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. 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.

The update does not specify a quantitative medium-term objective (MTO) for the budgetary position. The programme presents projections on a no-policy-change basis and envisages a gradual reduction in the general government deficit. In 2008/2009, the deficit-to-GDP ratio is projected to be slightly lower than in the previous year. During the same year, the structural deficit is estimated to improve by about 0,3 percentage points. The primary deficit is expected to edge upwards as the rise in primary expenditure is only partly offset by a drop in interest payments. Subsequently, the programme forecasts a reduction in the general government deficit by 0,5 p.p. in 2009/2010 and by an average of 0,25 p.p. per annum during the following three financial years.

In view of this risk assessment, the budgetary stance in the programme may not be sufficient to ensure the limited consolidation foreseen in the programme. There is a clear risk that the deficit will be higher in the near term, thus breaching the reference value. A deficit level that provides a safety margin against breaching the 3 % of GDP deficit threshold with normal economic fluctuations (estimated at 1,5 % of GDP) is unlikely to be achieved within the programme period. The pace of fiscal consolidation should be strengthened over the programme period. The United Kingdom appears to be at medium risk with regard to the sustainability of public finances. The long-term budgetary impact of ageing is close to the EU average, with pension expenditure showing a somewhat more limited increase than on average in the EU, in part as a result of the fact that the United Kingdom relies relatively more on private pension arrangements than do other EU countries.

Overall conclusions
The overall conclusion is that the programme confirms a significant deterioration in the United Kingdom's budgetary position that, coupled with a probably weaker macroeconomic context than envisaged, carries a clear risk that general government deficit will breach the 3 % of GDP deficit reference value in the near term. While the programme envisages some fiscal tightening from 2008/2009 through a progressive increase in tax revenues and a reduction in previously rapid growth in current expenditure, there are risks to the achievement of this consolidation. These primarily stem from the deterioration in macroeconomic prospects and risks to the achievements of spending targets. The projected speed of consolidation is itself unambitious. The debt ratio remains significantly below the 60 per cent of GDP reference value, increasing slightly before falling from 2010/2011 onwards only. The long-term sustainability of United Kingdom public finances has deteriorated when compared to the previous programme, mainly due to the deterioration of the starting position, although the United Kingdom remains at medium risk.

The United Kingdom is invited to:

1. Implement measures necessary for the deficit not to exceed the reference value of 3 per cent of GDP.
2. Strengthen the pace of fiscal improvement over the programme period, which would also address the increased risks to the long-term sustainability of the public finances.