Post Budget Briefing
Institute for Fiscal Studies
23rd March 2006
http://www.ifs.org.uk/budgets/budget2006/index.php
Public finances
Carl Emmerson
A small Budget?
• 2006 Budget
• 45 measures averaging £40m each per year
• 2002 Budget
• 54 measures averaging £220m each per year
• 1997 Budget
• 27 measures averaging £370m each per year
• 2005 Pre-Budget Report
• 30 measures averaging £165m each per year
Source: HM Treasury
Budget measures
£million
2006–07
2007–08
2008–09
Total takeaway
515
1,260
1,205
Total giveaway
895
845
500
Net takeaway
–380
415
705
Source: HM Treasury
Underlying public finances
• Economy
• growth forecasts unchanged from PBR
• output gap estimated to be slightly smaller
• Public finances
• offsetting changes in receipts and spending
• borrowing and debt broadly unchanged
Public Sector Net Borrowing
March 2005 Budget
45
December 2005 Pre-Budget Report
40
March 2006 Budget
35
£ Billion
30
25
20
15
10
5
0
2004–05 2005–06 2006–07 2007–08 2008–09 2009–10 2010–11
Financial year
Source: HM Treasury
Changes to forecasts (1)
• BBC classification change
• January 2006 ONS decision to count this
as central government rather than public
corporation
• both receipts and spending increased by
around £3bn a year
Changes to forecasts (2)
• Medium term receipts up by £2bn/year
• 8% rise in stock market
• slight increase in oil price
• No increase in short-term receipts
• recent average earnings and employment
data
• oil production
• Spending up on Working and Child Tax Credits
• due to lower salaries and wages
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
Current budget balance
Current cycle total =
0.7% of GDP or £10.1bn
4.0
3.0
2.2 2.2
2.0
1.2
1.0
1.0
0.0
0.1
-0.2
10–11
09–10
08–09
07–08
05–06
04–05
03–04
02–03
01–02
00–01
99–00
Budget 06 forecast
98–99
-4.0
-2.8
97–98
-2.0
-3.0
0.5 0.7 0.8
-0.6
-0.9
-1.2
Outturns
-1.9 -1.6
06–07
-1.0
96–97
Percentage of national income
5.0
Source: HM Treasury
Chances of meeting the golden rule?
Probability
100%
90%
80%
70%
60%
55%
50/50 chance
50%
40%
30%
20%
10%
0%
Budget 2006
Source: HM Treasury; IFS
Chances of meeting the golden rule?
Probability
100%
90%
80%
70%
60%
58%
55%
50/50 chance
50%
40%
30%
20%
10%
0%
Pre-Budget Report
2005
Budget 2006
Source: HM Treasury; IFS
Chances of meeting the golden rule?
Probability
100%
90%
80%
70%
60%
75%
58%
55%
50/50 chance
50%
40%
30%
20%
10%
0%
Budget 2003
Pre-Budget Report
2005
Budget 2006
Source: HM Treasury; IFS
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
60
50
Budget 2006
40
30
Ceiling
20
10
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
0
97–98
Percentage of national income
Will the investment rule be met?
Financial year
Source: HM Treasury; IFS
60
Budget 2006
50
40
Ceiling
30
20
Budget 2003
10
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
0
97–98
Percentage of national income
Will the investment rule be met?
Financial year
Source: HM Treasury; IFS
60
80%
60%
40%
20%
Budget 2006
20%
40%
60%
80%
Ceiling
50
40
30
20
10
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
0
97–98
Percentage of national income
Will the investment rule be met?
Financial year
Source: HM Treasury; IFS
A rising tax burden
Current receipts
Net taxes and social security contributions
45.0
40.0
35.0
30.0
10–11
05–06
00–01
95–96
90–91
85–86
80–81
75–76
25.0
70–71
Percentage of national income
50.0
Source: HM Treasury
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
8
7
6
5
4
3
2
1
0
-1
-2
00–01
99–00
98–99
97–98
96–97
Percentage real increase
Level (RH axis)
50
48
46
44
42
40
38
36
34
32
30
Percentage of national
income
Total Managed Expenditure
Financial year
Source: HM Treasury
50
48
46
44
42
40
38
36
34
32
30
Real increase (LH axis)
Level (RH axis)
Line 2
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
PBR projection (% of
GDP, RHS)
Percentage of national
income
8
7
6
5
4
3
2
1
0
-1
-2
96–97
Percentage real increase
Total Managed Expenditure
Financial year
Source: HM Treasury
What increases might we have?
Total Managed Expenditure
1.9
Of which:
Home office
0.0
-5.0
HMRC, HMT, DWP & Cabinet Office
Official Development Assistance
10.5
NHS
4.4
Social security & tax credits
Non education
2.2
0.0
Education
-6
-5
-4
-3
-2
-1
3.4
0
1
2
3
4
5
6
7
8
9
10 11
Percentage real increase
Source: HM Treasury ; IFS
What increases might we have?
Total Managed Expenditure
1.9
Of which:
Home office
0.0
-5.0
HMRC, HMT, DWP & Cabinet Office
Official Development Assistance
10.5
NHS
3.1
Social security & tax credits
Non education
2.2
0.0
Education
-6
-5
-4
-3
-2
-1
5.2
0
1
2
3
4
5
6
7
8
9
10 11
Percentage real increase
Source: HM Treasury ; IFS
Conclusion
• Relatively small Budget
• fiscal rules still expected to be met with
reduced margin of error
• Risks
• can economy grow as quickly as hoped?
• will receipts materialise?
• will total spending be reduced?
• if so which departments will suffer?