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Last Updated: Wednesday, 21 September 2005, 10:50 GMT 11:50 UK
UK 'broke budget deficit rules'
Chancellor of the Exchequer Gordon Brown
Mr Brown is president of the EU's Council of Finance Ministers
The UK is to be reprimanded after breaching the European Union's (EU) stability pact, under which budget deficits should not exceed 3% of GDP.

Economics Commissioner Joaquin Almunia said provisional estimates put the UK budget deficit at 3.1% of GDP for the financial year 2004/2005.

This is the second year running the UK has breached the limit.

Meanwhile, the International Monetary Fund has warned of slower economic growth that could widen the budget gap.

The UK said it believes in a "prudent interpretation" of the pact and insists that public investment is important.

Such an interpretation should "take into account the economic cycle [and] the long-term sustainability of public finances," a government statement said.

Under the UK's own fiscal rules, the budget must balance, but only over the whole economic cycle, and public investment is excluded from the calculation.

As the UK is not in the eurozone, it cannot be fined by Brussels.

But the European Commission is to launch an "excessive deficit procedure", which will be a slap on the wrist for Chancellor Gordon Brown, current president of the EU's Council of Finance Ministers.

Previous offenders

Other nations that have breached the pact in recent years include Germany, France, and Italy.

The trio have ignored calls from the European Commission to rein in spending and rejected complaints from smaller euro nations, while continuing to run budget deficits in excess of 3% of GDP.

There have been complaints that the limit is too inflexible, and that to fine offenders merely makes their economic position worse.

A report from the Commission says analysis suggests the UK has not been successful in meeting the "deficit criterion".

The UK economy had been expected to grow by 2.75% per year in the two years to 2006, but the latest EU assessment is that GDP may grow at a rate of little more than 2% in 2005 and slightly more the following year.

However, on Wednesday the commission noted favourably that the UK had low public debt, roughly 41% in 2004/2005, which was the second lowest in the EU.

The report now goes to the council of finance ministers, who may spare the UK's blushes by deciding to rule that the budget deficit breach is "exceptional and temporary".

Slowing growth

Meanwhile, the International Monetary Fund warned that UK economic growth this year and next year was likely to be below the UK government forecast.

The IMF said that the UK would only grow by 1.9% this year, compared to the official forecast of 3-3.5%.

And it warned that a "modest" correction of 1% of GDP (around 10bn) in extra taxes or cuts in spending would be needed if the UK was to meet its fiscal rules for balancing the budget.




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