Meeting the fiscal rules?
Gemma Tetlow
Institute for Fiscal Studies
Strengthening the public finances
Change in current budget balance, 2007–08 to 2012–13
% GDP
PBR 2007
Budget 2008
+1.7%
+1.6%
Spending cuts
CSR 07 years
SR 09 years
Tax increase
Overall current budget
tightening
Source: HM Treasury; IFS
Strengthening the public finances
Change in current budget balance, 2007–08 to 2012–13
% GDP
Spending cuts
PBR 2007
Budget 2008
–0.7%
CSR 07 years
SR 09 years
Tax increase
+1.0%
Overall current budget
tightening
+1.7%
+1.6%
Source: HM Treasury; IFS
Strengthening the public finances
Change in current budget balance, 2007–08 to 2012–13
% GDP
PBR 2007
Budget 2008
–0.7%
–0.9%
Tax increase
+1.0%
+0.7%
Overall current budget
tightening
+1.7%
+1.6%
Spending cuts
CSR 07 years
SR 09 years
Source: HM Treasury; IFS
Strengthening the public finances
Change in current budget balance, 2007–08 to 2012–13
% GDP
PBR 2007
Budget 2008
–0.7%
–0.9%
–0.4%
–0.3%
Tax increase
+1.0%
+0.7%
Overall current budget
tightening
+1.7%
+1.6%
Spending cuts
CSR 07 years
SR 09 years
Source: HM Treasury; IFS
Strengthening the public finances
Change in current budget balance, 2007–08 to 2012–13
% GDP
PBR 2007
Budget 2008
–0.7%
–0.9%
CSR 07 years
–0.4%
–0.3%
SR 09 years
–0.3%
–0.6%
Tax increase
+1.0%
+0.7%
Overall current budget
tightening
+1.7%
+1.6%
Spending cuts
Source: HM Treasury; IFS
Strengthening the public finances
Change in current budget balance, 2007–08 to 2012–13
2007–08 terms
PBR 2007
Budget 2008
Spending cuts
–£10bn
–£12bn
CSR 07 years
–£6bn
–£4bn
SR 09 years
–£4bn
–£8bn
Tax increase
+£14bn
+£9bn
Overall current budget
tightening
+£24bn
+£22bn
Source: HM Treasury; IFS
43
Labour I
42
Labour II
41
40
39
38
Receipts
Current expenditure
Total expenditure
37
36
12–13
11–12
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
35
96–97
Percentage of national income
The big picture
Financial year
Source: HM Treasury
The fiscal rules
• Golden Rule
• Borrow only to invest
• Current budget balance or surplus
• Judged over the economic cycle
• Sustainable Investment Rule
• Debt at a stable and prudent level
• This cycle: ≤40% of national income every
year
Source: HM Treasury
5.0
4.0
2.3 2.4
3.0
2.0
1.2
1.2
0.3 0.6
1.0
1.0
0.0
-1.0 -0.1
-2.0
-1.0
-1.5 -1.6
-1.1
-0.3 -0.6
-0.7
-0.2
Outturns
-3.0
12–13
11–12
10–11
09–10
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
08–09
Budget 08 forecast
-4.0
97–98
Percentage of national income
Current budget balance
Source: HM Treasury
Meeting the golden rule?
120
Cumulative surplus £bn,
2007–08 terms
100
Cumulative current budget balance
Cycle starting in 1997-98
80
60
40
20
0
-20
-40
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th
Financial year of the cycle
Source: HM Treasury; IFS
Meeting the golden rule?
120
Cumulative surplus £bn,
2007–08 terms
100
80
Cumulative current budget balance
Cycle starting in 1997-98
Cycle starting in 2006-07
60
40
20
0
-20
-40
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th
Financial year of the cycle
Source: HM Treasury; IFS
Meeting the golden rule?
120
Cumulative surplus £bn,
2007–08 terms
100
Cumulative current budget balance
Cycle starting in 1997-98
80
60
40
20
0
-20
-40
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th
Financial year of the cycle
Source: HM Treasury; IFS
Current budget balances
Budget 01
Budget 03
Budget 05
Budget 07
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
12–13
11–12
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
Budget 02
Budget 04
Budget 06
Budget 08
Source: HM Treasury
The fiscal rules
• Golden Rule
• Borrow only to invest
• Current budget balance or surplus
• Judged over the economic cycle
• Sustainable Investment Rule
• Debt at a stable and prudent level
• This cycle: ≤40% of national income every
year
• Now defined excluding Northern Rock
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Percentage of national income
Will the investment rule be met?
60
50
Budget 2008
40
30
20
Ceiling
10
0
Financial year
Source: HM Treasury; IFS
60
Budget 2008
50
40
Ceiling
30
20
10
0
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Percentage of national income
Will the investment rule be met?
Including
estimated
impact of
Northern Rock
Financial year
Source: HM Treasury; IFS
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Percentage of national income
Will the investment rule be met?
60
50
Budget 2008
40
30
20
Ceiling
10
0
Financial year
Source: HM Treasury; IFS
Meeting the net debt rule?
Minimum forecast headroom from 40% ceiling
12.0
% of national income
10.0
9.7
9.0
8.0
6.2
6.0
3.6
4.0
2.9
1.6
2.0
1.2
0.2
0.0
Budget
01
Budget
02
Budget
03
Budget
04
Budget
05
Budget
06
Budget
07
Budget
08
Source: HM Treasury; IFS
Meeting the net debt rule?
Minimum forecast headroom from 40% ceiling
160.0
£bn, 2007-08 terms
140.0
136.3
126.5
120.0
100.0
87.1
80.0
60.0
40.0
20.0
50.6
40.7
22.5
16.9
2.8
0.0
Budget Budget Budget Budget Budget Budget Budget Budget
08
07
06
05
04
03
02
01
Source: HM Treasury; IFS
Risks to the public finances
• Economic downturn deeper/more prolonged
• Underlying receipts weaker than Treasury
believes
• Though Budget 2008 projection now closer
to Green Budget 2008
• Political pressure for greater giveaways
Greater giveaways ahead?
• One-off enhanced payment for over-60s
• Maybe over-60s equally deserving next winter?
• Cost £575 million per year
• Fuel duty: delay 2p nominal increase until October
• Maybe oil price will remain high?
• Cost £550 million per six months
• Gift aid: 2p cut in charity relief delayed for 3 years
• Maybe charities equally deserving in year four?
• Cost £120 million per year
• To make these policies permanent: £2bn a year
Conclusions
• £7½bn deterioration in public finances
• Financed by new measures, tighter
Spending Review 2009 and higher
borrowing
• No room to manoeuvre against either fiscal
rule
• Debt rule could easily be breached in
2010–11
• Increased pressure for further giveaways?