Budget 2004 Briefing
Institute for Fiscal Studies
www.ifs.org.uk/budgetindex.shtml
The Public Finances
Christine Frayne
Overall picture
• No change to GDP growth rates
• Policy measures
• Set out spending envelope for the Spending
Review 2004
Changes in public sector net
borrowing
2003-04
2004-05 2005-06 2006-07 2007-08
Budget 2004
37.5
32.9
30.6
27
27
PBR 2003
37.4
31.1
29.9
27
27
Change
+0.1
+1.8
+0.7
0
0
Source: HM Treasury
Changes in public sector net
borrowing
2003-04
2004-05 2005-06 2006-07 2007-08
Change
+0.1
+1.8
+0.7
0
0
Current
spending
0.6
0.6
1.3
2
2
Investment
-1.8
-0.3
0
0
0
Receipts
-1.3
-1.5
0.6
2
2
Source: HM Treasury
Change in revenue forecasts
2003-04
2004-05
2005-06
2006-07
2007-08
Total changes
-1.3
-1.5
0.6
1½
2
Total non-discretionary
changes
–1.3
–1½
–½
0
0
VAT assumption
0
-½
0
½
1
Equity Prices
0
½
1
1
1
Consumers‟
expenditure
-1
0
½
½
½
Fiscal forecasting
changes
0
-1
-1
-1½
-1½
£bn
Source: HM Treasury
Discretionary Budget measures
£ million
2004-05
2005-06
2006-07
Local authority business
growth incentives
0
-150
-300
£100 payment to the over
70s
-475
0
0
Distributed profits minimum
rates
10
340
490
Other tax compliance
revenues
315
430
430
Fuel duties and VED
-425
-115
-115
Total
-725
65
-170
Source: HM Treasury
Discretionary Budget measures
£ million
2004-05
2005-06
2006-07
Local authority business
growth incentives
0
-150
-300
£100 payment to the over
70s
-475
0
0
Distributed profits minimum
rates
10
340
490
Other tax compliance
revenues
315
430
430
Fuel duties and VED
-425
-115
-115
Total
-725
65
-170
AME margin
-1000
-2000
Source: HM Treasury
Percentage of national income
Receipts & spending as % GDP
43
42
41
40
39
38
37
36
35
34
Current receipts
96–97
98–99
00–01
02–03
TME
04–05
06–07
08–09
The famous 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
Current budget surpluses
Outturns
Percentage of GDP
3.0
Budget 2004 forecast
2.1 2.1
2.0
1.1
1.0
0.9
0
0.3
0.7
0.0
-0.1
-1.0
-0.4
-2.0
-3.0
-0.9
-1.2
-1.9
-2.8
-4.0
1996-97
1998-99
2000-01
2002-03
2004–05
2006-07
2008-09
Source: HM Treasury
Average surplus on current
budget by 2005-06
% of national income
1.6%
1.4%
1.4%
1.2%
1.1%
1.0%
0.8%
0.6%
0.5%
0.4%
0.2%
0.2%
0.1%
0.0%
Budget 01 Budget 02 Budget 03
PBR 03
Budget 04
Source: HM Treasury
Cumulative surplus on current
budget in 2005-06
% of national income
1.6%
£124bn
1.4%
1.2%
£98bn
1.0%
0.8%
0.6%
£45bn
0.4%
£14bn
0.2%
£8bn
0.0%
Budget 01 Budget 02 Budget 03
PBR 03
Budget 04
Source: HM Treasury
“There is a margin against the golden rule of
£11 billion this cycle, including the AME
margin” (Introduction, Appendix C, Budget
2004)
Cumulative current budget
120
100
Budget 01
Budget 02
Budget 03
PBR 03
Budget 04
£billion
80
60
40
20
0
-20
M
-9
ar
9
M
-0
ar
0
M
-0
ar
1
M
-0
ar
2
M
-0
ar
3
M
-0
ar
4
M
-0
ar
5
M
-0
ar
6
Year
Source: HM Treasury
So what is the verdict on the
Golden Rule?
• Small room for manoeuvre on the % GDP
figure
• Missed on the cash summation measure
• But forward looking?
Percentage of GDP
Cyclically-adjusted current
budget
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Budget 02
Budget 03
PBR 03
Budget 04
1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 20082000 01
02
03
04
05
06
07
08
09
Source: HM Treasury
Public sector net debt
% GDP
01–02 02–03 03–04 04–05 05–06
Budget 2001
30.3
29.6
29.7
29.9
30.0
Budget 2004
30.2
30.8
33.2
34.4
35.5
Conclusions
• Little change since PBR 2003
• Very little room for manoeuvre over current
cycle
• Slightly bigger improvement in the underlying
fiscal position into the next cycle
Public spending
Carl Emmerson
What did the Budget tell us? (1)
• Total spending in 2006–07 and 2007–08
• Current / Capital split also set
• Education spending pre-announced
• (NHS spending already set in Budget 2002)
What did the Budget tell us? (2)
• Promised real increases in:
• Defence, transport, home office, housing,
local government, services to the elderly
and children
• HE funding/student „maintained‟ in real terms
• Nominal freeze in all administration spending
What remains for SR2004?
• DEL / AME split
• Precise allocation to other departments
19
71
19 -72
73
19 -74
75
19 -76
77
19 -78
79
19 -80
81
19 -82
83
19 -84
85
19 -86
87
19 -88
89
19 -90
91
19 -92
93
19 -94
95
19 -96
97
19 -98
99
20 -00
01
20 -02
03
20 -04
05
20 -06
07
-0
8
Percentage of national income
Public spending over time
60.0%
Public Sector Net Investment
50.0%
Current spending
40.0%
30.0%
20.0%
10.0%
0.0%
Source: HM Treasury
20
07
20
06
20
05
20
04
20
03
20
02
20
01
-0
8
-0
7
-0
6
-0
5
-0
4
-0
3
-0
2
-0
1
0
-9
9
-9
8
-2
00
20
00
19
99
19
98
19
97
% real increase
NHS spending over time
10.0
8.0
6.0
4.0
2.0
0.0
Financial year
Source: HM Treasury
20
07
20
06
20
05
20
04
20
03
20
02
20
01
-0
8
-0
7
-0
6
-0
5
-0
4
-0
3
-0
2
-0
1
0
-9
9
-9
8
-2
00
20
00
19
99
19
98
19
97
% real increase
Education spending over time
10.0
8.0
6.0
4.0
2.0
0.0
Financial year
Source: HM Treasury
Cutting the cake
TME
2007/08
£ bn
Av. real inc.
06/07–07/08
2007/08
% of GDP
£579bn
2.7%
42.2%
Source: HM Treasury
Cutting the cake
NHS
2007/08
£ bn
£109.4bn
Av. real inc.
06/07–07/08
7.0%
2007/08
% of GDP
8.0%
Education
£76.6bn
3.2%
5.6%
TME
£579bn
2.7%
42.2%
Source: HM Treasury
Cutting the cake
NHS
2007/08
£ bn
£109.4bn
Av. real inc.
06/07–07/08
7.0%
2007/08
% of GDP
8.0%
Education
£76.6bn
3.2%
5.6%
Other
£393.0bn
1.4%
28.6%
TME
£579bn
2.7%
42.2%
Source: HM Treasury
Administrational savings
• Gershon review:
• Increased shared purchasing
arrangements
• Streamlined back office operations
• Reduced transaction costs
• Nominal freeze in all admin spending
• Would save at least £1.1bn in 2007–08
Administrational savings
“the Secretary for Work is announcing today for his
Department a gross reduction of 40,000 staff
posts, a redeployment of 10,000 posts to new
priorities and thus an overall reduction over 4
years of 30,000 posts. Staff numbers will fall from
130,000 now to – by 2008 – 100,000”
• Not a completely new announcement – DWP staff
numbers already forecast to fall from 130,200 in
2002–03 to 115,900 in 2005–06
• Announcement is an extension of current policy
Efficiency savings
• Target of efficiency increase of 2½% a year
• £20bn a year by 2007–08
• Aspiration is to deliver continued improvements in
public services at less cost
• Measuring whether this is achieved is difficult
• 2½% greater than the 2¼% growth in productivity
forecast across the UK economy
Conservatives alternative:
• Cut spending as a share of national income
• Increased spending on schools and the NHS
and pensioners
• Cut spending on central government
administration
• Reductions in spending as a share of national
income in other areas
Liberal Democrats alternative:
• Public spending to remain constant over time
• Redirecting spending towards priority areas
• Individuals on high incomes to pay higher tax
to finance
• Abolition of graduate charge
• Free personal care for the elderly
• (and reduction in local taxation)
• Any additional efficiency savings used to
reduce borrowing
Total Managed Expenditure as share of national income
44
42
40
38
36
Historic
Labour
Conservative
Lib Dem
34
96
-9
97 7
-9
8
98
-9
99 9
-0
00 0
-0
1
01
-0
02 2
-0
03 3
-0
4
04
-0
05 5
-0
06 6
-0
7
07
-0
08 8
-0
09 9
-1
0
10
-1
11 1
-1
2
Percentage of national income
How the spending plans compare
Implications for tax
• Increase in tax burden required to finance all of these spending
plans if the golden rule is to be met looking forwards
• If Treasury revenue forecasts are right:
• Revenues sufficient to finance Labour‟s plans
• Lower spending would allow announcements of tax cuts
• If our forecasts are right:
• Increase in revenues insufficient to finance Labour‟s plans
• Increase is sufficient to finance Conservative‟s plans but
announcements of tax cuts not initially possible
• Impossible to say for certain whether tax raising or cutting
measures are necessary or possible
Distributional analysis
Robert Chote
or
es
t
De
ci
le
2
De
ci
le
3
De
ci
le
4
De
ci
le
5
De
ci
le
6
De
ci
le
7
De
ci
le
8
De
ci
le
9
Ri
ch
es
t
Po
% gains by income decile
2.0%
1.5%
1.0%
0.5%
0.0%
Pre-announced
Budget 2004
Budget 2004 Briefing
Institute for Fiscal Studies
www.ifs.org.uk/budgetindex.shtml
19
87
1 9 /8
88 8
1 9 /8
89 9
1 9 /9
90 0
1 9 /9
91 1
1 9 /9
92 2
1 9 /9
93 3
1 9 /9
94 4
1 9 /9
95 5
1 9 /9
96 6
1 9 /9
97 7
1 9 /9
98 8
1 9 /9
9 9
2 0 9 /0
00 0
2 0 /0
0 1
2 0 1 /0
02 2
2 0 /0
03 3
2 0 /0
04 4
2 0 /0
05 5
2 0 /0
0 6
2 0 6 /0
07 7
/0
8
Percentage of national income
CT revenues and forecasts
5%
Outcomes
Budget 2003
PBR 2003
Budget 2004
4%
3%
2%
1%
0%