Brussels Raps Britain for Excessive Budget Deficit

The government yesterday suffered the ignominy of being lumped with Hungary as the sole members of the EU-27 to be rapped over the knuckles by the European commission for running an excessive budget deficit.

The commission severely criticized Britain for a "significant deterioration" in its budgetary situation and the government for conducting an expansionary fiscal policy despite economic good times.

And it warned that the chancellor had exacerbated the deficit with last month's tax cuts to offset the abolition of the 10p starting rate, ensuring that it would be well above the 3% Maastricht treaty limit this year and next.

A Treasury spokesman said: "We do not agree with the European commission's assessment, which does not take proper account of the UK's low debt - which remains well below the levels in other major EU nations and the euro area average - the economic cycle, or the important role of investment in public services and infrastructure."

Opposition parties were quick to exploit the censure from Brussels.

Conservative shadow chancellor George Osborne said: "Gordon Brown's reputation for economic incompetence is now international. The decision by the European commission to begin proceedings against the government is a humiliation for a prime minister who used to boast about the comparison with other European countries."

The EU has no powers to fine Britain for running an excessive deficit as the UK is not a member of the euro zone but the rebuke will anger Gordon Brown before next week's European summit, where he will reaffirm the supremacy of Britain's liberal economic policies. The chancellor, Alistair Darling, forecast in his March budget that the 2008-09 deficit would be 3.2% but his May tax cuts, according to Brussels, will add a further 0.2 percentage points, taking the deficit to 3.4%.

The commission forecasts a higher deficit of 3.5% in the current fiscal year. The Treasury insists that Britain's deficit will fall to 2.8% in 2009-10 after financial markets recover from their turmoil and economic growth rebounds from 1.75% this year to 2.5%.

The commission, which forecasts lower growth because of adverse credit conditions, a weaker housing market and higher inflation, predicts a deficit of 3.3% in 2009-10. It warned that this deficit could be even higher if the bail-out of Northern Rock, the mortgage lender nationalized in February, is taken into account.