IFS
Fiscal rules and public spending
Gemma Tetlow
Institute for Fiscal Studies
7 February 2007
The fiscal framework
• Code for Fiscal Stability
• Fiscal rules by which performance is judged
– Golden rule
– Sustainable investment rule
© Institute for Fiscal Studies, 2007
The golden rule
• Borrow only to invest
• Current budget balance or surplus
• Judged over the economic cycle
© Institute for Fiscal Studies, 2007
Current budget balance
5
4
2.3 2.5
3
2
1.2
1.0
0.6 0.8
0.5
0.3
1
0
-0.1
-1.1
-2
-1.2
-0.6
-0.1
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
02–03
Pre-Budget Report 2006 forecast
01–02
00–01
99–00
Actual
98–99
-4
-2.8
97–98
-3
-1.7 -1.6
03–04
-1
96–97
Percentage of national income
Has Gordon Brown met the
golden rule?
Financial Year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
5
Budget 2005 cycle = 0.0% of GDP or +£2.4bn
4
2.3 2.5
3
2
1.2
1.0
0.8
0.3 0.5 0.6
1
0
-0.1
-1.1
-2
-1.2
11–12
10–11
09–10
08–09
07–08
06–07
05–06
02–03
01–02
00–01
98–99
97–98
-0.1
Pre-Budget Report 2006 forecast
Actual
-4
-1.7 -1.6
04–05
-2.8
99–00
-3
-0.6
03–04
-1
96–97
Percentage of national income
Has Gordon Brown met the
golden rule?
Financial Year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
5
Budget 2006 cycle = 0.1% of GDP or +£10.8bn
4
2.3 2.5
3
2
1.2
1.0
0.8
0.3 0.5 0.6
1
0
-0.1
-1.1
-2
-1.2
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
02–03
01–02
00–01
99–00
-1.7 -1.6
-0.1
Pre-Budget Report 2006 forecast
Actual
98–99
-4
-2.8
97–98
-3
-0.6
03–04
-1
96–97
Percentage of national income
Has Gordon Brown met the
golden rule?
Financial Year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
5
PBR 2006 cycle = 0.1% of GDP or +£8.4bn
4
2.3 2.5
3
2
1.2
1.0
0.6 0.8
0.5
0.3
1
0
-0.1
-1.1
-2
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
02–03
01–02
00–01
99–00
-1.2
-0.6
-0.1
Pre-Budget Report 2006 forecast
Actual
98–99
-4
-2.8
97–98
-3
-1.7 -1.6
03–04
-1
96–97
Percentage of national income
Has Gordon Brown met the
golden rule?
Financial Year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
The sustainable investment rule
• Debt at a stable and prudent level
• This cycle: ≤40% of national income every
year
• Undefined over next cycle
© Institute for Fiscal Studies, 2007
50
Forecast
Actual
45
40
35
30
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
25
97–98
Percentage of national income
Will the investment rule be met?
Financial year
© Institute for Fiscal Studies, 2007
Source: HM Treasury; IFS
Forecasts for the next five years
% national income
2006–07
2011–12
Net borrowing (PSNB)
2.8
1.3
Current budget balance
–0.6
0.8
© Institute for Fiscal Studies, 2007
Forecasts for the next five years
% national income
2006–07
2011–12
Net borrowing (PSNB)
2.8
1.3
Current budget balance
–0.6
0.8
Current spending
40.3
39.5
Net investment
2.2
2.2
Revenues
39.7
40.4
© Institute for Fiscal Studies, 2007
A challenging spending review?
Average annual increase in
spending (%)
Current
Capital
Total
+1.9?
+2.7
+2.0?
April 1999 to March 2008
+3.6
+15.6
+4.0
April 1997 to March 1999
–0.3
+6.7
–0.2
April 1997 to March 2008
+2.9
+13.9
+3.2
+1.7
–4.9
+1.5
2007 CSR
Labour
Conservatives
April 1979 to March 1997
© Institute for Fiscal Studies, 2007
How has spending increased?
Total
3.2
6.2
NHS
Education
4.4
Other
2.3
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Average annual real growth (%)
© Institute for Fiscal Studies, 2007
Source: HM Treasury
Note: Average annual increase 1996–97 to 2007–08
What might the trade-off be?
• Health spending
– Wanless Review recommended minimum 4.4%
annual growth in spending
• Education spending
– State school spending per pupil to match that in
the private sector in 2005–06
• Child poverty
– £4½ billion needed to meet 2010–11 target
© Institute for Fiscal Studies, 2007
What increases might we have?
Total Managed Expenditure
2.0
TME after refilling margin
1.8
Of which:
Home office
0.0
-5.0
9 smaller departments
-3.5
Department for Constitutional Affairs
Official Development Assistance
11.2
Debt interest
2.0
Social security and tax credits
1.6
Non NHS, non-education
NHS and education
-6 -5 -4 -3 -2 -1
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Percentage real increase
© Institute for Fiscal Studies, 2007
Source: HM Treasury ; IFS
What increases might we have?
Total Managed Expenditure
2.0
TME after refilling margin
1.8
Of which:
Home office
0.0
-5.0
9 smaller departments
-3.5
Department for Constitutional Affairs
Official Development Assistance
11.2
Debt interest
2.0
Social security and tax credits
Non NHS, non-education
2.5
0.0
NHS and education
-6 -5 -4 -3 -2 -1
3.3
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Percentage real increase
© Institute for Fiscal Studies, 2007
Source: HM Treasury ; IFS
Annual real growth in education
spending (%)
A trade-off between health and
education?
10
9
8
3.3%
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
10
9
8
3.3%
7
6
5
4
Labour to date
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
Wanless
recommendation =
4.4%
10
9
8
3.3%
7
6
5
4
Labour to date
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
Wanless
recommendation =
4.4%
10
9
8
3.3%
7
6
5
4
Labour to date
Expected growth in
national income =
2½%
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
Wanless
recommendation =
4.4%
10
9
8
3.3%
4.1%
7
6
5
4
Labour to date
Expected growth in
national income =
2½%
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
IFS
Fiscal rules and public spending
Gemma Tetlow
Institute for Fiscal Studies
7 February 2007