The European Commission will declare Britain in breach of the EU's budget deficit limits tomorrow, according to a draft commission report.
Although Britain is not a member of the euro zone, it is still obliged to try to avoid deficits that exceed the Stability and Growth Pact's limit of 3 per cent of gross domestic product. Britain will not face the threat of financial sanctions over its budget deficit because it is not a euro-zone member.
At the end of August, Britain told the commission that its deficit for the April 2004 to March 2005 financial year was 3.2 per cent, the second year in a row above the 3 per cent ceiling.
"Moreover, the most recent information suggests that, on unchanged policies, the deficit is expected to remain above the 3 per cent reference value in 2005/06 and in 2006/07," the report to be adopted by the commission tomorrow said.
"The figure for the 2004/05 financial year deficit provides evidence of an excessive deficit in the United Kingdom," the report said. "The commission has therefore decided to initiate the excessive deficit procedure for the United Kingdom."
A spokesman for the British treasury said Britain believed the pact's rules should take into account the economic cycle, the long-term sustainability of public finances and the importance of public investment.
"The public finance projections set out in the 2005 budget show Britain is meeting its fiscal rules, that public finances are sustainable and the recent increases in public sector investment are affordable," he said.
Britain was running budget surpluses between 1998 and 2001, which means its average deficit over the past six years would be well below 3 per cent. The country's debt-to-GDP ratio was 41.5 per cent last year - the second smallest in the EU.
