Meeting the fiscal rules?
Christine Frayne
Gordon Brown’s fiscal rules
• Golden rule
• only borrow to invest
• receipts must cover current spending
• implies surplus or balance on current
budget
• judged over the economic cycle, not year
by year
• Sustainable investment rule
2009Q2
2008Q3
2007Q4
2007Q1
2006Q2
2005Q3
2004Q4
2004Q1
2003Q2
2002Q3
2001Q4
2001Q1
2000Q2
1999Q3
1998Q4
1998Q1
1997Q2
1996Q3
1995Q4
1995Q1
% of potential output
A seven year cycle?
2.0
PBR04: 1999/00 – 2005/06
1.0
0.0
-1.0
-2.0
Source: HM Treasury
2009Q2
2008Q3
2007Q4
2007Q1
2006Q2
2005Q3
2004Q4
2004Q1
2003Q2
2002Q3
2001Q4
2001Q1
2000Q2
1999Q3
1998Q4
1998Q1
1997Q2
1996Q3
1995Q4
1995Q1
% of potential output
A twelve year cycle?
2.0
PBR04: 1999/00 – 2005/06
PBR05: 1997/98 – 2008/09
1.0
0.0
-1.0
-2.0
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
PBR 05 forecast
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
-4.0
96–97
Percentage of national income
5.0
Source: HM Treasury
Meeting the golden rule?
“We would meet the Golden Rule irrespective.”
Gordon Brown, Evidence to Treasury Select
Committee,19th July 2005
Source: www.publications.parliament.uk/pa/cm200506/cmselect/cmtreasy/399/5071902.htm
Meeting the golden rule?
Previous estimated cycle
Percentage of national income
2.0%
1.5%
Average current budget surplus
1999/00 - 2005/06
1.0%
0.5%
0.0%
-0.5%
Budget 01 Budget 02 Budget 03 Budget 04 Budget 05
PBR 05
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
1999/00 to
2005/06
–0.0%
–£2.4
–0.9%
1997/98 to
2005/06
+0.1%
+£10.3
–0.9%
1997/98 to
2008/09
+0.1%
+£12.3
+0.5%
Source: HM Treasury
Meeting the golden rule?
Estimated cyclically adjusted current budget surplus
Budget 02
Budget 03
Budget 04
Budget 05
PBR 05
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
-2.5
99–00
Percentage of national income
2.5
Source: HM Treasury
Gordon Brown’s fiscal rules
• Golden rule
• Sustainable investment rule
• keep debt at a “stable and prudent” level
• defined as below 40% of national income
• to be met every year in current economic
cycle
Public sector net debt
Budget 2002
Budget 2003
Budget 2004
Budget 2005
PBR 2005
45.0
40% ceiling
40.0
35.0
30.0
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
25.0
96–97
Percentage of national income
50.0
Source: HM Treasury
Conclusion
• Treasury expects Golden Rule to be met
• Over current cycle due to re-dating of economic
cycle
• Medium term outlook potentially improved by
• £3bn discretionary tax increase
• Possible tight control over public spending over
CSR 2007, saving £8bn in today’s money
• Risks
• Is there as much spare capacity in the economy
as the Chancellor hopes?
• Will receipts materialise?
• Will spending be reduced?