32004A0219(07)

Council opinion

of 10 February 2004

on the updated Convergence Programme of the United Kingdom, 2002-03 to 2008-09

(2004/C 43/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies(1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission, after consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 10 February 2004, the Council examined the United Kingdom's updated Convergence Programme, which covers the period financial years 2002-03 to 2008-09. The updated programme largely complies with the data requirements of the revised "code of conduct" on the content and format of stability and convergence programmes.

The budgetary strategy underlying the update continues to be the maintenance of sustainable public finances as part of an integrated strategy for achieving high and stable economic growth. The projections set out in the update would increase, over the programme period, both the revenue and the expenditure ratios to GDP with a slight rise in the modest debt-to-GDP ratio. A significant programme of public investment is being implemented.

The programme draws a distinction between its central macroeconomic projection and the GDP growth rates used for public finance projections; for caution, the latter are set one quarter percentage point per annum lower. The update centrally projects real GDP growth to accelerate from an estimated 2 % in 2003 to 3 to 3,5 % in 2004 and 2005. In 2006, the final year for which detailed macroeconomic projections are provided, growth falls back to trend at 2,5 to 3 % and the present negative output gap is expected to close. Underlying trend employment growth is estimated at 0,2 % per annum. HICP inflation is forecast to rise gradually from 1,5 % in 2003 to 2 %, the recently recalibrated inflation target, in 2006. The central macroeconomic scenario is close to the Commission's evaluation and the slightly lower growth rates used for the public finance projections in the update even closer. However, projected growth in the latter is still slightly higher than forecast by the Commission in the short term.

The update projects a general government deficit of 2,6 % of GDP in 2004-05, compared to an expected deficit of 3,3 % in 2003-04. For 2005-06, 2006-07, 2007-08 and 2008-09, the projections are for headline deficits of 2,4 %, 2,1 %, 2,0 % and 1,8 % of GDP respectively. In cyclically-adjusted terms, the update projects an improvement in the deficit between 2003-04 and 2004-05 of 0,4 percentage points to 2,0 % of GDP. In the following years, the deficits amount to 2,2 %, 2,1 %, 2,0 % and 1,8 % of GDP. Commission calculations of the cyclically-adjusted changes, according to the commonly-agreed methodology, are similar. The gross debt ratio is projected to rise gradually, from 37,9 % of GDP in 2002-03 to stabilise at 41,5 % in 2008-09.

The budgetary stance in the programme is expected to rise above the 3 % of GDP reference value on a financial year basis in 2003-04. If confirmed, this could constitute an excessive deficit. Looking ahead, the projection includes a strong increase in the revenue-to-GDP ratio. Despite an expected narrowing of the cyclically-adjusted deficit to 1,8 % in 2008-09, in no year of the update period does it seem to provide a sufficient safety margin according to Commission calculations against rising above the 3 % of GDP reference value with normal macroeconomic fluctuations. According to the budgetary projections in the update, the Stability and Growth Pact's medium-term objective of a budgetary position of close to balance or in surplus will not be achieved within the programme period. At the same time, however, it should be noted that the projected balances reflect to a significant extent the implementation of an intensive programme of public investment, bringing the general government net investment-to-GDP ratio up from 1,1 % in 2002-03 to 2,2 % in 2005-06, compared to an EU-average of 1,5 % in 2002. Moreover the gross debt to GDP ratio is well below 60 % of GDP over the programme period. The United Kingdom authorities are themselves committed to keeping net debt below 40 % of GDP.

Long term sustainability of public finances is constantly monitored and represents a key commitment in the UK's fiscal policy. A prudent budgetary position kept in the medium term would help avoid a risk of emerging budget imbalances in the context of ageing populations. On the basis of current policies, the United Kingdom seems to be on a sustainable path but some risk due to an ageing population may emerge in the long run. Indeed, quantitative indicators estimated by the Commission show an upward trend in the debt-to-GDP ratio in the long run. An additional element to be considered is that much of the financial sustainability of the pension system depends on the performance of private pension providers, particularly if private provision produces significantly less than the anticipated coverage or level of pensions. Nevertheless, the low level of debt and the relatively low level of taxation give room for manoeuvre.

In the 2003 Broad Economic Policy Guidelines, the UK authorities are recommended to "ensure that the public services associated with the announced increases in public expenditure (including investment in the transport infrastructure) are delivered efficiently and with a view to ensuring cost-effectiveness". The economic policies as reflected in the updated programme are broadly consistent with the recommendations in the Broad Economic Policy Guidelines, specifically those with budgetary implications.

(1) OJ L209, 2.8.1997