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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