EU tells Brown to cut 'excessive' budget deficit to below 3 per cent

Britain was told yesterday to cut its "excessive" budget deficit over the next year to below 3 per cent as the European Commission delivered an embarrassing reprimand over the state of public finances.

Joaquin Almunia, the European commissioner for economic and monetary affairs, said Britain broke EU rules in 2004-05 for the second year in a row by running a deficit of 3.3 per cent while the economy was growing.

Disputing Treasury projections, the Commission declared the UK deficit to be "excessive", saying "it is likely to remain above the 3 per cent ceiling in 2005-06 and 2006-07" and called for it to be "brought below 3 per cent by the forthcoming 2006-07 financial year".

Mr Almunia argued that, if his recommendation is backed by EU finance ministers, "the UK has to comply with the rules". Likening the EU rulebook to the highway code, he argued: "I drive my car properly not because I don't want to pay fines but because it's the right thing to do."

That argument is likely to cut little ice with Gordon Brown, who has based policy on his own "golden rule" of balancing the budget over the economic cycle. Mr Brown argues that the deficit has increased because of investment in health and education and there is little prospect of public spending cuts being ordered to meet an unenforceable edict from Brussels.

The Treasury says no change of policy is necessary anyway because it predicts that the deficit will be cut to 2.7 per cent by 2006-07 - below the 3 per cent ceiling laid down in the stability and growth pact.

It said in a statement: "We continue to meet our fiscal rules over the cycle, with the public finances sustainable and increases in public investment fully affordable. Over the last year, the UK's current deficit has virtually halved, and is projected to halve again over the coming year."

Nevertheless, the Commission's stance reflects wider concern over the state of the UK's public finances and over the potential impact of any slowing of growth.

Aides of the European trade commissioner, Peter Mandelson, said that he had helped soften the language of the text but fully supported the position of Mr Almunia to enforce the stability pact rules.

Although it is not part of the euro group, the UK is committed to seeking to "endeavour to avoid excessive deficits". Twelve of the 25 EU member states, including six of the old 15 nations, now have "excessive" deficits.