10UK Excessive Deficit Procedure
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Committee’s assessment |
Politically important |
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Cleared from scrutiny; drawn to the attention of the Treasury Committee |
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Document details |
Recommendation for a Council Decision abrogating Decision 2008/713/EC on the existence of an excessive deficit in the United Kingdom |
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Legal base |
Article 126(12) TFEU; QMV (with the UK not voting) |
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Department |
Treasury |
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Document Number |
(39257), 14828/17, COM(17) 801 |
Summary and Committee’s conclusions
10.1The EU’s Stability and Growth Pact (SGP) requires all Member States to maintain a budget deficit of less than three per cent of GDP, and to keep their government debt below 60 per cent of GDP. In 2008 the EU placed the UK in an Excessive Deficit Procedure (EDP) under the SGP, after the Government’s budget deficit rose above the three per cent threshold.108 Although EU law provides for sanctions where Member States do not correct budgetary imbalances when they are subject to an EDP,109 the UK is exempt from these by virtue of Protocol 15 to the Treaties.
10.2The other Member States confirmed the existence of a persistent budget deficit in the UK in April 2009 and in June 2015, although they recognised that the Government had implemented a fiscal consolidation programme following the financial crisis. The European Commission in November 2017 published its latest economic forecasts, which showed that the UK’s deficit had decreased to 2.3 per cent in 2016–17, and was expected to remain below 3 per cent over the forecast horizon in 2020.
10.3Based on these new statistics, the EU’s Finance Ministers on 5 December 2017 formally abrogated the UK’s Excessive Deficit Procedure. This means the UK is now subject to the “preventative arm” of the Stability and Growth Pact, where the Commission monitors government debt and deficit but no policy recommendations are made unless there is a perceived risk that the SGP’s thresholds could be exceeded.
10.4As this Excessive Deficit Procedure concerned the UK, we consider its abrogation by the Council of political importance and report it to the House. We also draw it to the attention of the Treasury Committee.
Full details of the documents
Recommendation for a Council Decision abrogating Decision 2008/713/EC on the existence of an excessive deficit in the United Kingdom: (39257), 14828/17, COM(17) 801.
Background
Stability and Growth Pact and the Excessive Deficit Procedure
10.5The EU’s Stability and Growth Pact aims to ensure that EU countries pursue sound public finances and coordinate their fiscal policies, avoiding excessive budget deficits or public debt. It is based on Article 126 of the Treaty on the Functioning of the European Union and the related Protocol 12.
10.6The SGP consists of two elements, called “arms”: the preventative arm (the default for any Member State) and the corrective arm (for Member States in breach or at risk of breaching the Pact’s fiscal responsibility thresholds), called the Excessive Deficit Procedure (EDP). The EDP can only be opened by a qualified majority of the Council on a recommendation from the European Commission.110 Where an excessive deficit is established, the Council also addresses recommendations to the Member State in question as to how that deficit should be reduced. If such recommendations are not followed the Council can decide on “sanctions”, including:
- impositing of financial penalties;
- requiring the Member State to make a non-interest bearing deposit with the European Commission until the excessive deficit has been corrected; and
- asking the European Investment Bank to “reconsider its lending policy” towards the Member State in question.
10.7The UK is subject to the EU’s Stability and Growth Pact, but has a special position by virtue of Protocol 15 to the Treaties.111 This exempts the UK from the requirement to avoid excessive government deficits, and instead establishes a looser obligation for the UK to “endeavour to avoid an excessive government deficit”. The Protocol also exempts the UK from any sanctions the Council can impose on other Member States for failure to implement its recommendations to reduce the deficit (see above).
The UK’s Excessive Deficit Procedure
10.8On 8 July 2008, following a recommendation from the Commission, the Council decided that an excessive deficit existed in the United Kingdom, triggered in part by the Government’s announcement in May that year that it was lowering income tax.112 On the same date it issued a Recommendation to the Treasury with a view to bringing the excessive deficit situation to an end by the financial year 2009–10 at the latest. In December 2009, having decided earlier that year that the UK had not taken “effective action”,113 the Council issued a revised Recommendation which envisaged that the deficit would be sufficiently reduced by 2014–15.114
10.9In June 2015 the Council again took the view that the UK had not taken effective action in response to its Recommendation of December 2009, although it recognised that measures had been put in place within the confines imposed by the exceptional economic constraints created by the financial crisis.115 It therefore asked the Government to correct its excessive deficit by financial year 2016–17. Specifically, it suggested the UK should reach a headline deficit of 4.1 per cent of GDP in 2015–16 and 2.7 per cent of GDP by the end of 2017.
10.10In November 2017, the European Commission published its latest economic forecasts. These showed that the UK’s budget deficit had dropped below the reference value of 3 per cent of GDP in 2016–17 and was expected to stay below that value beyond 2020. Although the Commission also found that government debt had reached 86.8 per cent of GDP, it expects it to decline in the coming years. As such, it recommended to the Council that it should close the Excessive Deficit Procedure. On 5 December 2017 the Council accepted the Commission’s Recommendation and formally placed the UK back in the preventative arm of the SGP.116
10.11The Chief Secretary to the Treasury (Elizabeth Truss) submitted an Explanatory Memorandum on the proposal to abrogate the EDP in respect of the UK on 18 December 2017. The Memorandum reiterated that the UK was never potentially subject to sanctions under the EU’s Stability and Growth Pact. As a result of the adoption of the Council Decision, the UK is now in the preventative arm of the SGP alongside all other EU countries except France and Spain.
Previous Committee Reports
Thirty-Fifth Report HC 16–xxxi (2007–08), chapter 13 (15 October 2008); First Report HC 342–i (2015–16), chapter 79 (21 July 2015).
108 Council Decision 2008/713/EC. It was considered by a previous Committee on 15 October 2008.
109 For example financial penalties. See paragraph 10.6 for more information.
110 The Member State in question cannot vote on matters regarding its own Excessive Deficit Procedure.
112 Council Decision 2008/713/EC. It was considered by a previous Committee on 15 October 2008.
114 These Council Recommendations are not made public.
115 Council Decision 2015/1098. Cleared from scrutiny by the previous Committee on 21 July 2015.
116 Council of the EU, “UK’s deficit back below 3% of GDP, Council closes procedure“ (5 December 2017).
15 January 2018