The European Commission said today that its analysis of the British budget suggested that London was in breach of the EU's deficit ceiling.
But it refrained from declaring that the 3.2 per cent shortfall Britain reported for the 2004/2005 financial year was excessive, adding it would consult the Economic and Financial Committee of junior European Union finance ministers and central bankers before making a final judgment.
It is the second year in a row that Britain's budget deficit exceeds the limit of 3 per cent of gross domestic product that is stipulated by the EU's Stability and Growth Pact.
"The report adopted today by the Commission ... indicates that the excess over the 3 per cent cannot be explained by the economic situation as domestic GDP growth was above potential in the last two years (3.2 per cent in 2004 and 2.9 per cent in 2005)," the Commission said.
"Although the deficit is close to the reference value, it has been above 3 per cent for the past two years and may not be corrected in the ongoing financial year," it said.
"The analysis in the report, therefore, suggests that the deficit criterion in the Treaty is not fulfilled by the UK." Although Britain is not a member of the euro zone, it is still obliged to try to avoid deficits above the 3 per cent limit.
But unlike euro zone members, Britain will not face the threat of financial sanctions over its budget deficit because it has opted out of the EU's Economic and Monetary Union.
The Commission noted in its statement that Britain had low public debt, which at almost 41 per cent in the financial year 2004/05 was the second lowest in the 25-nation block.
The Commission also said that it had examined the quality and sustainability of Britain's public finances and that the analysis was "relatively favourable."
Such factors can help a country avoid having its budget deficit declared excessive. "But according to the Stability and Growth Pact such factors can only be taken into account if the principle that the deficit remains close to the reference value and is temporary is fully met," the statement said.