UK faces disciplinary action by EU for breaching budget rules

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The Independent Online

Britain will find itself alone among the 27 nations of the European Union next month in facing disciplinary action from the European Commission over the gap between its spending and borrowing.

The UK is the only member of the EU on course to breach agreed rules on the size of its budget deficit, the Commission said yesterday, pitching the Government into an embarrassing row with Brussels over its handling of the economy.

The Commission's latest forecasts for economic growth across the EU predict that UK GDP growth will slow to 1.7 per cent this year and 1.6 per cent in 2009, down from 3 per cent in 2007. That would result in the UK's budget deficit widening to 3.3 per cent of GDP both this year and next, up from 2.9 per cent last year and in breach of the 3 per cent limit agreed under the terms of the Maastricht Treaty.

Joaquin Almunia, the EU's monetary affairs commissioner, said Britain's projected breach of the Commission's maximum allowed budget deficit would automatically trigger EU disciplinary procedures. "We will start the excessive deficit procedure," he said. "I intend to present this report for adoption on 11 June." While the Commission's disciplinary powers are theoretical when it comes to the UK, because it has not joined the single currency, Mr Almunia's criticisms will nevertheless embarrass the Government. The Commission said it expected the other 26 members of the EU to meet its threshold this year.

The UK's budget deficit compares unfavourably with the 3 per cent the EU forecasts for France this year, though Mr Almunia warned Nicolas Sarkozy's government that it too was close to breaching the limit. Threats of action against other countries previously forecast to have difficulties with the 3 per cent rule – including Portugal, Slovakia, the Czech Republic and Poland – have been withdrawn after action taken in these countries to curb their deficits.

The row centres on the EU's forecasts for UK economic growth, which are substantially lower than those made by the Chancellor, Alistair Darling, in last month's Budget. Mr Darling expects GDP growth to be between 1.75 and 2.25 per cent this year, and between 2.25 and 2.75 per cent in 2009.

A Treasury spokesman said that on this basis, the Government was comfortable with its plans on spending and taxation. He said: "The 2008 Budget confirmed that the UK is delivering a sustainable increase in public investment – which is fully consistent with a prudent interpretation of the Stability and Growth Pact – while continuing to meet the Government's strict fiscal rules over the cycle, maintaining low debt and sustainable public finances."

However, forecasts from independent economists, including those at the International Monetary Fund, for the UK's performance this year and next have generally been much closer to those produced by the Commission yesterday.

Howard Archer, of Global Insight, said: "We forecast GDP growth will be limited to 1.6 per cent in 2008 and 1.4 per cent for 2009."