Brussels warns Brown on public finance deficit

The British government must tackle its public finance deficit, the European Union's economic commissioner said yesterday.

Joaquin Almunia said that "current policies" were likely to keep the deficit above the Maastricht Treaty limit of 3 per cent this year and in 2006.

Although Brussels has no power to sanction the UK as a non-member of the euro, the Commission will officially reprimand Britain at a meeting in January. "We will ask for some fiscal effort towards consolidation from the authorities as we will do from the other 11 member states [in excessive deficit]," he said in an interview in London.

He also singled out Portugal Greece, Germany and Italy and six of the new member states for excessive deficits. "Current policies are expected to be insufficient to bring the deficit below the [Maastricht] value by the end of the forecast horizon," he said. "However the correction is within reach in these countries if additional measures are taken.

The EU economy is set to grow 1.5 per cent this year before rebounding to 2.1 per cent in 2006 and 2.4 per cent in 2007. The corresponding figures for the euro zone are 1.3 per cent, 1.9 per cent and 2.1 per cent.

Mr Almunia backed an expected rise in euro area interest rates next week, saying the current policy stance was "not putting the brakes on the euro economy".

He highlighted concerns over soaring house prices in Spain, France and Ireland that contrasted with lacklustre property markets in countries such as Germany. "The perceived wealth effects from rising house prices could boost consumption expenditure while a correction of the over-valuation of housing could work in the opposite direction," he said.

He admitted that it created a problem for the European Central Bank, which he said had to set a "one size fits all" interest rate. "It is a reason for concern and we continue to analyse this - how the same monetary policy is creating different inflation situations in different countries because of structural issues or attitudes of consumers," he said. In the absence of a national interest rate, governments should look to the "tool box" for fiscal measures, he said.

"We have the same interest rate for Germany where house price inflation is stable while in Ireland and Spain we have economic growth and asset price inflation."