Download The public finances

The public finances
Robert Chote
Carl Emmerson
Christine Frayne
The Chancellor’s fiscal rules
• ‘Golden rule’
• only borrow to invest
• on average over the economic cycle
• Sustainable investment rule
• net debt below 40% of national income
• every year of current economic cycle
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
44
99–00
46
98–99
97–98
96–97
Percentage of national income
Public finances under Labour
Revenues
Total spending
Current spending
42
40
38
36
34
Source: HM Treasury
Returning to surplus?
Financial
Growth in
Output
year
economy
gap
Current budget surplus
cyclical
structural
total
2005–06
–0.9
2006–07
–0.3
2007–08
0.0
2008–09
0.5
2009–10
0.7
2010–11
0.8
Source: HM Treasury
Returning to surplus?
Financial
Growth in
Output
year
economy
gap
cyclical
structural
total
1¾%
–1.4
–0.8
–0.1
–0.9
2005–06
Current budget surplus
2006–07
–0.3
2007–08
0.0
2008–09
0.5
2009–10
0.7
2010–11
0.8
Source: HM Treasury
Returning to surplus?
Financial
Growth in
Output
Current budget surplus
year
economy
gap
cyclical
structural
total
2005–06
1¾%
–1.4
–0.8
–0.1
–0.9
2006–07
2¼%
–1.5
–0.3
2007–08
3%
–0.7
0.0
2008–09
2¾%
–0.1
0.5
2009–10
2¼%
0
0.7
2010–11
2¼%
0
0.8
Source: HM Treasury
Returning to surplus?
Financial
Growth in
Output
Current budget surplus
year
economy
gap
cyclical
structural
total
2005–06
1¾%
–1.4
–0.8
–0.1
–0.9
2006–07
2¼%
–1.5
–1.0
0.7
–0.3
2007–08
3%
–0.7
–0.7
0.7
0.0
2008–09
2¾%
–0.1
–0.2
0.7
0.5
2009–10
2¼%
0
0
0.7
0.7
2010–11
2¼%
0
0
0.8
0.8
Source: HM Treasury
2009Q2
2008Q2
2007Q2
2006Q2
2005Q2
2004Q2
2003Q2
2002Q2
2001Q2
2000Q2
1999Q2
1998Q2
1997Q2
1996Q2
% of potential output
A seven year cycle?
2.0
Budget 05: 1999–2000 to 2005–06
1.0
0.0
-1.0
-2.0
Source: HM Treasury
A twelve year cycle?
2.0
PBR 05: 1997–98 to 2008–09
1.0
0.0
-1.0
2009Q2
2008Q2
2007Q2
2006Q2
2005Q2
2004Q2
2003Q2
2002Q2
2001Q2
2000Q2
1999Q2
1998Q2
1997Q2
-2.0
1996Q2
% of potential output
Budget 05: 1999–2000 to 2005–06
Source: HM Treasury
A twelve year cycle?
2.0
PBR 05: 1997–98 to 2008–09
1.0
0.0
-1.0
2009Q2
2008Q2
2007Q2
2006Q2
2005Q2
2004Q2
2003Q2
2002Q2
2001Q2
2000Q2
1999Q2
1998Q2
1997Q2
-2.0
1996Q2
% of potential output
Budget 05: 1999–2000 to 2005–06
Source: HM Treasury
Current budget balance
New estimated cycle
4.0
Previous estimated cycle
3.0
2.0
1.0
0.0
-1.0
-2.0
Outturns
-3.0
10–11
09–10
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
96–97
08–09
PBR 05 forecast
-4.0
07–08
Percentage of national income
5.0
Source: HM Treasury
Meeting the golden rule?
1999–2000 to
2005–06
Average
surplus over
current cycle
(%GDP)
Cumulative
surplus
(£bn 2005-06
GDP terms)
–0.0%
–£1.9
Source: HM Treasury
Meeting the golden rule?
Average
surplus over
current cycle
(%GDP)
Cumulative
surplus
(£bn 2005-06
GDP terms)
1999–2000 to
2005–06
–0.0%
–£1.9
1997–98 to
2005–06
+0.1%
+£10.8
Source: HM Treasury
Meeting the golden rule?
Average
surplus over
current cycle
(%GDP)
Cumulative
surplus
(£bn 2005-06
GDP terms)
1999–2000 to
2005–06
–0.0%
–£1.9
1997–98 to
2005–06
+0.1%
+£10.8
1997–98 to
2008–09
+0.1%
+£12.8
Source: HM Treasury
Meeting the golden rule?
Average
surplus over
current cycle
(%GDP)
Cumulative
surplus
(£bn 2005-06
GDP terms)
Current
budget
balance: first
year of next
cycle
1999–2000 to
2005–06
–0.0%
–£1.9
–0.9%
1997–98 to
2005–06
+0.1%
+£10.8
–0.9%
1997–98 to
2008–09
+0.1%
+£12.8
+0.5%
Source: HM Treasury
Recent forecasting errors
Percentage of national income
2.5
Treasury estimates of current budget surplus
Previous year’s Budget
In-year Pre-Budget Report
Actual
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
99–00
00–01
01–02
02–03
03–04
Financial year
04–05
05–06
Source: HM Treasury
100%
Probability with 3 years of cycle remaining
80%
60%
50/50 chance
40%
20%
0%
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
Probability of meeting golden rule
Will the golden rule be met?
Expected average CB surplus over cycle (% of GDP)
Source: HM Treasury; IFS
100%
Probability with 3 years of cycle remaining
80%
60%
40%
50/50 chance
PBR 2005,
+£12.8bn
= 58%
20%
0%
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
Probability of meeting golden rule
Will the golden rule be met?
Expected average CB surplus over cycle (% of GDP)
Source: HM Treasury; IFS
100%
Probability with 3 years of cycle remaining
80%
60%
40%
50/50 chance
PBR 2002,
+£59.0bn
= 82%
PBR 2005,
+£12.8bn
= 58%
20%
0%
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
Probability of meeting golden rule
Will the golden rule be met?
Expected average CB surplus over cycle (% of GDP)
Source: HM Treasury; IFS
The Chancellor’s fiscal rules
• ‘Golden rule’
• only borrow to invest
• on average over the economic cycle
• Sustainable investment rule
• net debt below 40% of national income
• every year of current economic cycle
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
Percentage of national income
Will the investment rule be met?
60
50
Central
40
30
20
Ceiling
10
0
Financial year
Source: HM Treasury; IFS
60
80%
60%
40%
20%
Central
20%
40%
60%
80%
Ceiling
50
40
30
20
10
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
0
97–98
Percentage of national income
Will the investment rule be met?
Financial year
Source: HM Treasury; IFS
Reforming the fiscal framework
• Both fiscal rules appropriate rules of thumb
• ‘Golden rule’
• more forward-looking measure preferable
• Net debt rule
• wider measure might aid transparency
• comprehensive measure potentially
meaningless
Green Budget forecasts
• Green Budget forecast
• slightly weaker revenues in medium-term
• assumes 2007 CSR envelope as PBR 2005
Green Budget forecasts
• Green Budget forecast
• slightly weaker revenues in medium-term
• assumes 2007 CSR envelope as PBR 2005
• 50% chance of missing golden rule
• 44% chance of missing SIR in 2008–09
Green Budget forecasts
• Green Budget forecast
• slightly weaker revenues in medium-term
• assumes 2007 CSR envelope as PBR 2005
• 50% chance of missing golden rule
• 44% chance of missing SIR in 2008–09
• Budget judgement
• case for further £2½ billion tightening
• larger tax increase required if smaller spending
cut delivered over 2007 CSR period
Little difference in 2005–06
£ billion
PBR
Dec. 2005
GB
Jan. 2006
Difference
Current receipts
483.0
483.1
0.1
Current expenditure
493.6
493.6
0.0
Current budget surplus
–10.6
–10.5
0.1
Net investment
26.3
26.3
0.0
PSNB
37.0
36.8
–0.2
Source: HM Treasury; IFS
Receipts forecasts
Percentage of national income
42
Treasury December 2005 Pre-Budget Report forecast
Green Budget January 2006 forecast
41
40
39
38
37
04–05
05–06
06–07
07–08
08–09
Financial year
09–10
10–11
Source: HM Treasury; IFS
Treasury forecast optimistic?
200
Corporate tax receipts
Stockmarket profits
HM Treasury CT forecast
Morgan Stanley profits forecast
180
Index, 1997 = 100
160
140
120
100
80
60
40
20
Analysis by Graham Secker, Morgan Stanley Research
2010e
2009e
2008e
2007e
2006e
2005e
2004
2003
2002
2001
2000
1999
1998
1997
0
Current spending forecasts
Percentage of national income
42
Treasury December 2005 Pre-Budget Report forecast
Green Budget January 2006 forecast
2007 CSR constant spending
41
40
39
38
37
04–05
05–06
06–07
07–08
08–09
Financial year
09–10
10–11
Source: HM Treasury; IFS
Current budget balance
Percentage of national income
3.0
2.0
1.0
HM Treasury, Pre-Budget Report, December 2005
Green Budget, 'cautious' assumptions
0.0
-1.0
-2.0
-3.0
01–02 02–03 03–04 04–05 05–06 06–07 07–08 08–09 09–10 10–11
Financial year
Source: HM Treasury; IFS
100%
80%
60%
Probability with 3 years of cycle remaining
PBR 2005,
+£12.8bn
= 58%
50/50 chance
40%
20%
0%
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
Probability of meeting golden rule
Will the golden rule be met?
Expected average CB surplus over cycle (% of GDP)
Source: HM Treasury; IFS
100%
80%
60%
40%
Probability with 3 years of cycle remaining
PBR 2005,
+£12.8bn
= 58%
50/50 chance
GB 2006,
–£0.7bn
= 50%
20%
0%
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
Probability of meeting golden rule
Will the golden rule be met?
Expected average CB surplus over cycle (% of GDP)
Source: HM Treasury; IFS
Will the SIR be met?
Chance of debt exceeding SIR limit
HMT PBR
2005
2006–07
1%
2007–08
24%
2008–09
37%
Source: HM Treasury; IFS
Will the SIR be met?
Chance of debt exceeding SIR limit
HMT PBR
2005
IFS Green
Budget 2006
2006–07
1%
2%
2007–08
24%
31%
2008–09
37%
44%
Source: HM Treasury; IFS
Risks on the downside
Percentage of national income
3.0
2.0
1.0
Current budget balance
HM Treasury, Pre-Budget Report, December 2005
Green Budget, 'cautious' assumptions
Green Budget, Morgan Stanley 'central' forecast
Green Budget, Morgan Stanley 'worse case' scenario
0.0
-1.0
-2.0
-3.0
01–02 02–03 03–04 04–05 05–06 06–07 07–08 08–09 09–10 10–11
Financial year
Source: HM Treasury; IFS
Budget judgement
• Last two Green Budgets called for tightening of
£11–£13 billion
• 2005 PBR announced £3 billion tax increase,
and pencilled in £8½ billion spending cut
• 2006 Green Budget suggests case for modest
further tax increase of £2½ billion
• assumes provisional spending plans inked in
• larger tax increase required if smaller
spending cut delivered over 2007 CSR period