member States' macroeconomic situations and the accompanying UK Country Report, together with the economic and employment policy guidelines, has now been completed by the Council and the European Council and the 2015 European Semester process has been completed. We think therefore that there is little purpose now in debating these documents and accordingly clear the new documents from scrutiny and rescind the predecessor Committee's debate recommendations on the earlier documents.

79.10 Nevertheless, we note that we will wish to revert to the normal pattern of debates on the documents for the 2016 European Semester.

Full details of the documents: (a) Draft Council Recommendation with a view to bringing an end to the situation of an excessive government deficit in the United Kingdom: (36859), 8908/15 + ADD 1, COM(15) 245; (b) Draft Council Recommendation on the National Reform Programme of the United Kingdom and delivering a Council opinion on the 2015 Convergence Programme of the United Kingdom: (36873), 8943/15, COM(15) 277; (c) Draft Council Decision establishing that no effective action has been taken by the United Kingdom in response to the Council Recommendation of 2 December 2009: (36878), 8976/15, COM(15) 244.

Background

79.11 The European Semester is an EU-level framework for coordinating and assessing Member States' structural reforms and fiscal/budgetary policy and for monitoring and addressing macroeconomic imbalances. It attempts to exploit the synergies between these policy areas by aligning their reporting cycles, which would tie together consideration of National Reform Programmes (reports on progress and plans on structural reforms, under the Europe 2020 Strategy) and Stability and Convergence Programmes (reports on fiscal policy, under the Stability and Growth Pact).

79.12 The annual European Semester cycle begins with an Annual Growth Survey (AGS) by the Commission, followed by a series of overarching and country specific documents from the Commission and culminating in examination of the overall and country-specific situations by the European Council. The AGS is accompanied by a draft Joint Employment Report which is based on employment and social developments in the European Economic Forecast, commonly referred to as the EU Autumn Forecast. An element of the European Semester process is the Macroeconomic Imbalances Procedure (MIP). The MIP is a mechanism designed to identify and, if necessary, correct harmful macroeconomic imbalances across the EU, which were a key cause of the current sovereign debt crisis. The first stage of the MIP is publication by the Commission of an annual Alert Mechanism Report (AMR).

79.13 On the previous Committee's recommendation the four documents for the first stage of the 2015 European Semester, the AGS, the draft Joint Employment Report, the EU Autumn Forecast and the AMR, were debated in European Committee B on 4 March, prior to their consideration by the European Council on 19-20 March.[ 522]

79.14 As the second stage of the 2015 European Semester the Commission published its Communication about an assessment of growth challenges, prevention and correction of macroeconomic imbalances, and results of in-depth reviews. It was accompanied by Commission Staff Working Documents giving Country Reports for all Member States (including the UK) apart from Greece. These reports contained an in-depth review of macroeconomic imbalances (where applicable), and an assessment of Member State progress in addressing their 2014 Country Specific Recommendations (CSRs), approved by the June 2014 European Council. These documents, together with a package of recommended CSRs reflecting the analysis in the Country Reports and material submitted by Member States in their National Reform Plans, which the Commission was expected to present in May, were to be considered by the June European Council.

79.15 The accompanying Commission Staff Working Document, entitled Country Report United Kingdom 2015, comprised an assessment of the general UK economic situation and its outlook, the in-depth reviews of possible macroeconomic imbalances identified in the AMR and a statement of the UK progress regarding the completion of 2014 CSRs. The Commission's view was that the UK was experiencing macroeconomic imbalances, which required policy action and monitoring — this was the lowest of the five categories of imbalances the Commission made use of in its Communication.

79.16 The Commission also published in March a draft Council Recommendation on broad guidelines for economic policies of Member States and the EU and a draft Council Decision on guidelines for the employment policies of Member states and the EU.

79.17 The predecessor Committee recommended that these four documents be debated in European Committee B together with, once available, the Commission's draft 2015 CSRs. It suggested that these debates should take place before the documents were considered at the June European Council and urged the Government to schedule the debates as soon as possible in this Parliament. It added that in the debates Members might discuss the Commission's overall and Member State specific assessments of economic, particularly macroeconomic, issues, saying that the Commission's UK Country Report would be of particular interest.[ 523]

79.18 The Stability and Growth Pact (SGP) is an EU agreement to ensure that Member States pursue sound public finances and coordinate their fiscal policies. Some of the SGP's rules aim to prevent fiscal policies being potentially problematic, while others are intended to correct excessive budget deficits or excessive public debt burdens. It involves fiscal monitoring, against a number of criteria, of Member States by the Commission and the Council and the issuing of yearly recommendations for policy actions to ensure full compliance with the SGP. It has both a preventative and a dissuasive (corrective) arm, the latter being known as the excessive deficit procedure.

79.19 In July 2008 the Council placed the UK in the excessive deficit procedure. In December 2009 it revised its Recommendations to the UK.[ 524]

The documents

79.20 The Commission's recommended CSRs for each Member State are introduced by a preamble. The preamble to the UK draft CSRs, document (b):

·  notes the previous decisions taken as part of the European Semester, and recalls the conclusions of the UK's 2015 Country Report;

·  notes that the UK is in the corrective arm of the SGP, and the draft Council Recommendation, document (a), to correct the excessive deficit by 2016-17;

·  says that a high level of household debt has been identified as a possible macroeconomic imbalance, and that planning reforms have been undertaken but are unlikely to have a short-term impact;

·  mentions that the UK labour market has performed well, but points to challenges around low work intensity and female and youth employment; and

·  suggests boosting investment is a key challenge and that the UK should ensure the business tax system is pro-investment.

79.21 In light of the preamble, the Commission suggests the following recommendations to the UK for the period 2015-16:

·  ensure effective action under the excessive deficit procedure and endeavour to correct the excessive deficit in a durable manner by 2016-17, in particular by prioritising capital expenditure;

·  take further steps to boost supply in the housing sector, including by implementing the reforms of the national planning policy framework;

·  address skills mismatches by increasing employers' engagement in the delivery of apprenticeships;

·  take action to further reduce the number of young people with low basic skills; and

·  further improve the availability of affordable, high-quality, full-time childcare.

79.22 In the recitals to the Commission's draft Council Decision that the UK has taken no effective action in response to the December 2009 Council Recommendation under the excessive deficit procedure, document (c), the points made are that:

·  in December 2009 the Council had recommended that the UK bring the general government deficit below the SGP reference level of 3% of Gross Domestic Product (GDP) by 2014/15;

·  it also specified that the Government should implement the fiscal measures in 2009/10 as planned in the 2009 Budget, ensure an average annual fiscal effort of 1.75% of GDP between 2010/11 and 2014/15, in order to contribute to bringing the general government gross debt ratio back on a declining path and accelerate the reduction of the deficit if economic or budgetary conditions turned out better than expected;

·  the budget deficit was 5.2% of GDP in 2014/15, above the 3% reference level;

·  the average annual reduction in the structural deficit was 0.7% of GDP between 2010/11 and 2014/15;

·  when adjusted for the impact of revisions to potential GDP growth, and revenue developments compared to the expected relationship between revenue and GDP growth, the adjusted average annual improvement in the structural deficit is 1.1%, which is below the 1.75% target;

·  the discretionary fiscal consolidation measures set out between the Pre-Budget Report 2009 and the 2014 Autumn Statement amounts to 3.5% of GDP between 2010/11 and 2014/15;

·  despite the implemented fiscal consolidation plan, the UK government deficit did not fall below 3% in 2014/15, and the UK did not achieve an average annual fiscal effort of 1.75% of GDP; and

·  overall the UK response to the Council Recommendation has not been sufficient.

79.23 Given the Commission's suggested finding that the UK has not responded adequately to the 2009 Council Recommendation the Council would need to adopt a new Recommendation that the UK reduce the government deficit below 3% of GDP within a given period, which would also need to establish a deadline of six months for the Government to demonstrate it is taking effective action and need to be consistent with a minimum annual improvement in the structural deficit of 0.5% of GDP. Accordingly the new Council Recommendation, document (a), the Commission proposes would suggest that the UK should:

·  reach a headline deficit of 4.1% of GDP in 2015/16 and 2.7% in 2016/17 at the latest, which should be consistent with delivering an improvement in the structural balance of 0.5% of GDP in 2015/16 and 1.1% in 2016/17, based on the Commission's updated 2015 Spring Forecast;

·  fully implement the consolidation measures incorporated into all Budgets and Autumn Statements up and including the 2015 Budget to achieve the recommended structural effort, with any modifications being fiscally-neutral in relation to current plans;

·  further detail the expenditure cuts in the forthcoming spending Review, these being necessary to ensure correction of the excessive deficit by 2016/17;

·  accelerate the reduction of the headline deficit in 2015/16 and 2016/17 if economic, financial or budgetary conditions turn out better than currently expected — budgetary consolidation measures should secure a lasting improvement in the general government structural balance in a growth-friendly manner and, in particular further cuts in capital expenditure should be avoided;

·  comply with the obligation to set out a medium term objective as laid down by the SGP; and

·  implement the planned reforms of increasing the state pension age in order to contribute towards strengthening the long-term sustainability of the public finances.

79.24 The new Council Recommendation would also:

·  establish a six month deadline for the UK to take effective action in response to the Council Recommendation and to report in detail the consolidation strategy envisaged to achieve the required targets; and

·  comment that, to ensure the success of the fiscal consolidation strategy, it would also to back that consolidation with comprehensive structural reforms in line with the proposed CSRs for the UK, particularly those related to the preventative arm of the MIP.

The Government's view

79.25 In his Explanatory Memorandum of 3 June 2015[ 525] the Financial Secretary to the Treasury (Mr David Gauke) first says the Government notes the Commission's SGP draft Council Decision, document (c), and draft Council Recommendation, document (a), the latter of which is referenced in the first draft Recommendation in the UK draft SCRs, document (b). He continues that:

·  over the period of the Commission's assessment described in the preamble to the draft Council Decision the UK deficit has been cut by half from its post-war peak while delivering the strongest growth of any major European economy last year and the latest IMF data shows that the Government reduced the structural deficit by more than half between 2010 and 2013, a larger absolute reduction than any other country in the G7; and

·  the Commission's draft Council Recommendation that the UK reduce the deficit below 3% of GDP by 2016/17 is in line with plans as set out in the 2015 Budget and the requirement of Member States to avoid excessive government deficits does not apply to the UK unless it adopts the euro, rather it should "endeavour to avoid an excessive deficit".

79.26 Turning to the other UK draft CSRs the Minister says, in relation to CSR 2 about taking further steps to boost supply in the housing sector, including by implementing the reforms of the National Policy Planning Framework, that:

·  the housing market is recovering from the severe impact of the financial crisis;

·  in 2014 there were 137,000 housing starts in England — a 10% increase on 2013;

·  annual housing starts and planning approvals are at seven year highs;

·  the Government is committed to making the vital reforms needed to address the structural issues in the housing market;

·  this includes measures to support home ownership, increase housing supply and reform the planning system;

·  the Commission's draft is in line with the Government's priorities in this area; and

·  it should be noted that housing and planning is a devolved matter and, although there is a shared commitment to boosting housing supply, including action on reviewing national planning frameworks, that this is being taken forward in different ways and with different emphasis in each devolved administration, as outlined in the UK National Reform Programme.

79.27 On CSR 3, about addressing skills mismatches by increasing employer engagement in apprenticeships, taking further action to reduce the number of people with low skills and further improving the availability of affordable, high-quality and full time childcare, the Minister says that:

·  the Commission rightly highlights how important it is that young people can acquire the skills that they, and employers and the wider economy need;

·  in addition to the 2.2 million new apprenticeships delivered over the last five years, the Government is committed to delivering three million more in the next five years;

·  on basic skills, young people over 19 who have left full-time education without an English and Maths qualification are eligible for free training to obtain these;

·  devolved administrations have introduced guarantees of education, training or employment for targeted groups;

·  on childcare, the Government is committed to providing 30 hours of free childcare to working parents of three and four year-old children; and

·  devolved administrations also have responsibility for childcare policy, and this varies across jurisdictions.

79.28 Finally, the Minister reiterates that the UK is not subject to sanctions under the SGP nor at any stage of the European Semester.

Previous Committee Reports

None.


519   (36530), 15953/14 + ADD 1, (36542), 15985/14, (36543), 15988/14 + ADD 1, (36560),-: Twenty-seventh Report HC 219-xxvi (2014-15), chapter 2 (17 December 2014), Twenty-eighth Report HC 219-xxvii (2014-15), chapter 3 (7 January 2015) and Gen Co Debs, European Committee B, 4 March 2015, cols. 3-30. Back

520   (36690), 6632/15; (36691), -, SWD(15) 47: see Thirty-sixth Report HC 219-xxxv (2014-15), chapter 2 (11 March 2015); (36712) 6813/15 + ADD 1: see Thirty-seventh Report HC 219-xxxvi (2014-15), chapter 2 (18 March 20150; (36703) 6144/15 + ADD 1: see Thirty-ninth Report HC 219-xxxvii (2014-15), chapter 2 (24 March 2015). Back

521   (31396), 15765/09: see Nineteenth Report HC 5-xviii (2009-10), chapter 8 (7 April 2010). Back

522   Op cit. Back

523   Op cit. Back

524   Op cit. Back

525   This Explanatory Memorandum is also concerned with the Commission's Communication on the 2015 European Semester CSRs: see (36843) 8886/15 in chapter 78 of this Report.  Back


 
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Prepared 30 July 2015