UK warned of long-term risk to public finances
By Tony Barber in Brussels FINANCIAL TIMES Published: October 15 2009 12:31
The public finances of the UK, Spain and 10 other European Union countries are at long-term high risk, because of projected increases in welfare expenditure and the impact of the world financial crisis, according to a report by the European Commission.
The 175-page study, published this week, placed only five of the EU?s
27 countries in the low-risk category ? Bulgaria, Denmark, Estonia, Finland and Sweden. Ten countries, including France, Germany, Italy and Poland, were identified as medium-risk.The report was released in the midst of delicate discussions among EU governments about when and how to withdraw anti-recession spending programmes that are expected to increase the EU?s public debt by 20 percentage points in the three years from 2008 to 2010.
The Commission estimated that EU budget deficits would average about 7 per cent of gross domestic product next year, up from 6 per cent this year, but said the biggest problem consisted of rising long-term pension costs and other age-related expenditure.
?Though the debt and deficit increases are by themselves quite impressive, the projected impact on public finances of ageing populations is anticipated to dwarf the effect of the crisis many times over,? the report said. ?The fiscal costs of the crisis and of projected demographic development compound each other and make fiscal sustainability an acute challenge.?
High-risk countries Sustainabilty gap Ireland 15.0% Greece 14.1% UK 12.4% Slovenia 12.2% Spain 11.8% Latvia 9.9% Romania 9.1% Cyprus 8.8% Czech Republic 7.4% Slovakia 7.4% Malta 7.0% Netherlands 6.9% Source: Europa
According to the Commission, the UK has a ?sustainability gap? of 12.4 per cent of GDP, almost double the average EU level of 6.5 per cent. This means that the government will have to adjust its tax and spending plans by 12.4 per cent of GDP, on a durable basis, to put its public finances on a sustainable path.
principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Alternatively, the social protection system would have to be reformed to decelerate the projected increase in age-related expenditure,? the report said. ?Although the contribution of an ageing population is not amongst the most problematic [in the EU], the UK?s budgetary position poses severe risks to the sustainability of public finances.?
With a UK election due less than a year from now, the Commission?s warning provided a golden opportunity for the opposition Conservative party to criticise Gordon Brown, prime minister, and his government?s management of the public finance.
?This latest rebuke from the EU is further evidence of the extent of Gordon Brown?s debt crisis, and shows why we need a clear and credible plan to start reducing Britain?s deficit now,? said Philip Hammond, shadow chief secretary to the Treasury.
Apart from Spain and the UK, the countries named at long-term high risk were Cyprus, the Czech Republic, Greece, Ireland, Latvia, Malta, the Netherlands, Romania, Slovakia and Slovenia.
For Greece, Ireland, Latvia, Spain and the UK, ?avoiding exponentially increasing debts is a policy challenge already in a medium-term perspective?, the report said.
The Commission said that, if European economic growth returned to pre- crisis levels after the recession but governments failed to restore fiscal discipline, the EU?s public debt could shoot up to 100 per cent of GDP as early as 2014 and keep rising.