Download chote slides2

The crisis, the consolidation and
Britain’s public finances
Robert Chote
Chairman
St Catharine’s College, Cambridge, 30 April 2014
Outline
• The Budget 2008 forecast
• What happened instead
• Impact on receipts and spending
• Balancing the budget: will it happen and how?
The outlook in March 2008
• Financial crisis underway, but impact on economy and
public finances still expected to be modest
• “Because of the changes made by this Government to
entrench stability and increase the flexibility and
resilience of our economy, I am able to report that the
British economy will continue to grow through this year
and beyond.”
(Alistair Darling, 2008 Budget speech)
• Outside forecasters only a bit more pessimistic
March 2008 GDP growth forecasts
Cumulative real GDP growth forecast for calendar years 2008 and 2009
Lloyds TSB
Oxford Economics
N IESR
Da iwa Institute of Resea rch
ITEM Club
Liverpool Ma cro Research
CBI
Ba rcla ys Ca pita l
HMT Foreca st
Ca mbridge Econometrics
Bea con Economic Foreca sting
Morga n Sta nley
ABN AMRO
Da iwa Securities SMBC
CEBR
Lehma n Brothers
Goldma n Sa chs
Global Insight
HSBC
Hermes
Citigroup
Ingenious Securities
Commerzba nk
BN P Paribas
Avera ge Outside Foreca st
UBS
Lomba rd Street
Ca pita l Economics
Experia n Business Stra tegies
Sta nda rd Cha rtered Ba nk
IN G Fina ncia l Ma rkets
RBS Global Ba nk ing & Ma rkets
Fortis Ba nk
Dresdner Kleinwort Wa sserstein
Deutsche Ba nk
Economic Perspectives
Outturn
-8
-6
-4
-2
0
2
4
6
Public sector net borrowing
Budget 2008
50
48
Per cent of GDP
46
44
42
40
38
36
34
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Current receipts
Tota l mana ged expenditure
Benign fiscal outlook reflected…
•
Real GDP growth dipping to 1¾% in 2008, then rising to 2½%
•
Nominal GDP growth steady at 4¾ – 5½% a year
•
Potential GDP growth steady at 2¾% a year (2½% assumed)
•
Financial sector profits recovering after brief disruption
•
Equity prices rising with money GDP
•
House prices flat in 2008, then growing with earnings
•
Housing transactions remaining at pre-crisis levels
•
CPI inflation stable at 2% from second half of 2009 onwards
•
Real earnings growth stable at around 2%
•
Little movement in Gilt rates
But instead…
Change from 07-08 to 12-13
Budget 08
Outturn
Real GDP
+13.8%
–2.6%
Nominal GDP
+30.4%
+7.9%
Nominal wages and salaries
+30.2%
+8.7%
Nominal consumer spending
+29.1%
+12.5%
Nominal financial profits
+53.8%
+7.1%
Nominal non-financial profits
+28.7%
+3.4%
But instead…
Change from 07-08 to 12-13
Budget 08
Outturn
Employment
+720k
+294k
Unemployment
+235k
+754k
Consumer prices index
+11.2%
+17.5%
Retail prices index
+15.6%
+17.4%
Equity prices
+15.3%
–4.7%
House prices
+19.7%
–2.3%
Housing transactions
+10.7%
–36.5%
Sterling oil prices
+£11
+£34
10-year gilt yields
–0.1ppt
–3.0ppt
Actual and potential GDP
140.0
130.0
120.0
Rea l GDP = 100 in 2007 Q4
110.0
100.0
90.0
80.0
20 06
20 07
2008 Actual
20 08
20 09
20 10
2008 Potential
20 11
20 12
20 13
2014 Actual
20 14
20 15
20 16
2014 Potential
20 17
Actual and potential GDP
140.0
130.0
120.0
Rea l GDP = 100 in 2007 Q4
110.0
Capital economics -6%
100.0
Fathom
consulting -0.8%
90.0
80.0
20 06
20 07
2008 Actual
20 08
20 09
20 10
2008 Potential
20 11
20 12
20 13
2014 Actual
20 14
20 15
20 16
2014 Potential
20 17
Forecasts of potential GDP
120
Mar-08
Mar-10
Jun-10*
110
100
Mar-13
Mar-14
90
80
Actual output =
100 in Q4 2007
70
60
199601
*In
199903
200301
200603
June 2010 the OBR had not produced a historical potential output series
201001
201303
201701
O BR Budget 2014
O BR December 2013
O BR Budget 2013
O BR December 2012
O BR Budget 2012
O BR November 2011
O BR Budget 2011
O BR November 2010
O BR Budget June 2010
HMT Budget March 2010
HMT PBR 2009
HMT Budget 2009
HMT PBR 2008
Per cent of GDP
The ‘hole’ in the public finances
Deterioration in medium-term structural budget balance relative to March 2008 Budget forecast
10
9
8
7
6
5
4
3
2
1
0
Policy measures post Budget 08
12.0
Perc cent of GDP
10.0
8.0
6.0
4.0
2.0
0.0
- 2.0
Labour
Source: Institute for Fiscal Studies
Policy measures post Budget 08
12.0
Perc cent of GDP
10.0
8.0
6.0
4.0
2.0
0.0
- 2.0
Labour
Source: Institute for Fiscal Studies
Coalition - Budget 2010
Policy measures post Budget 08
12.0
Perc cent of GDP
10.0
8.0
6.0
4.0
2.0
0.0
- 2.0
Labour
Coalition - Budget 2010
Source: Institute for Fiscal Studies
Coalition - post Budget 2010
Policy measures post Budget 08
12.0
Perc cent of GDP
10.0
March 14: 8.6%
8.0
6.0
June 10: 5.8%
March 10: 5.3%
4.0
The 'hole'
2.0
0.0
- 2.0
Labour
Coalition - Budget 2010
NB: Measures include re-costing of previously implemented measures,
notably 50p income tax rate
Source: Institute for Fiscal Studies
Coalition - post Budget 2010
Policy measures post Budget 08
12
10
8
6
4
2
0
-2
2008-09
2009-10
2010-11 2011-12
2012-13
2013-14 2014-15
Tax
NB: Measures include re-costing of previously implemented measures,
notably 50p income tax rate
Source: Institute for Fiscal Studies
2015-16
Spending
2016-17
2017-18 2018-19
Public sector net borrowing
Budget 2008
50
48
Per cent of GDP
46
44
42
40
38
36
34
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Current receipts
Tota l mana ged expenditure
Public spending and receipts
Budget 2008 and March 2014 forecasts
50
48
Per cent of GDP
46
44
42
40
38
36
34
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Tota l mana ged expenditure
Current receipts
Public spending and receipts
March 2014 forecast: including and excluding post Budget 2008 measures
50
48
Per cent of GDP
46
44
42
40
38
36
34
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Tota l mana ged expenditure
Source: Institute for Fiscal Studies
Current receipts
Nominal GDP permanently lower
350
300
250
200
150
100
50
0
1996-97
2000-01
2004-05
Budget 2014
2008-09
Budget 2008
2012-13
2016-17
NGDP fell in this recession
Changes over period of peak to trough fall in real GDP
30%
25%
Rea l GDP
20%
N omina l GDP
15%
10%
5%
0%
- 5%
- 10%
1979Q2 to 1981Q1
1990Q2 to 1991Q3
2008Q1 to 2009Q2
Nominal GDP since 2008 in the G7
20.0%
15.0%
10.0%
5.0%
0.0%
- 5.0%
- 10.0%
- 15.0%
Cana da
Fra nce
Real GDP growth
Germany
Ita ly
GDP deflator growth
Japan
United
Kingdom
United
Sta tes
N ominal GDP growth
Spending or receipts problem?
2009-10: error relative
to Budget 2008
forecast
Cash
% Nominal GDP*
Receipts
–£96bn
–2.3%
Spending
+£25bn
+6.7%
*excluding revisions to 2007-08 NGDP)
• Nominal GDP fell 1.2% from 2007-08 to
2009-10, compared to the Budget 2008
forecast of a 10% rise
Public spending and receipts
Budget 2008
1050
950
£ billion
850
750
650
550
450
350
250
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Tota l ma na ged expenditure
Current rece ipts
Public spending and receipts
March 2014
1050
950
£ billion
850
750
650
550
450
350
250
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Tota l mana ged expenditure
Current receipts
Public spending and receipts
Budget 2014 forecast: including and excluding post Budget 2008 measures
1050
950
£ billion
850
750
650
550
450
350
250
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Tota l ma na ged expenditure
Current rece ipts
Receipts during the crisis
Change in receipts between 2007-08 and 2009-10 (£bn)
Excise duties
Business rates
Council tax
VAT ex measures
NICS
Interest and
dividends
VAT reduction
Income tax
Onshore CT
Capital taxes
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
Why did receipts fall 07-08 to 09-10?
• By a lot in cash terms:
– Lower nominal GDP (including lower nominal labour income,
consumer spending and profits)
• But also somewhat as a share of NGDP:
– Profits tend to be super-cyclical
– Negative fiscal drag, thanks to weak earnings growth and
stubborn consumer inflation
– Disproportionate hit to revenue-rich financial sector
– Asset prices and transactions weak relative to NGDP
– Discretionary VAT cut
The fall and rise in receipts
Change in share of GDP
Crisis
(0910 v 07-08)
Consolidation
(18-19 v 09-10)
–1.9
+2.0
Income tax and NICs
VAT
Onshore corporation tax
UK oil and gas
Capital taxes
Fuel and excise duties
Business rates and council tax
Interest and dividends
Other
Total
Memo: policy measures
Memo: financial sector
The fall and rise in receipts
Change in share of GDP
Crisis
(0910 v 07-08)
Consolidation
(18-19 v 09-10)
Total
–1.9
+2.0
Memo: policy measures
–0.7
+2.3
Memo: financial sector
–0.5
+0.1
Income tax and NICs
VAT
Onshore corporation tax
UK oil and gas
Capital taxes
Fuel and excise duties
Business rates and council tax
Interest and dividends
Other
The fall and rise in receipts
Change in share of GDP
Crisis
(0910 v 07-08)
Consolidation
(18-19 v 09-10)
Income tax and NICs
–0.5
+0.2
VAT
–0.4
+1.1
Onshore corporation tax
–0.7
–0.0
UK oil and gas
–0.1
–0.3
Capital taxes
–0.7
+0.9
Fuel and excise duties
+0.2
–0.5
Business rates and council tax
+0.3
–0.4
Interest and dividends
–0.3
+0.5
Other
+0.2
+0.5
Total
–1.9
+2.0
Memo: policy measures
–0.7
+2.3
Memo: financial sector
–0.5
+0.1
Public spending: rising or falling?
Total managed expenditure, 2007-08=100
140
130
Index
120
110
100
90
80
2007-08
2009-10
2011-12
Nominal
2013-14
real terms
2015-16
% GDP
2017-18
Public spending during the crisis
2009-10
versus
2007-08
Total spending,
of which
Public services/admin
(current + capital DEL)
Social security
tax credits
and
Central government
debt interest
Nominal % change
Budget 08
Outturn
+10.2%
+14.7%
Change in share of GDP
Budget 08
Outturn
Public spending during the crisis
2009-10
versus
2007-08
Nominal % change
Budget 08
Outturn
Total spending,
of which
+10.2%
+14.7%
Public services/admin
(current + capital DEL)
+9.8%
+13.0%
Social security
tax credits
+11.6%
+19.6%
+1.3%
+1.0%
and
Central government
debt interest
Change in share of GDP
Budget 08
Why did nominal spending rise more quickly than expected?
• Public services: underspend in 07-08 plus stimulus spending
• Welfare: unemployment higher than expected
• Debt interest: more borrowing but lower borrowing costs
Outturn
Public spending during the crisis
2009-10
versus
2007-08
Nominal % change
Change in share of GDP
Budget 08
Outturn
Budget 08
Outturn
Total spending,
of which
+10.2%
+14.7%
0
+6.5
Public services/admin
(current + capital DEL)
+9.8%
+13.0%
-0.1
+3.2
Social security
tax credits
+11.6%
+19.6%
+0.1
+2.4
+1.3%
+1.0%
-0.2
0
and
Central government
debt interest
•
Nominal spending and GDP were both expected to rise by
c.10% in Budget 2008, leaving spending/GDP unchanged
•
But nominal spending rose by around 15% while nominal
GDP fell by 1.2%, so spending jumped sharply as a share of
GDP
Welfare spending
14
Foreca st
12
Per cent of GDP
10
8
6
4
2
0
1983-84
Source: DWP, HMRC, O BR
1986-87
1989-90
1992-93
1995-96
Children a nd working a ge
1998-99
2001-02
2004-05
Pensioners
2007-08
2010-11
Tota l
2013-14
2016-17
Drivers of welfare spending
Caseloads compared with Budget 2008 forecasts
Thousands
2007-08
2008-09
2009-10
2010-11
State pension
0
-18
-18
-33
Housing benefit
21
165
557
833
JSA
66
270
636
440
DLA/PIP
15
24
40
33
Drivers of welfare spending
Inflation, earnings and nominal GDP per capita (% change)
Per cent
2008-09
2009-10
2010-11
2011-12
2012-13
Total
change
between
2008-09
and 201213
RPI inflation
3.9
5.0
-1.4
4.6
5.6
18.8
ROSSI
inflation
2.3
6.3
1.8
4.8
6.8
23.9
CPI inflation
1.8
5.2
1.1
3.1
5.2
17.4
Average
earnings
growth
0.6
3.0
1.0
2.7
1.0
8.5
Growth in
nominal GDP
-1.2
-1.4 were generally
4.1 uprated
2.4with ROSSI
0.7 and other
4.5
Priorper
to 2011-12,
means-tested
benefits
16+
benefits
with RPI (in 2010-11 these were uprated by +1.5% rather than -1.4%). The
person
baseline assumption since 2011-12 has been to uprate most benefits with CPI.
Debt interest: rising from low base
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1979/1980
1983/1984
1987/1988
1991/1992
1995/1996
Outturn
1999/2000
Bud 08
2003/2004
2007/2008
BUD14
2011/2012
2015/2016
Debt stock and debt interest
2007-08
2012-13
2018-19
535.6
731.2
-
Average interest rate
4.7
4.6
-
Debt interest
29.9
36.3
-
537.8
1185.2
1548.1
Average interest rate
4.7
1.8
4.0
Debt interest
30.2
47.6
75.2
Budget 2008
Cash PSND
Budget 2014
Cash PSND
Public spending and receipts
Budget 2008 and March 2014 forecasts
50
48
Per cent of GDP
46
44
42
40
38
36
34
1996- 97 1999- 00 2002- 03 2005- 06 2008- 09 2011- 12 2014- 15 2017- 18
Total managed expenditure
Current receipts
Squaring the circle
Change in share of GDP
2007-08
2018-19
Change
PSNB
2.6
-0.2
-2.8
Welfare
10.2
11.2
1.0
Debt Interest
2.1
3.7
1.6
Other AME
5.8
6.9
1.1
Receipts
37.9
38.1
0.1
Departmental spending
22.5
16.1
-6.4
of which: capital
2.7
1.9
-0.7
of which: resource
19.8
14.2
-5.7
The squeeze on public spending
60
55
Annually managed expenditure (AME)
Capital investment (CDEL)
Day-to-day spending on public services (RDEL)
50
45
Per cent of nominal GDP
40
21.4
35
30
20.4
21.9
22.5
18.1
25
20
21.7
2.7
2.9
3.5
2.9
2.3
2.0
22.3
2.0
21.9
2.2
22.0
2.1
22.0
2.0
15
10
19.8
20.8
22.2
21.6
20.7
20.1
19.2
18.5
22.0
21.8
1.9
1.9
17.5
16.2
14.9
14.2
2015-16
2016-17
2017-18
2018-19
5
0
2007-08
2008-09
2009-10
Source: O BR, HMT
Memo: AME includes Single Use Military Equipment
2010-11
2011-12
2012-13
2013-14
2014-15
The squeeze on public spending
Government consumption of goods and services as a share of
GDP
26
Forecast
24
Per cent
22
20
18
16
14
1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Source: O N S, O BR
The squeeze on public spending
Current Spending on public services and administration
24
Per cent of nominal GDP
20
16
11.9
11.4
10.7
10.0
9.1
8.6
7.9
12
8
4
0.4
0.4
0.4
0.4
0.5
0.5
0.5
3.4
3.4
3.2
3.2
3.1
3.1
3.0
6.4
6.4
6.5
6.4
6.3
6.2
2011-12
2012-13
6.5
16.2
14.9
14.2
0
2009-10
2010-11
Other
NHS (Health)
2013-14
2014-15
2015-16
International development
Implied PSCE in RDEL
2016-17
2017-18
Education
PSCE in RDEL
Plans for RDEL excluding depreciation upto 2015-16. Beyond 2015-16 based on implied PSCE in RDEL calculated from the
Government assumption for TME. O ther includes unallocated amounts.
Source: HM Treasury Budget 2014, HM Treasury Public Expenditure Statistical Analyses, July 2013
2018-19
Conclusion: will this happen?
• Lots of uncertainties
– Macro forecast and fiscal forecast
– Assessment of potential and ‘hole’ in public finances
• Policy choices
–
–
–
–
We have to forecast on basis of Coalition policy, but
Conservatives want more welfare cuts
Labour see less need for balanced budget
Lib Dems: more borrowing and tax?