Download UK reflections on the golden rule - Office for Budget Responsibility

UK reflections
on the golden rule
Presentation to Austrian Fiscal Advisory Council seminar
Andy King
Chief of Staff
Office for Budget Responsibility
29 September 2015
Background
The Office for Budget Responsibility
• Created in 2010 to provide independent and
authoritative analysis of the public finances
• Produces the budget and autumn statement forecasts of
the economy and public finances
• Assesses Government progress against fiscal targets
• Reports on the sustainability of the public finances and
the health of the public sector balance sheet
• Scrutinises the Government’s costing of policy measures
• Objective to make fiscal forecasts and costings unbiased
and clear, but we have no role in making or commenting
on Government policy
Core outputs of the OBR
Core outputs of the OBR
Core outputs of the OBR
Core outputs of the OBR
UK fiscal framework
1997 to 2008:
Golden rule &
Sustainable investment rule
Institutional context:
macroeconomic policy reforms
• Bank of England given operational independence
for monetary policy, to hit Govt inflation target
• Financial regulation would be brought together
under a single statutory authority
• Fiscal policy would be guided by two new fiscal
rules:
– Golden rule – borrow only to invest over the economic
cycle
– Sustainable investment rule – keep debt at a prudent level
over the economic cycle*
* The name of the rule and the 40% of GDP specification came later
Golden rule:
Rationale and objectives
The ‘Silver Book’ argued:
• It would approximate to the principle of achieving
fairness between generations
• It would address past fiscal failings by removing
the bias against capital spending
• It would allow the automatic stabilisers to work, by
targeting balance over the economic cycle
• Coupled with debt rule, it would ensure the public
finances were on a long-term sustainable path
Sustainable investment rule:
Rationale and objectives
The ‘Silver Book’ argued:
• It should focus on a net measure of public debt,
for the whole public sector, as a per cent of GDP
• While public debt plays important roles, high levels
of public debt reduce the buffer against shocks and
may impose other costs (e.g. via interest rates)
• While current levels of public debt were not high by
historical or international standards, a modest
reduction to 40 per cent of GDP was consistent
with balanced and responsible fiscal management
Real-time critiques
of the golden rule
in the UK
Real-time critiques:
Dating the economic cycle
Real-time critiques:
Dating the economic cycle
Real-time critiques:
Dating the economic cycle
Real-time critiques:
Dating the economic cycle
IFS Green Budget 2006:
“Re-dating the cycle at
such a convenient time
risks undermining the
credibility of the fiscal
framework. The golden
rule should be made more
forward-looking and less
reliant on a precisely
dated economic cycle. If
still required, the task of
estimating the output gap
could be handed to an
independent body.”
Real-time critiques:
Backward-looking approach
Real-time critiques:
Backward-looking approach
Budget 2007 forecast for the golden rule from 1997-98
3
Budget 2007 forecast
2
1
0
-1
-2
-3
-4
-5
Average surplus on current budget since 1997-98
Cyclically-adjusted surplus on current budget
-6
1997-98
1999-00
Source: HM Treasury
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
Real-time critiques:
Backward-looking approach
IFS Green Budget 2006:
“…defining a particular period as ‘a cycle’ and seeking to
balance the current budget over this period is not the only
way to allow the automatic stabilisers to function. This
approach is backward-looking in the sense that the amount
you can borrow today and in the near term depends on the
impact on borrowing of shocks and policy mistakes earlier in
the cycle. A more forward-looking approach would set policy
today consistent with meeting the rule in the future, whether
or not it was consistent with meeting it in the past.”
Real-time critiques:
Backward-looking approach
Budget 2007 forecast for the golden rule from 1997-98
3
Budget 2007 forecast
2
1
0
-1
-2
-3
-4
-5
Average surplus on current budget since 1997-98
Cyclically-adjusted surplus on current budget
-6
1997-98
1999-00
Source: HM Treasury
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
Real-time critiques:
Backward-looking approach
Latest data for the golden rule from 1997-98
3
2
1
0
-1
-2
-3
-4
Average surplus on current budget since 1997-98
-5
Cyclically-adjusted surplus on current budget
-6
1997-98
1999-00
Source: ONS, OBR
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
Real-time critiques:
Optimistic revenue forecasts
Real-time critiques:
Optimistic revenue forecasts
Difference between official and external PSNB forecasts
10
£ billion
5
PSNB forecasts
at a 4-year
horizon
Outside forecasters more
optimistic than the Treasury
0
-5
-10
Outside forecasters more
pessimistic than the Treasury
-15
Budget
1998
Budget
1999
Source: HM Treasury
Budget
2000
Budget
2001
Budget
2002
Budget
2003
Budget
2004
Budget
2005
Budget
2006
Budget
2007
Budget
2008
Looking back at pre- and post-crisis
fiscal performance
UK running structural deficit
when the crisis struck
Contemporaneous and recent OECD estimates
Hungary
Czech Republic
United States
Japan
United Kingdom
Greece
Italy
France
Portugal
Germany
Austria
Norway
Netherlands
Belgium
Luxembourg
Canada
Spain
Australia
Switzerland
Ireland
Sweden
Iceland
Finland
Denmark
New Zealand
Source: OECD
Greece
Hungary
United Kingdom
United States
France
Portugal
Ireland
Italy
Czech Republic
Japan
Austria
Belgium
Netherlands
Germany
Spain
Switzerland
Canada
Australia
Luxembourg
Sweden
Norway
Denmark
Iceland
Finland
New Zealand
June 2007 forecast
-12
-10
-8
-6
-4
-2
0
Per cent of GDP
2
4
6
June 2014 forecast
-12
-10
-8
-6
-4
-2
0
Per cent of GDP
2
4
6
UK public sector debt
rising before the crisis struck
Change in general govt net liabilities: 2004 to 2007
Hungary
Slovak Republic
Estonia
Austria
Luxembourg
United Kingdom
Portugal
Greece
Japan
United States
Czech Republic
Australia
Germany
Switzerland
Italy
Poland
Korea
Ireland
Slovenia
Netherlands
France
Canada
New Zealand
Spain
Belgium
Israel
Denmark
Sweden
Iceland
Finland
Norway
Source: OECD
-40
-30
-20
-10
Per cent of GDP
0
10
20
Revenue forecasts
and spending plans
Successive pre-crisis Spending Reviews
6
TME planned
TME outturn
Receipts forecast
Receipts outturn
5
Per cent of GDP
4
3
2
1
0
-1
-2
SR2000
2000-01 vs 2003-04
Source: HM Treasury
SR2002
2002-03 vs 2005-06
SR2004
2004-05 vs 2007-08
CSR2007
2007-08 vs 2010-11
Revenue forecasts
and spending plans
Successive pre-crisis Spending Reviews
6
TME planned
TME outturn
Receipts forecast
Receipts outturn
5
Per cent of GDP
4
3
2
1
0
-1
-2
SR2000
2000-01 vs 2003-04
Source: HM Treasury
SR2002
2002-03 vs 2005-06
SR2004
2004-05 vs 2007-08
CSR2007
2007-08 vs 2010-11
Crisis-related structural
hit to the public finances
Pre-crisis and latest estimates of potential output
150
March 2008 actual
March 2008 potential
140
Actual output 2007Q4 =100
July 2015 actual
July 2015 potential
130
120
110
Range of implied external forecasts
for potential output in 2016
100
90
2008
2009
2010
Source: HM Treasury, ONS, OBR
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Temporary fiscal rules
2008 to 2010
Temporary fiscal rules
November 2008: Temporary operating rule:
“to set policies to improve the cyclically adjusted current
budget each year, once the economy emerges from the
downturn, so it reaches balance and debt is falling as a
proportion of GDP once the global shocks have worked their
way through the economy in full”
Temporary fiscal rules
November 2008: Temporary operating rule:
“to set policies to improve the cyclically adjusted current
budget each year, once the economy emerges from the
downturn, so it reaches balance and debt is falling as a
proportion of GDP once the global shocks have worked their
way through the economy in full”
February 2010: Fiscal Responsibility Act:
Legislative duties:
–
Borrowing to be more than halved to 5.5% of GDP or less in 2013-14
–
Borrowing to be reduced as a share of GDP in each and every year from
2009-10 to 2015-16; and
–
Public sector net debt to be falling as a share of GDP in 2015-16
UK fiscal framework
2010 to 2015:
Fiscal mandate &
Supplementary target
The 2010 fiscal framework
Fiscal mandate:
• to achieve cyclically-adjusted current balance by the
end of the rolling, five-year forecast period
Supplementary debt target:
• for public sector net debt as a percentage of GDP to
be falling at a fixed date of 2015-16
Office for Budget Responsibility:
• an independent fiscal institution
Fiscal mandate:
Rationale and objectives
June 2010 Budget argued:
• The fiscal mandate is based on:
– the current balance, to protect the most
productive public investment expenditure
– a cyclically adjusted aggregate, to allow some
fiscal flexibility at a time of economic uncertainty
• Unlike the golden rule, the fiscal mandate is:
– forward-looking, not backward-looking
– based on an independent OBR assessment of the structural
fiscal position
Supplementary target:
Rationale and objectives
June 2010 Budget argued:
• “At this time of rapidly rising debt, the fiscal
mandate will be supplemented by a target for public
sector net debt… ensuring that the public finances
are restored to a sustainable path.”
• “once the exceptional rise in debt has been
addressed, a new target for debt as a percentage of
GDP will be set, taking account of the OBR’s
assessment of the long-term sustainability of the
public finances.”
Office for Budget Responsibility:
Rationale and objectives
June 2010 Budget argued:
• In order to promote international and domestic
confidence in the sustainability of the public
finances, the Government had:
“created the new Office for Budget Responsibility
(OBR), which introduces independence, greater
transparency and credibility to the economic and
fiscal forecasts on which fiscal policy is based.”
UK fiscal framework
from 2015:
Proposed new fiscal targets
Proposed fiscal rules
Draft Charter for Budget Responsibility sets out:
• In normal times: a target for a surplus on public sector
net borrowing in each subsequent year
• For the period outside normal times from 2015-16: a
surplus on public sector net borrowing by 2019-20
• Until 2019-20, the mandate is supplemented by a
target for public sector net debt as a percentage of
GDP to be falling in each year
Proposed fiscal rules
Draft Charter for Budget Responsibility sets out:
• These targets apply unless and until the Office for
Budget Responsibility assess, as part of their economic
and fiscal forecast, that there is a significant negative
shock to the UK. A significant negative shock is
defined as real GDP growth of less than 1% on a
rolling 4 quarter-on-4 quarter basis.
Public investment
in the UK
Current budget deficit
and net investment
Budget 2007 outturns and forecast
8
Budget
2007
forecast
6
3.6
3.0
4
2.4
2
1.8
0
1.2
-2
0.6
Current budget deficit (LHS)
Net investment (RHS)
-4
1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12
Source: ONS, HM Treasury
0.0
Current budget deficit
and net investment
Latest current budget and Budget 2007 investment
8
3.6
6
3.0
4
2.4
2
1.8
0
1.2
-2
0.6
Current budget deficit (LHS)
Net investment (RHS)
-4
1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12
Source: ONS, HM Treasury
0.0
Current budget deficit
and net investment
Latest outturns
8
3.6
6
3.0
4
2.4
2
1.8
0
1.2
-2
0.6
Current budget deficit (LHS)
Net investment (RHS)
-4
1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12
Source: ONS, HM Treasury
0.0
6
5
0
Source: OECD
Germany
Belgium
Ireland
Italy
Mexico
Turkey
Iceland
UK
Greece
Spain
Austria
Switzerland
Portugal
Japan
Slovak Rep
Australia
New…
Denmark
US
Netherlands
Finland
Luxembourg
France
Czech Rep
Canada
Hungary
Norway
Slovenia
Sweden
Korea
Poland
Estonia
International comparison
Government investment in the OECD
General government GFCF
Per cent of GDP (2010-2014 average)
4
3
2
1
Infrastructure:
Survey indicators
6.8
Road infrastructure
6.4
2014-15 GCR score (out of 7)
2014-15 GCR score (out of 7)
6.8
6.0
5.6
5.2
4.8
4.4
6.0
5.6
5.2
4.8
4.4
4.0
4.0
6.8
US CAN UK
ITA
Port infrastructure
6.4
6.0
5.6
5.2
4.8
4.4
4.0
US
GER UK CAN JPN FRA
JPN FRA GER AUT
G7
ITA AUT G7
Source: 2014-15 Global Competitiveness Report
6.8
2014-15 GCR score (out of 7)
AUT FRA JPN GER
2014-15 GCR score (out of 7)
Rail infrastructure
6.4
US
UK CAN ITA
G7
Airport infrastructure
6.4
6.0
5.6
5.2
4.8
4.4
4.0
US
GER CAN FRA JPN
UK AUT ITA
G7
Conclusions