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
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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