Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
The fiscal state of the nation Paul Johnson Chartered Institute of Housing Conference June 12 2012 © Institute for Fiscal Studies Since 2008... • Following a long period of growth, GDP has fallen dramatically and failed to recover © Institute for Fiscal Studies GDP has nowhere near recovered pre-crisis levels 115 2007Q1–2014Q1 Peak = 100 110 105 100 95 Quarters from peak © Institute for Fiscal Studies 24 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 90 A completely different story than previous recessions 115 2007Q1–2014Q1 1989Q2–1996Q2 Peak = 100 110 1978Q4–1985Q4 105 100 95 Quarters from peak © Institute for Fiscal Studies 24 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 90 Since 2008... • GDP has fallen dramatically and failed to recover • Trend output is now expected to be 13% smaller in 2016 than had been forecast in Budget 2008 – The economy will be about £200 billion smaller than expected • This is expected to be a permanent loss – Depends on uncertain estimates of the “output gap” • And, along with effects of tax and benefit changes will lead to a big fall in household incomes © Institute for Fiscal Studies Household incomes falling to unprecedented degree Median net household income (indexed to 2009=100) 100 99 98 97 96 95 94 93 92 91 90 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Sources: Department for Work and Pensions’ HBAI series; IFS calculations and projections using Family Resources Survey. © Institute for Fiscal Studies Since 2008... • GDP has fallen dramatically and failed to recover • Trend output is now expected to be 13% smaller in 2016 than had been forecast in Budget 2008 – The economy will be about £200 billion smaller than expected • This is expected to be a permanent loss – Depends on uncertain estimates of the “output gap” • And, along with effects of tax and benefit changes will lead to a big fall in household incomes • And a big public finance problem © Institute for Fiscal Studies This has created a hole in the public finances Total spending (Budget 2008) Total spending (no action) Permanent damage = 7.5% of GDP (£114bn) Receipts (Budget 2008) Receipts (no action) 50.0 45.0 40.0 © Institute for Fiscal Studies Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012. 2016–… 2015–… 2014–… 2013–… 2012–… 2011–… 2010–… 2009–… 2008–… 2007–… 2006–… 2005–… 2004–… 2003–… 2002–… 2001–… 2000–… 1999–… 1998–… 30.0 1997–… 35.0 1996–… Percentage of national income 55.0 1974–75 1977–78 1980–81 1983–84 1986–87 1989–90 1992–93 1995–96 1998–99 2001–02 2004–05 2007–08 2010–11 2013–14 2016–17 2019–20 2022–23 2025–26 2028–29 2031–32 2034–35 2037–38 2040–41 2043–44 2046–47 2049–50 Percentage of national income Which has to be dealt with 200 180 160 140 120 100 80 60 40 20 0 Debt: Budget 2008 Debt: No policy action © Institute for Fiscal Studies Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012. The government plans to do that over 7 years (original plan to do so over 5 years) Percentage of national income 9 8 7 6 5 Nov 2011: 7.5% national income (£114bn) hole in public finances Other current spend Debt interest Benefits Investment Tax increases 80% 4 3 2 1 20% 0 2010–11 © Institute for Fiscal Studies 2011–12 2012–13 2013–14 2014–15 2015–16 Notes and sources: see Figure 3.5 of The IFS Green Budget: February 2012. 2016–17 Which just leads to fiscal mandate being met.. Total spending (Budget 2008) Receipts (no action) Total spending (November 2011) 50.0 Receipts (Budget 2008) Total spending (no action) Receipts (November 2011) 45.0 40.0 © Institute for Fiscal Studies Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012. 2016–… 2015–… 2014–… 2013–… 2012–… 2011–… 2010–… 2009–… 2008–… 2007–… 2006–… 2005–… 2004–… 2003–… 2002–… 2001–… 2000–… 1999–… 1998–… 30.0 1997–… 35.0 1996–… Percentage of national income 55.0 1974–75 1976–77 1978–79 1980–81 1982–83 1984–85 1986–87 1988–89 1990–91 1992–93 1994–95 1996–97 1998–99 2000–01 2002–03 2004–05 2006–07 2008–09 2010–11 2012–13 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 2026–27 2028–29 2030–31 2032–33 2034–35 2036–37 2038–39 2040–41 Percentage of national income Debt back on a more sustainable path - but to remain above pre-crisis levels for a generation 200 180 160 140 120 100 80 60 40 20 0 Debt: Budget 2008 Debt: No policy action © Institute for Fiscal Studies Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012. Risks to the public finances • Macroeconomic forecasts might not prove accurate – Even if they did, revenues/spending might not turn out as forecast • Government may yet be unable or unwilling to implement the planned spending cuts – Only 12% of the planned cut to public service spending (6% of the planned cut to current public service spending) implemented by the end of 2011–12 • Nothing close to this scale of cuts has been attempted in the last 60 years © Institute for Fiscal Studies 7-year 6-year squeeze on public service spending 16.2% cut over 7 years 9.3% cut over 7 years 10 5 0 -5 © Institute for Fiscal Studies Note: Figure shows total public spending less spending on welfare benefits and debt interest. 2015–16 2010–11 2005–06 2000–01 1995–96 7 year moving average 1990–91 1985–86 Historic 1980–81 1975–76 ConLib 1970–71 1965–66 1955–56 -10 1960–61 Labour 1950–51 Annual percentage real increase 15 Real spending (1998-99 = 100) Public service spending returns to 2004 levels 230 210 190 170 150 130 110 90 70 50 © Institute for Fiscal Studies Public service spending Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012. With big variations in DEL changes 2010-11 to 2014-15 by department International Development 37.8% Energy and Climate Change 6.5% NHS (England) 1.0% Defence -8.2% Education -11.9% Total -11.5% Transport -14.5% CLG: Local Government -20.7% Home Office -22.0% Justice -27.2% Environment, Food and Rural Affairs -27.6% Business, Innovation and Skills -31.2% Culture, Media and Sport CLG: Communities -100% -46.1% -71.3% -80% -60% -40% -20% 0% Percentage real increase, 2010–11 to 2014–15 © Institute for Fiscal Studies 20% 40% Real spending (1998-99 = 100) But remarkably similar priorities over time 230 210 190 170 150 130 110 90 70 50 © Institute for Fiscal Studies Health Public service spending Education Defence Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012. What comes next for public services • Chancellor has pencilled in cuts in 2015-16 and 2016-17 • How much comes from public services depends on choice between welfare spending and public service spending • In the Budget the chancellor suggested a welfare cut of £8 billion (in current terms) would leave same balance between welfare and public services as over this SR period • Which would imply RDEL cuts of 2.3% a year – Would need to be 3.8% a year without welfare cuts © Institute for Fiscal Studies Trade-off between cuts to public service spending and welfare cuts: 2015–16 and 2016– 17 Average annual real change in RDEL (%) 1 0 -1 No RDEL cut, £20bn welfare cut RDEL cut by 2.3% a year, £8bn welfare cut -2 -3 -4 -5 -25 © Institute for Fiscal RDEL cut by 3.8% a year, no welfare cut -20 -15 -10 -5 0 Change in welfare spending (£bn, 2011–12 terms) (or change in taxation or borrowing) Note: HM Treasury and IFS calculations. Resource Departmental Expenditure Limits (RDEL) is the non-investment component of the spending by central Studies government on the delivery and administration of public services. 5 What comes next for public services • Chancellor has pencilled in cuts in 2015-16 and 2016-17 • How much comes from public services depends on choice between welfare spending and public service spending • In the Budget the chancellor suggested a welfare cut of £8 billion (in current terms) would leave same balance between welfare and public services as over this SR period • Which would imply RDEL cuts of 2.3% a year – Would need to be 3.8% a year without welfare cuts • With no welfare cuts and health still protected (no real cuts) rest of public service spending would need to fall even faster © Institute for Fiscal Studies Summary • The loss of output following the crisis has been deep and prolonged • With a consequent reduction in household incomes and dramatic worsening of the public finances • Government’s fiscal consolidation is most dramatic in 60 years – But still leaves debt above pre-crisis levels for a generation or more • Though a remarkable consistency of priorities across time • Cuts pencilled in for 2015-16 and 2016-17 look painful • The new fiscal framework, especially the independent OBR, looks more robust than what went before • But there remain risks to deliverability © Institute for Fiscal Studies – And the short term problems shouldn’t lead to us ignoring long