Updated convergence programme of the United Kingdom, 2007/2008-2012/2013 - Main contents

EN

Official Journal of the European Union

C 49/25

On 12 February 2008, the Council examined the updated convergence programme of the United Kingdom, which covers the period from financial year 2007/2008 to financial year 2012/2013 (2).

The United Kingdom economy has displayed robust and remarkably stable growth over the last ten years and in 2007 grew at a rate above potential, though with building imbalances including low household saving and a wider external deficit. Favourable growth conditions have, however, been accompanied by a deterioration in the general government deficit in the current financial year, 2007/2008. After a general government deficit in 2006/2007 of 2,6 % of GDP, the deficit is envisaged in the programme to reach around 3 % of GDP in 2007/2008, with no margin to the reference value.

Furthermore, there are risks of a further deterioration in economic prospects following the financial market turmoil and a weakening in the housing market in the second half of 2007. This points towards a near-term economic slowdown. Looking ahead, this could constrain revenue growth, reinforcing the need for expenditure restraint if the United Kingdom is to achieve an improvement in the fiscal balance. The recent relatively rapid exchange rate depreciation could also raise inflationary pressures. Particular macroeconomic risks relate to a markedly more abrupt slowdown in housing market activity, which could dampen private consumption growth, and a larger-than-expected weakening in financial services growth and employment.

The programme contains two macroeconomic scenarios: a central scenario and an alternative scenario based on trend growth one quarter of a percentage point lower than the central view. The public finances projections are based on the alternative scenario, which is designed to be more cautious than the central scenario. Both scenarios assume some feed-through to tighter credit conditions as a result of recent financial market disruption. The alternative scenarios considered the reference scenario in the assessment of the updated programme. This scenario envisages a slowdown in economic growth from 3,0 % in 2007/2008 to 2,0 % in 2008/2009. In 2009/2010, the programme expects growth to gather pace again, rising to 2,75 %. Assessed against currently available information (3), including increasing prospects of a significant downturn in the housing market and protracted financial market difficulties, this scenario appears to be based on growth assumptions that are favourable until 2009/2010 and plausible thereafter. The programme's projections for inflation in the short term also appear to be on the low side, primarily due to its assumption on oil prices next year. However, the near-term prospect of activity levels depressed relative to potential should lead to a subsequent moderation in inflation, which should preserve price stability.

For 2007/2008, the general government deficit is estimated at 3,0 % of GDP in the Commission services' autumn 2007 forecast, against an estimate of 2,3 % of GDP set in the previous update of the convergence programme. The structural deficit, defined as the cyclically-adjusted budget balance calculated according to the...