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A report from the European Commission warns the U.K.'s budget deficit, at 12% of GDP, could be the worst in the EU unless the next government takes rapid steps
Britain is hurtling towards the worst budget deficit in the European Union. The European Commission's latest forecast shows the Government faces a shortfall of 12 per cent of gross domestic product (GDP) this year: worse than Greece, Portugal, Ireland or any of the other troubled and heavily indebted eurozone members. In cash terms it equates to about £15bn more than the Chancellor has budgeted for.
The EC said in a report: "Restoring the UK public finances is a central task as they have been greatly weakened by a combination of the severe downturn, its impact on previously tax-rich income and expenditure, the operation of automatic stabilisers and the fiscal stimulus."
Olli Rehn, the EU commissioner for economic and monetary affairs, added: "The first thing for the new government to do is to agree on a convincing, ambitious programme of fiscal consolidation in order to start to reduce the very high deficit and stabilise the high debt level of the UK.
"That is by far the first and foremost challenge of the new government. I trust whatever the colour of the government, I hope it will take this measure."
The EC's figure for borrowing this year is almost a full percentage point above the Treasury forecast, and the equivalent of an extra £15bn. In 2011-12 the ratio of government debt to GDP, according to the commission, will peak at about 88 per cent and overtake the EU average.
Brussels did offer better news about Britain's general growth forecasts, which were sharply upgraded. The EC sees the UK growing by 1.2 per cent this year, about double its previous thinking, and by 2 per cent next year. This is broadly in line with other recent forecasts by independent bodies such as the International Monetary Fund (IMF) and the National Institute of Economic and Social Research, and in marked contrast to the Treasury's more optimistic central estimate of 1.25 per cent growth this year accelerating to 3.25 per cent in 2011.
Only slow progress seems likely in addressing the structural budget deficit – the part that will not disappear as the economy starts to expand again – which estimated by the EC at about 10 per cent of GDP, or £140bn.
"The structural budget deficit, is estimated to decline only slightly... as a result of continued weak activity in the financial and housing markets, each of which had hitherto been major sources of revenue," the report said. Despite some recent buoyancy, the EC sees sluggish economic growth reflected in stagnating tax revenues.
It also expressed fears of a "jobless recovery," saying: "While consumer sentiment has improved since the start of 2010 and points towards continuing household spending growth in the short term, the strength of the spending recovery will be limited by negative real average earnings growth in 2010 and very limited job creation over the forecast horizon. Preserving full-time employment is an important challenge."
In the case of Greece, the commission voiced some unfashionable optimism, saying: "Successful and credible fiscal adjustment efforts should boost confidence and improve sentiment. Credibility gains will compensate the vast economic cost of adjustment and lead to the beginning of a recovery process in the second half of 2011."