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PBR 2008 and the fiscal rules Gemma Tetlow, Institute for Fiscal Studies The previous fiscal rules over the last cycle • Sustainable Investment Rule – Maintain debt below 40% of national income in each and every year • Golden Rule – Borrow only to invest over the economic cycle – In other words, cumulative current budget must be in balance or surplus • Both were met over the cycle now thought to have begun in 1997 and closed in second half of 2006 – Sustainable Investment Rule: • Debt below 40% of national income in each year, except 1997–98 • Debt 4% of national income below the ceiling at end of the cycle (about £59 billion in 2008–09 terms) – Golden rule: • Cumulative surplus on current budget equal to 1.4% of national income © Institute for Fiscal Studies, 2008 Meeting the Golden Rule £ billion, 2008-09 terms Cumulative surplus on the current budget over the cycle (£bn, 2008-09) 50 0 -50 -100 -150 -200 -250 -300 -350 -400 20 Tories: 1978 to Tories: 1986 to Labour: 1997 to 2006 1997 1986 © Institute for Fiscal Studies, 2008 Labour: 2006 to 2014 Source: HM Treasury, Authors’ calculations Meeting the Golden Rule £ billion, 2008-09 terms Cumulative surplus on the current budget over the cycle (£bn, 2008-09) 50 0 -50 -100 -150 -200 -250 -300 -350 -400 20 -241 -341 Tories: 1978 to Tories: 1986 to Labour: 1997 to 2006 1997 1986 © Institute for Fiscal Studies, 2008 Labour: 2006 to 2014 Source: HM Treasury, Authors’ calculations Meeting the Golden Rule £ billion, 2008-09 terms Cumulative surplus on the current budget over the cycle (£bn, 2008-09) 50 0 -50 -100 -150 -200 -250 -300 -350 -400 © Institute for Fiscal Studies, 2008 20 -341 -296 Tories: 1978 to Tories: 1986 to Labour: 1997 to 2006 1997 1986 Labour: 2006 to 2014 -241 Source: HM Treasury, Authors’ calculations The new fiscal framework: compliance • Previous rules suspended – Justified on grounds that economic shocks could not have been anticipated and fiscal policy needs “the flexibility to respond appropriately to those shocks” • Darling’s temporary operating rule: “…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”. © Institute for Fiscal Studies, 2008 Improving the cyclically-adjusted current budget 3 2 1 0 -1 -2 © Institute for Fiscal Studies, 2008 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 -3 -4 -5 1997-98 Percentage of national income Cyclically-adjusted surplus on the current budget (% national income) Source: HM Treasury, Authors’ calculations Improving the cyclically-adjusted current budget 3 2 on trend 1 0 -1 -2 -3 -4 -5 © Institute for Fiscal Studies, 2008 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 above trend 1997-98 Percentage of national income Cyclically-adjusted surplus on the current budget (% national income) Source: HM Treasury, Authors’ calculations The new fiscal framework: critique • Darling’s temporary operating rule: “…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”. • Tory proposal, September 2008: “At the end of a forecast horizon: falling debt as a percentage of GDP and a balanced current budget, adjusted for the cycle” • Falling debt at the end of the forecasting period is not a sufficiently constraining fiscal target © Institute for Fiscal Studies, 2008 © Institute for Fiscal Studies, 2008 2012-13 2006-07 2008-09 2010-11 2002-03 2004-05 1996-97 1998-99 2000-01 1992-93 1994-95 1988-89 1990-91 1982-83 1984-85 1986-87 1978-79 1980-81 1974-75 1976-77 Percentage of national income Net debt – a 40-year high 60 50 40 30 20 10 0 Financial year Source: HM Treasury © Institute for Fiscal Studies, 2008 2012-13 2006-07 2008-09 2010-11 2002-03 2004-05 1996-97 1998-99 2000-01 1992-93 1994-95 1988-89 1990-91 1982-83 1984-85 1986-87 1978-79 1980-81 1974-75 1976-77 Percentage of national income Net debt – a 40-year high 60 50 40 30 20 10 0 Financial year Source: HM Treasury © Institute for Fiscal Studies, 2008 2012-13 2006-07 2008-09 2010-11 2002-03 2004-05 1996-97 1998-99 2000-01 1992-93 1994-95 1988-89 1990-91 1982-83 1984-85 1986-87 1978-79 1980-81 1974-75 1976-77 Percentage of national income Net debt – a 40-year high 60 50 40 30 20 10 0 Financial year Source: HM Treasury 1946-47 1949-50 1952-53 1955-56 1958-59 1961-62 1964-65 1967-68 1970-71 1973-74 1976-77 1979-80 1982-83 1985-86 1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 2012-13 Percentage of national income Borrowing – a 63-year high -4 -2 0 2 4 6 8 10 Financial year © Institute for Fiscal Studies, 2008 Source: HM Treasury Percentage of national income Structural current budget balance: Labour vs Conservatives 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 Brown / Darling Howe / Lawson / Major / Lamont / Clarke 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Years since 1978-79 and 1996-97 respectively © Institute for Fiscal Studies, 2008 Conclusions • Sharp deterioration in forecast for GDP and borrowing – Including 4% permanent loss of trend GDP • Both fiscal rules set to be missed and no adequate replacement • Debt and borrowing both set to rise to historically high levels • Medium-term tightening – Largely through cutbacks to spending plans – Planned real cuts in capital spending © Institute for Fiscal Studies, 2008