European Commission asks UK to deliver £25bn a year in spending cuts

The European Commission will propose tomorrow that the UK's budget deficit be brought down from a prospective 12 per cent of GDP to just 3 per cent by 2014-15, requiring tax increases and public spending cuts as yet unimagined by the main political parties. It would mean about £25bn in spending cuts and tax rises every year.

It is likely to embarrass Number 10 in the run-up to the pre-Budget report, though the Treasury might be grateful for the backing it gives for a return to fiscal sustainability.

And, in a sign that many of Europe's leading economies are likely to reverse stimulus packages ahead of time, the Commission will also ask Germany, France and Spain to bring their budget deficits under control by 2013, to take them below the formal Maastricht criteria limit of 3 per cent, a rule that was de facto suspended during the financial crisis.

Italy will be required to do so by 2012. Germany already has a new constitutional amendment requiring its national and state governments to virtually eliminate its structural deficit by 2016.

The Uk, which the Commission expects will have a budget gap of 12.5 per cent in 2010-2011, will need to reduce the gap by 1.75 per cent of GDP annually to meet the deadline.

Such a radical policy – which would require that national treasuries start retrenching as early as next year – would be contrary to the spirit of the G20 agreement that such "exit strategies" should not be implemented before the global recovery is secured. In practice, that means that other nations are being asked to wait until the US and UK have caught up with them.

The G20 Communiqué issued after the St Andrews meeting at the weekend illustrated the current international tension over the timing of exit strategies: "While we will continue to provide support for the economy until the recovery is secured, we also commit to develop further our strategies for managing the withdrawal from our extraordinary macroeconomic and financial support measures. We agreed to co-operate and co-ordinate, taking into account any spillovers caused by our strategies, and consulting and sharing information where possible."

Draft documents leaked yesterday suggested that the Commission will announce its proposals tomorrow, following discussions among European finance ministers yesterday and today. In September the Commission warned that without drastic remedies current plans could drive EU debt to levels of 100 per cent of its gross domestic product by 2016, way above the Maastricht treaty criteria.

EU finance ministers will discuss the recommendations in December.

Comments