The European Commission will declare Britain in breach of EU budget deficit limits tomorrow, according to a draft 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 three per cent of GDP.
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 ceiling.
"Moreover, the most recent information suggests that on unchanged policies the deficit is expected to remain above the three per cent reference value in 2005/06 - of the order of 3.25 per cent of GDP - and also remain slightly above three per cent in 2006/07," the report said.
"The figure for the 2004/05 financial year deficit provides prima facie evidence on the existence of an excessive deficit in the UK in the sense of the Treaty and the Stability and Growth Pact.
" The Commission has therefore decided to initiate the excessive deficit procedure for the UK." Despite breaking the budget deficit ceiling in 2003/2004 financial year, Britain avoided the EU excessive deficit procedure, which could eventually end in financial sanctions, because its excess shortfall was then seen as small and likely to be only temporary.
Both the Commission and Britain had expected the deficit to fall below three per cent in the financial year 2004/05.
But a sharper than expected slowdown in economic growth since the second half of 2004, which cut Government revenues, and slightly higher spending pushed the budget deficit up to 3.2 per cent, the report said.
The Commission said it now expected the economy to grow 2.1 per cent this year, rather than the 2.8 per cent it forecast in April. It revised its 2006 growth forecast for Britain to 2.4 per cent from 2.8 per cent in April.
As a result unemployment this year is likely to be around five per cent of the workforce rather than the earlier forecast of 4.7 per cent.
A spokesman for the Treasury said Britain believed the Stability and Growth Pact's rules should take into account the economic cycle, the longterm sustainability of public finances and the importance of public investment.
"The public finance projections set out in the 2005 budget show that Britain is meeting its fiscal rules over the cycle, 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 last six years would be well below the three per cent threshold. Debt to GDP ratio was 41.5 per cent last year - second smallest in the EU.