March 15, 2010 / 7:05 PM / 10 years ago

UPDATE 2-EU to recommend more fiscal cuts for Britain-draft

(Adds comment from opposition Conservative Party)

* EU draft: British budget plan not ambitious enough

* Draft: Britain’s econ forecast may be too optimistic

* Draft: uncertainties in Britain regarding banks

By Marcin Grajewski

BRUSSELS, March 15 (Reuters) - The European Commission will tell Britain to do more to cut its ballooning budget deficit in the medium term, saying the country’s fiscal programme lacks ambition, a draft from the EU executive showed on Monday.

The draft, obtained by Reuters two days before publication, said the programme failed to guarantee Britain would meet a European Union deadline of 2014-15 for cutting the deficit to below the bloc’s cap of 3 percent of economic output.

“The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced,” said the draft, expected to be approved by the Commission on Wednesday.

“A credible timeframe for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned,” it said.

The British government defended its budget plans in response to the leaked draft, saying they took into account a need to support the economy through the downturn.

The opposition Conservative Party’s finance spokesman, George Osborne, called the news “a heavy blow for (Prime Minister) Gordon Brown’s credibility”.

Britain’s plan envisages cutting the gap to 4.7 percent of gross domestic product in the fiscal year 2014-15 from 12.1 percent planned for 2010-2011. That means it will fail to meet the deadline given by EU finance ministers late last year.

But even this target may be missed because British economic growth could turn out lower than the government expects, the draft said.

“The achievement of the consolidation forecast by the UK authorities, is further clouded by the likelihood that the macroeconomic context could be less favourable than envisaged by the authorities, as well as the uncertainties relating to the banking sector loans and investments insured by the government.”

The programme forecasts economic growth at 2.0 percent in 2010-11 and then 3.3 percent each year until 2014-15.

A British Treasury spokesman said the government was committed to halving the deficit over four years and that such a cut would be the sharpest among the Group of Seven industrialised countries.

“The Chancellor (Alistair Darling) has taken a judgment on the appropriate pace of adjustment in 2010-11 and beyond,” the spokesman said.

This takes into account “the uncertainty around prospects for the public finances given the exceptional nature and strength of the global downturn, the need to support the economy through the early stages of the recovery and the need to deliver sustainable public finances”, he said.

LITTLE LEVERAGE

Brussels has little leverage to force Britain to follow its recommendation made under the 27-country EU’s budget discipline rules. Britain is not a member of the 16-nation euro zone so cannot be fined for breaching the deficit limit.

Still, the assessment may prove embarrassing for the prime minister before a parliamentary election expected on May 6 in which the Conservatives could end 13 years of Labour rule.

The Labour government delivers its budget on March 24 in which it is expected to emphasise its already-announced plan to halve the deficit over four years.

The Conservatives have pledged to tackle the deficit faster and harder to restore investor confidence.

“Our argument is backed by credit rating agencies, business leaders, international investors and now the European Commission,” finance spokesman Osborne said in a statement.

The Commission will also publish on Wednesday its assessment of the fiscal programmes of Austria, Germany, Belgium, Spain, Finland, Ireland, Italy, France, the Netherlands and Slovakia.

They will then be studied by EU finance ministers. The ministers in theory can change the Commission’s recommendation, but this happens rarely.

Budget deficits are swelling across the EU as the economic crisis undermined government revenues and fiscal stimulus programmes boosted spending.

The draft said Britain’s fiscal plans for 2010-2011 appeared adequate but those for subsequent years seemed lax.

Britain should publish this year “the detailed departmental spending limits underlying the overall expenditure projections” for the period after 2010-11, it added. (Additional reporting by Matt Falloon in London; editing by Dale Hudson)

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