PBR 2008 and the public finances
Carl Emmerson, Institute for Fiscal Studies
X
No return to boom and bust?
Output gap since 1978
March 2008 Budget
November 2008 PBR with higher Budget 2008 trend output
November 2008 PBR
8%
Percentage of trend output
6%
4%
2%
0%
-2%
-4%
-6%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-8%
Year and quarter
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
An ever worsening outlook?
© Institute for Fiscal Studies, 2008
13–14
12–13
11–12
10–11
09–10
08–09
07–08
06–07
05–06
Budget 2002
Budget 2006
PBR 2008
03–04
02–03
01–02
00–01
99–00
Budget 2000
Budget 2004
Budget 2008
04–05
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
98–99
Percentage of national income
Cyclically-adjusted public sector net borrowing
Source: HM Treasury.
Forecasting changes since Budget 2008
Public sector net borrowing, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
42.5
38
32
27
23
PBR 2008
77.6
118
105
87
70
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Forecasting changes since Budget 2008
Public sector net borrowing, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
42.5
38
32
27
23
Revisions
+25.8
+63½
+77½
+73
+70½
PBR 2008
77.6
118
105
87
70
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Forecasting changes since Budget 2008
Public sector net borrowing, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
42.5
38
32
27
23
Revisions
+25.8
+63½
+77½
+73
+70½
4% GDP loss
+22.3
+38
+43
+46
+49
Cyclical component
–2.3
+8
+16
+15
+10
+1
+3½
+3½
+3½
+3½
+7
+7
+7
+7
+8
+7
+1
+2
118
105
87
70
Equity prices
House prices
Other
PBR 2008
© Institute for Fiscal Studies, 2008
+5
77.6
Sources: HM Treasury; Author’s calculations.
Forecasting changes since Budget 2008
Public sector net borrowing, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
42.5
38
32
27
23
Revisions
+25.8
+63½
+77½
+73
+70½
4% GDP loss
+22.3
+38
+43
+46
+49
Cyclical component
–2.3
+8
+16
+15
+10
+1
+3½
+3½
+3½
+3½
+7
+7
+7
+7
+8
+7
+1
+2
Equity prices
House prices
Other
+5
Discretionary changes
+9.3
+16½
–4½
–14
–22½
PBR 2008
77.6
118
105
87
70
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Forecasting changes since Budget 2008
Current budget surplus, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
–9.6
–4
+4
+11
+18
Revisions
–23.3
–61
–78
–75
–72
Discretionary changes
–8.3
–13
+1
+10
+16
PBR 2008
–41.2
–78
–73
–54
–37
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Forecasting changes since Budget 2008
Public sector net investment, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
32.9
35
37
38
41
Revisions
+2.5
+2½
–½
–2
–1½
Discretionary changes
+1.0
+3½
–3½
–4
–6½
PBR 2008
36.5
40
33
33
33
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Measures: giveaway and then takeaway
£ billion
Net takeaway
© Institute for Fiscal Studies, 2008
2008–09
2009–10
2010–11
2011–12
2012–13
–9.3
–16.3
+4.8
+14.1
+22.5
Sources: HM Treasury; Author’s calculations.
Measures: giveaway and then takeaway
£ billion
2008–09
2009–10
Tax giveaway
–6.9
–13.6
Tax takeaway
+0.3
+1.2
Spend giveaway
–2.7
–4.1
Spend takeaway
0
+0.2
Lower spend growth
0
0
Net tax increase
–6.6
–12.4
Net spending cut
–2.7
–3.9
Net takeaway
–9.3
–16.3
© Institute for Fiscal Studies, 2008
2010–11
2011–12
2012–13
+4.8
+14.1
+22.5
Sources: HM Treasury; Author’s calculations.
Measures: giveaway and then takeaway
£ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Tax giveaway
–6.9
–13.6
–5.5
–6.2
–6.6
Tax takeaway
+0.3
+1.2
+2.2
+9.1
+10.6
Spend giveaway
–2.7
–4.1
–0.7
–0.3
–0.3
Spend takeaway
0
+0.2
+8.8
+5.0
+5.0
Lower spend growth
0
0
0
+6.5
+13.9
Net tax increase
–6.6
–12.4
–3.3
+2.9
+4.0
Net spending cut
–2.7
–3.9
+8.1
+11.2
+18.6
Net takeaway
–9.3
–16.3
+4.8
+14.1
+22.5
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Spending cuts
• “The inclusion of a £5.0 billion allowance for Additional Value for
Money Savings in 2010–11 Resource DEL”
– £5bn cut in current departmental spending in 2010–11 intention is that new
efficiency savings will ensure no impact on service quality
• “the updating of Department of Health (DH) capital plans to a level
consistent with the latest planned spend”
– £0.3bn increase in DH capital spend over 2008–09 and 2009–10 but with
a £1.4bn cut to DH capital spend in 2010–11
• Total spending to grow by 1.1% a year in real terms from April 2011 to
March 2014
– this would reduce total spending by 2.5% of national income over this
period
– £37bn in today’s terms
© Institute for Fiscal Studies, 2008
How big would a £37bn spending cut be?
© Institute for Fiscal Studies, 2008
How big would a £37bn spending cut be?
“The Conservative Party is committed to making cash cuts of
£35 billion from Labour's public spending plans – cuts so large
they could only be found from cutting deep into front-line public
services, including schools, hospitals and the police.”
(Alistair Darling, 17 March 2005)
© Institute for Fiscal Studies, 2008
Protecting investment spending?
“Lesson 5: Avoid a bias against capital investment”
HM Treasury, “Planning sustainable public spending: lessons from
previous policy experience”, November 2000
“[The new temporary operational fiscal rule] protects investment by
focussing on improving the current budget”
HM Treasury, “The Government’s fiscal framework”, November 2008
© Institute for Fiscal Studies, 2008
Protecting investment spending?
Percentage change in tax and spending in 2012–13 relative
to no discretionary Pre-Budget Report measures
Tax
0.6
Total Managed
Expenditure
-2.5
Of which
Current spending
Public sector net
investment
-16.5
-20
© Institute for Fiscal Studies, 2008
-1.7
-15
-10
-5
Percentage change
0
5
Sources: HM Treasury; Author’s calculations.
Forecast nominal growth in tax revenues
Headline nominal increase in tax revenues
Underlying nominal increase in tax revenues
Nominal GDP growth
10.0
Percentage increase
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
08–09
© Institute for Fiscal Studies, 2008
09–10
10–11
11–12
Financial year
12–13
13–14
Sources: HM Treasury; Author’s calculations.
Conclusions
• Sharp deterioration in Treasury’s economic forecast
– decline in economic output forecast to peak at 6% of trend output, with 4%
of national income being permanently lost
– this lost GDP would typically add 2.8% of GDP to borrowing (£40bn)
• Sharp deterioration in forecast for cyclically adjusted borrowing
– not projected to recover until middle of next decade
– despite £22½bn discretionary tightening by 2012–13
• Short-term net giveaway
– largest year 2 tax cut since the Spring 1988 Budget
– capital spending also brought forward
• Medium-term net takeaway
– more about a cuts to spending than a net tax increase
– spending cuts to fall disproportionately on capital spending
© Institute for Fiscal Studies, 2008