Brussels to act against UK over size of budget deficit

The European Commission is to take formal proceedings against the UK next week for lax management of public finances in a move likely to herald another confrontation between Brussels and the Treasury.

The decision, due to be adopted next Wednesday, will be an embarrassment to the Chancellor, who chairs the group of European finance ministers, because the UK holds the EU presidency.

Officials in Brussels say the action is inevitable because, for the second consecutive year, the UK has failed to keep its budget deficit below 3 per cent of gross domestic product (GDP), as it is obliged to do.

The UK's failure to control the budget deficit on an annual basis opens it up to a procedure which can end in formal instructions from Brussels for corrective action. On the previous occasion the procedure against the UK for its 2003-04 deficit was stopped almost immediately because the deficit was classified as "exceptional and temporary". However, the Commission will almost certainly not be able to apply that get-out two years running.

Gordon Brown is likely to take a combative stance, particularly since the euro's rule book, the Stability and Growth Pact, was made more flexible after repeated breaches by France and Germany. Moreover, the UK economy is performing well compared with most of those in the eurozone, and the Government says that money is being borrowed to invest in infrastructure.

Joaquin Almunia, the European commissioner for economic affairs, said he intends to bring the UK case to the Commission's meeting next Wednesday. Last month the UK reported provisional estimates showing that, for the financial year 2004-05, it recorded a government deficit of £36.7bn, equivalent to 3.1 per cent of GDP.

The Commission's action will be damaging to the Chancellor as he has faced criticism for changing the Treasury's rules. Mr Brown gave himself more room for manoeuvre by declaring that the current economic cycle would date from 1997, two years earlier than previously expected.

Under article 104.3 of the treaty, the Commission must begin proceedings against the UK by compiling a report, unless it decides that the deficit is "exceptional and temporary, and remains close to the reference value".