Brussels delivers fresh attack on Brown's handling of budget deficit

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The Independent Online

Efforts to cut the UK's budget deficit below 3 per cent in 2006-07 are likely to fail, according to another embarrassing critique of the Government's handling of the public finances from the European Commission.

An updated assessment by officials in Brussels says that the Chancellor Gordon Brown may be using over-optimistic growth assumptions when he says that the deficit will be brought quickly below the 3 per cent ceiling.

The document, which will form the basis of an official analysis of UK financial plans, is the latest broadside to be delivered by the Commission against the Treasury.

There is no prospect of Mr Brown changing course and ordering spending cuts or tax increases to satisfy the Commission. But the criticism from Brussels is damaging to the Chancellor at a time when his handling of the economy is coming under growing scrutiny.

Last month, the European Commissioner for Economic and Monetary Affairs, Joaquin Almunia, delivered a formal reprimand to Mr Brown, designating the UK's deficit as "excessive" and ordering it to be "brought below 3 per cent by the forthcoming 2006-07 financial year".

Although the UK is not in the euro and cannot be fined for breaching its rules, the Government signed up to the commitments to avoid an excessive deficit above the 3 per cent limit. In January, Mr Almunia ruled that the UK broke the rules for a second consecutive year in 2004-05 by running a deficit of 3.3 per cent while the economy was growing.

At that point, the Treasury rejected the slap down, saying the deficit would be cut to 2.7 per cent by 2006-07, well below the ceiling.

However, an updated technical assessment of the UK's convergence programme completed last week says that, even after the measures announced by Mr Brown in his pre-Budget report, Britain may still fail to match its obligations.

The document argues that the "budgetary outcome could be worse than projected".

It added: "The projected recovery of the tax-to-GDP ratio, and in particular of corporation tax revenues, presents clear risks, to the extent that it depends on an assumption of positive developments in the financial sector that continue into the next year and are not subsequently reversed."

Given the risks, the document - the basis for a formal assessment of the UK convergence plans - says that British plans "may not be consistent" with the correction of the excessive deficit issued by EU finance ministers.

It said: "Specifically, while for 2006-07 the programme projects the deficit to drop below the reference value to 2.8 per cent of GDP, the Commission services estimate that, even after the discretionary measures announced in the December 2005 Pre-Budget Report, the deficit is likely to remain slightly above 3 per cent."

The document also said that "the budgetary strategy does not seem to provide a sufficient safety margin against breaching the 3 per cent of GDP reference value with normal macroeconomic fluctuations".

The assessment is the latest episode in a protracted war of words between Mr Brown and the European Commission.

The Chancellor argues that policy is based on his own "golden rule" designed to balance the budget over the economic cycle. The deficit has risen because of investment in education and health, the Treasury argues.

It also says 12 of the 25 EU member states, including six of the old 15 countries, are now running deficits designated as "excessive" by the Commission.

Despite its criticism, the Commission also acknowledges that, "over the last decade, United Kingdom macroeconomic performance has been impressive in terms of improved stability, growth, low inflation and labour market out turns".

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