Gordon Brown, the Chancellor, today faces the prospect of being lectured on his fiscal policies after the European Union demanded that the UK reduce its budget deficit.

In a move sure to anger and embarrass Mr Brown, who has prided himself on his fiscal "prudence", the European Commission has declared that the Government's borrowing is "excessive".

The Commission said the UK's budget deficit of 3.3 per cent of national wealth in 2004-2005 was above the 3 per cent limit allowed under the so-called Growth and Stability Pact and demanded that it take action.

The pact was designed to ensure fiscal prudence by the countries adopting the euro after fears that profligate spending could undermine the value of the single currency. Although the UK has not joined the euro and therefore does not face the threat of financial sanctions, it is still bound by the pact’s regulations.

The decision, which could lead to the embarrassing spectacle of Mr Brown being chastised by the finance ministers of Italy and France, was taken at a meeting of the 25 Commissioners in Brussels today - including Trade Commissioner Peter Mandelson, who fully supported the move.

France, Germany and Italy have broken the 3 per cent limit in every one of the past three years, and have lobbied intensively for a more flexible interpretation of the rules.

"Having examined the United Kingdom’s budgetary situation, the Commission considers that the deficit is likely to remain above the 3 per cent reference value in 2005-06 and 2006-07 in spite of the recently-announced fiscal measures," Joaquin Almunia, the Economic and Monetary Affairs Commissioner. said.

"The Commission is asking the Council [of EU finance ministers] to endorse this opinion and to recommend that the deficit be brought below 3 percent by the forthcoming 2006/07 financial year," he said.

If the EU ministers back the Commission’s views, they will give Britain six months to specify how it will cut the deficit.

The news comes at an unwelcome time for the Chancellor. In last month’s Pre Budget Report Mr Brown was forced into an embarrassing climb-down over growth, reducing his initial prediction for 2005 from 3 - 3.5 per cent to just 1.75 per cent.

George Osborne, the Shadow Chancellor, reacted to the news by telling Mr Brown to stop lecturing Europe on how to manage its economy. "After a year in which Mr Brown fiddled the fiscal rules, missed his growth forecast and saw public borrowing run out of control, now it’s the European Commission who is lecturing Brown on how to manage the public finances," he said.

But the Treasury brushed aside today's developments, insisting that the budget deficit was "extremely small". A spokesman for the Treasury pointed out that debt levels were running at 40 per cent of GDP - well inside the 60 per cent maximum permitted under EU rules.

"Our projections are fully consistent with our prudent interpretation of the growth pact and we continue to meet our fiscal rules over the cycle and our public finances are sustainable," the spokesman said.

Previous attempts by the Commission to rule against member countries for breaching the rules have ended in bitter confrontation.

The Chancellor has also called for a regime that takes account of different economic cycles in the member states instead of trying to apply a one-size-fits-all economy strategy.