79 European Semester 2015: the UK
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny
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| 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
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| 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
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| 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
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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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