Meeting the golden rule?
Christine Frayne
Changes since PBR 2004
• Forecasts for economic growth unchanged
• Small forecasting changes
• Higher equity prices boost current & future receipts
• But lower NICs and public sector corporation profits
• Small net discretionary change
• £265m tightening in 2005–06
• Small net giveaway thereafter
Small pre-election giveaway
4.0
£3.5bn
3.0
£ billion
2.0
1.0
0.0
–£0.3bn
-1.0
-2.0
-3.0
Budget Budget
2001 - 2001 GiveawayTakeaway
Budget Budget
2005 - 2005 GiveawayTakeaway
Other
Pensioners
Home owners(?)
Anti-avoidance
Stamp duty
Oil companies
Children
Income tax
Motorists
The Chancellor’s fiscal rules
• Golden rule: only borrow to invest
• Receipts cover current spending
• Surplus or balance on current budget
• Judged over the economic cycle
• Sustainable investment rule: debt at a ‘stable
and prudent’ level, <40% of national income
Meeting the golden rule? (1)
2.2
2.2
1.0
-0.5
-1.3
-1.4
-1.8
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
Current cycle?
00–01
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
99–00
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: HM Treasury
Meeting the golden rule? (1)
2.2
2.2
1.0
0.0
0.3
0.6
0.8
-0.5
-1.3
-1.4
-1.8
09–10
08–09
07–08
06–07
05–06
04–05
Next cycle?
03–04
02–03
01–02
Current cycle?
00–01
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
99–00
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: HM Treasury
Meeting the golden rule? (2)
02
03
04
05
09–10
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
08–09
Budget
Budget
Budget
Budget
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
99–00
Percentage of national income
Cyclically adjusted current budget surplus,
as a share of national income
Source: HM Treasury
Room to manoeuvre?
• PBR 2nd December 2004
• Golden rule met with £8bn to spare
• ONS revision 28th February 2005
• Margin increases by £3bn
• Golden rule now met with £11bn to spare
• Budget 16th March 2005
• Golden rule now met with £6bn to spare
Meeting the golden rule? (3)
Budget 04
PBR 04
IFS Green
Budget 05
Budget 05
0.0
-2.0
-4.0
£ billion
-6.0
-5.5
-5.7
-8.0
-6.9
-10.0
-12.0
-14.0
-16.0
-18.0
-10.5
-£10.8
-12.5
2004-05
2005-06
-13.4
-15.9
-16.1
Forecasting uncertainty
3.0
2.0
1.0
0.0
Central
-1.0
-2.0
06
20
05
-
05
20
04
-
04
20
03
-
03
20
02
-
02
20
01
-
01
20
00
-
20
00
-3.0
19
99
-
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: IFS calculations
Forecasting uncertainty
3.0
2.0
20%
1.0
0.0
Central
-1.0
-2.0
20%
06
20
05
-
05
20
04
-
04
20
03
-
03
20
02
-
02
20
01
-
01
20
00
-
20
00
-3.0
19
99
-
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: IFS calculations
Forecasting uncertainty
3.0
2.0
40%
1.0
20%
0.0
Central
-1.0
20%
-2.0
40%
06
20
05
-
05
20
04
-
04
20
03
-
03
20
02
-
02
20
01
-
01
20
00
-
20
00
-3.0
19
99
-
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: IFS calculations
Forecasting uncertainty
3.0
2.0
60%
40%
20%
Central
1.0
0.0
-1.0
20%
40%
60%
-2.0
06
20
05
-
05
20
04
-
04
20
03
-
03
20
02
-
02
20
01
-
01
20
00
-
20
00
-3.0
19
99
-
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: IFS calculations
Forecasting uncertainty
3.0
2.0
80%
60%
40%
20%
Central
20%
40%
60%
80%
1.0
0.0
-1.0
-2.0
06
20
05
-
05
20
04
-
04
20
03
-
03
20
02
-
02
20
01
-
01
20
00
-
20
00
-3.0
19
99
-
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: IFS calculations
Forecasting uncertainty
3.0
2.0
80%
60%
40%
20%
Central
20%
40%
60%
80%
1.0
0.0
-1.0
-2.0
06
20
05
-
05
20
04
-
04
20
03
-
03
20
02
-
02
20
01
-
01
20
00
-
20
00
-3.0
19
99
-
Percentage of national income
Current budget surplus, as a share of national income
Financial year
Source: IFS calculations
Will the golden rule be met?
100%
82.2%
Percentage
80%
60%
74.2%
59.1%
62.9%
44.5%
40%
20%
0%
Budget 02 Budget 03 Budget 04
Budget 05 IFS Green
Budget 05
Source: IFS Calculations
Current expenditure
Current receipts
Green Budget revenue projection
41.0
40.0
39.0
38.0
37.0
36.0
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
35.0
96–97
Percentage of national income
Taxes to rise, spending to stabilise?
Source: HM Treasury; IFS Green Budget
Forecast growth in revenues
Average annual real growth in revenues, 2004–05 to 2007–08
Current receipts
4.4
Of which
Corporation Tax
13.2
Income tax
4.7
NICs
3.5
'Other taxes and royalties'
3.5
VAT
2.0
Excise Duties
0.5
0
5
10
Average annual real growth
15
Source: HM Treasury
The parties compared: 2007–08
Tory
Lib Dem
Net change in
tax
–£4bn
+£4bn
Net change in
spending
–£12bn
+£4bn
Net change in
borrowing
–£8bn
No change
The parties compared: 2007–08
Tory
Lib Dem
Labour
baseline
plans
Net change in
tax
–£4bn
+£4bn
+£25bn
Net change in
spending
–£12bn
+£4bn
+£13bn
Net change in
borrowing
–£8bn
No change
–£11bn
Conclusions
• Public finances little changed since the PBR
• Despite £3bn improvement from ONS revision
• Over current economic cycle
• Whether golden rule is met likely to go to the wire
• Over the next economic cycle
• Tax burden set to grow
• New tax raising measures might still be required