EU tells Britain to cut budget deficit

European Union finance ministers told Britain it was running an excessive budget deficit and gave the country until the 2006/2007 fiscal year to bring the gap below the EU ceiling of 3 percent.

The ministers acted on a Jan. 11 recommendation from the European Commission, the EU executive, which polices the EU's budget rules, the Stability and Growth Pact that underpins the single euro currency.

"The commission's decision and recommendations on the United Kingdom budget deficit has been adopted by the ministers," a diplomat told Reuters.

However, the EU has no power to sanction London since it is not a euro zone member, and UK officials have signaled that British Chancellor of the Exchequer Gordon Brown had no intention of changing course to comply.

The commission has said that unless Britain changed fiscal policy, the overall government deficit would rise from 3.2 percent of GDP in 2004-2005 to 3.4 percent in the current 2005-2006 financial year.

It would then fall again to 3.2 percent in 2006-2007, the commission said.

Economic and Monetary Affairs Commissioner Joaquin Almunia said on Jan. 11 he was sure Britain would comply with the recommendation of the 25 EU finance ministers, adding the changes required were "not so huge."

Under the Stability and Growth Pact, Britain is obliged only to try to avoid deficits that exceed the 3 percent of GDP limit.

Unlike euro zone members, it does not face the threat of financial sanctions over its budget deficit because it opted out of the Economic and Monetary Union.

The EU thus has no means to enforce its recommendation. Brown has often boasted that Britain's fiscal and economic policies are superior to those of many other EU countries.

The ministers said London should cut its structural deficit -- the part not affected by cyclical changes in the economy -- by 0.5 percent of GDP between the 2005-2006 and 2006-2007 financial years and gave Britain six months to specify how it would do that.

Britain broke the budget deficit ceiling in 2003-2004 but avoided the kind of EU warning that has now been drawn up because the shortfall was small and considered only temporary.

The commission said Britain's excessive deficit was no longer deemed to be temporary although it projected the number would decline to 3 percent of GDP in 2007-2008.