FT: UK warned of long-term risk to public finances

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.

http://www.ft.com/cms/s/0/423f2eba-b979-11de-abac-00144feab49a.html
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