Council Opinion

of 12 February 2001

on the updated convergence programme for the United Kingdom, 1999/2000 to 2005/2006

(2001/C 77/02)

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 coordination 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 12 February 2001 the Council examined the updated Convergence programme of the United Kingdom which covers the period 1999/2000 to 2005/2006. The programme envisages a government surplus of 1,1 % of GDP in 2000/2001, a smaller surplus in 2001/2002, balance in 2002/2003 and deficits around 1 % of GDP in the three following years to 2005/2006. The Council considers it appropriate that the programme stresses the securing of macroeconomic stability supported by sound monetary and fiscal policies and continued structural reform.

The programme is built upon a macro-economic framework showing a return of GDP growth from 3 % in 2000 to close to trend - put at 2,5 % - thereafter, which the Council considers to be realistic if cautious. Moreover, the projections in the programme for the public finances are, for reasons of caution, based on a lower assumption for trend growth - namely 2,25 %.

With respect to inflation and interest rates, the United Kingdom continues to fulfil the convergence criterion with some margin. The Council notes that the monetary framework of inflation targeting, with operational responsibility for interest rate changes given to the Bank of England, has been an important condition for securing low inflation expectations. The Council notes that under the current policy framework, the programme projects the UK inflation target to be achieved over the programme period.

The United Kingdom has fulfilled the convergence criterion on the long-term interest rate for some time. This helps confirm the credibility given to the UK's stability oriented framework for macroeconomic policy. It notes that while there are signs of reduced exchange rate volatility, it cannot be concluded that this policy framework has delivered a stable exchange rate. Therefore the Council recommends that the United Kingdom continue with the stability-oriented policies with a view to securing exchange rate stability which, in turn, should help reinforce a stable economic environment.

The general government finances are in 2000/2001, 2001/2002 and 2002/2003 close to balance in underlying terms thus fulfilling the requirements of the stability and growth pact. However, the Council notes that a persistent deficit of 1 % of GDP emerges in the latter years of the plan; larger than the deficits of around 0,5 % of GDP in the two final years of the previous update. This would not be in line with the prescription of "close to balance or surplus" contained in the stability and growth pact. The Council acknowledges that this emerges in the projections as a result of the use of a very cautious trend growth assumption of 2,25 % per annum and as a consequence of increased government investment as a share of GDP within the expenditure totals. Should trend growth be higher, as expected, compliance with the BEPG will require more ambitious budgetary outcomes. While the specific recommendation to the UK in the BEPG advised the UK to pursue a policy of substantially raising the ratio of government fixed investment to GDP, it also recommended to do so within the context of firm control of government expenditure, thereby keeping the underlying position of government finances broadly unchanged. Therefore, the Council encourages the government to be alive to any deterioration in the public finances that would take them away from the terms of the stability and growth pact and, if necessary, to take remedial action.

The Council notes that the government gross debt ratio in the United Kingdom remains below 60 % of GDP and is expected to fall to 40 % in 2000/2001. The Council welcomes the envisaged further reduction of the gross debt ratio to 35 % of GDP by 2004/2005.

The Council welcomes the structural reforms included in the programme. It notes, with approval, that the progress on economic reforms should help to raise productivity levels to those of competitors and secure further improvements in the labour market.

The Council notes that the programme provides both long-term projections of public finances and a description of policies that could be addressed to minimise the impact of ageing, and welcomes the sustainable position which is projected.

(1) OJ L 209, 2.8.1997, p. 1.