Europe rebukes Chancellor Gordon Brown over budget deficit

The Government's management of the public finances came in for blunt criticism from the European Commission yesterday in a formal report which warned that the UK risks missing key targets.

The Government's management of the public finances came in for blunt criticism from the European Commission yesterday in a formal report which warned that the UK risks missing key targets.

The document, which provoked a sharp response from the Treasury, said commitments to keep the budget deficit below 3 per cent of gross domestic product could be missed "at any point" between now and 2008.

Although the UK's debt position is recognised to be one of the best in the EU, the "convergence report" identifies the budget deficit as a persistent problem. It says growth forecasts for 2005 may be optimistic and described measures in place as "insufficient" to hit long-term ambitions, failing to provide "a sufficient safety margin against breaching the 3 per cent ceiling".

The comments are likely to provoke friction with Gordon Brown. The Chancellor will be tempted to point out that the UK's economy is performing better than many of those in the eurozone, several of which are clearly in breach of the 3 per cent budget deficit ceiling. Even they have escaped sanctions, the Treasury points out.

Last night the Shadow Chancellor, Oliver Letwin, said the findings confirmed the Conservatives' claims that tax rises would be inevitable under another Labour government. Yesterday's document says the deficit will fall from an estimated 3.2 per cent in 2003-04 to 2.9 per cent - just below the ceiling - in the current financial year.

But it adds that "the deficit in financial year 2004-05 might be in excess of 3 per cent of GDP". It also highlights risks arising from a "relatively favourable" growth forecast for 2005, which may not be attained, meaning "weaker-than- expected recovery in receipts particularly in corporation tax".

The document argues: "The budgetary stance in the programme does not seem to provide a sufficient safety margin against breaching the 3 per cent of GDP deficit threshold with normal macroeconomic fluctuations at any point during the projection period [to 2008].

"It is insufficient to ensure that the Stability and Growth Pact's medium-term objective of budgetary position close to balance is achieved by 2009-10."

The report comes at a sensitive time, as the political parties launch into a phoney war in the run-up toan anticipated general election in May. Mr Letwin, said: "This is an all-too familiar story. Most independent forecasters agree that the public finances are in worse shape than Tony Blair and Gordon Brown would have us believe."

But a Treasury spokesman argued: "The UK is meeting all its EU commitments ... with the Treaty deficit remaining below 3 per cent and due to fall to half this level over coming years. The Chancellor has made clear there will be no relaxation of fiscal discipline."