Britain heads for budget row with Brussels

The Government was on course for a fresh row with Brussels over its budget plans last night as the European Commission prepared to issue a public rebuke to Germany.

The Commission will ask Germany's European Union partners today to formally warn the Berlin government about its high budget deficit. Germany has allowed its deficit to reach 2.7 per cent of GDP, close to the 3 per cent maximum allowed under the Stability and Growth Pact that governs EU countries' fiscal policy.

If Germany cannot muster enough allies it will receive the first-ever public rebuke at the EU finance ministers meeting (Ecofin) on 12 February. Portugal may also be given an "early warning".

The Ecofin meeting will also have to assess the convergence report that the UK submitted before Christmas setting out its fiscal policy. The report, which the UK must submit as a non-euro member, confirmed that the Government plans to run a deficit in excess of 1 per cent between 2002 and 2006.

A year ago Ecofin deemed the UK had broken the terms of the pact which states that budgets should be at or close to balance in the medium term.

However the Treasury is insistent that the Commission is being overly legalistic in reprimanding countries for running a deficit during an economic downturn. "It looks like we will be next after Germany and Portugal," one official said.

He pointed out that the country the Commission singled out for a mild rebuke last year – Ireland – was the EU's most successful economy of the last decade.

It believes countries should be allowed to let borrowing rise to offset the fall in private-sector output during a downturn – otherwise known as running "automatic stabilisers".

In its convergence report the Treasury said that its borrowing plans were "consistent with a prudent interpretation of the Stability and Growth Pact, which takes into account the economic cycle, sustainability and the role of public investment".

The Treasury believes governments should be allowed to run temporary deficits during an economic cycle. Its own fiscal rules dictate that debt must be kept at a sustainable level over the cycle and that it must only borrow to fund investment.

A Treasury spokesman said yesterday: "We have published our report and are awaiting a response."

A Commission spokesman said that while today's report would focus on the budget policies of Portugal, France, Italy, Ireland, Greece and Spain, the Commission was likely to address the case of the UK.

A rebuke for Germany today would be particularly humiliating for Berlin, which campaigned vigorously to set strict deficit limits for EU states enshrined in the 1997 pact.

But a reprimand for Europe's largest economy could hurt the euro, languishing near six-month lows of 86 cents against the dollar.