Presenting Britain's strategy for meeting targets set out in the Maastricht treaty, Kenneth Clarke reaffirmed his aim to balance the budget in the medium term. By 1997 the plan predicts a public sector borrowing requirement of 3.75 per cent of GDP, above the 3 per cent target set by the treaty.
But the EC finance ministers said that 'a more vigorous budgetary adjustment may be neccessary, especially in the first years, if the pace of economic recovery is slower than expected'. This year the deficit is expected to be 8 per cent of GDP.
The verdict may be useful to Mr Clarke in enforcing discipline within the Cabinet. 'I could have written it myself,' he said. But some officials said Britain had been privately criticised for claiming that its deficit was mainly caused by recession. They want tougher action to deal with what they consider a structural problem.
Concern over Europe's rising budget deficits was the main focus of EC finance ministers' efforts. In their semi-annual surveillance report they said: 'The best contribution that budgetary policy can now make to recovery is to announce credible, medium term measures to reduce fiscal imbalances.' This is the toughest language they have used and contrasts with a previous emphasis on using fiscal policy to reverse recession.
The toughness reflects growing alarm among bankers at the potential damage to Europe's financial system. A report from the committee of governors of the central banks of the EC warns: 'The impression that public finances are drifting away from the reference values established in the treaty also risks undermining the credibility of the EMU process.'
This was backed up by a warning from the EC's own economic policy committee. It adds: 'In certain cases the severity of the adjustment required is such that expenditure containment alone will not be sufficient to ensure the necessary improvement. In these cases tax increases are probably unavoidable.'