Budget 2016: a takeaway Budget to keep
on course to meet budget surplus target?
Carl Emmerson and Paul Johnson
Presentation to BBC journalists, 7 & 8 March 2016
© Institute for Fiscal Studies
Eliminating the deficit?
Percentage of national income
50
Current receipts
Total Managed Expenditure
45
Forecast surplus of £10 billion
(0.5% of national income)
40
35
© Institute for Fiscal Studies
Source: http://budgetresponsibility.org.uk/data/
2020–21
2019–20
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
30
1948
1950
1952
1954
1956–57
1958–59
1960–61
1962–63
1964–65
1966–67
1968–69
1970–71
1972–73
1974–75
1976–77
1978–79
1980–81
1982–83
1984–85
1986–87
1988–89
1990–91
1992–93
1994–95
1996–97
1998–99
2000–01
2002–03
2004–05
2006–07
2008–09
2010–11
2012–13
2014–15
% of national income
Achieving and maintaining a budget surplus
would be a break from the past
12
10
8
6
4
2
0
-2
-4
-6
Periods of
surplus
Financial year
© Institute for Fiscal Studies
Notes and sources: see Figure 3.1 of The IFS Green Budget: February 2016.
Borrowing in 2015–16
• OBR November 2015 forecast is for borrowing of £73.5bn
– compares to £74.1bn forecast in July 2015
• Extrapolating borrowing over the first ten months of this financial
year implies borrowing of just under £80 billion
• But £4 billion of the apparent overshoot is from rapid growth in
investment spending which might not persist
• Borrowing of around £76 billion would be above, but very close to,
the OBR’s forecast
© Institute for Fiscal Studies
Budget: Small downwards revision to growth?
GDP growth
2015
2016
2017
2018
2019
2020
2.4
2.4
2.5
2.4
2.3
2.3
Office for Budget
Responsibility
November 2015
• Bank, and independent forecasters have slightly downgraded their
forecasts since November
• None of these forecasts stand if Brexit occurs
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Inflation forecasts also down
• Chancellor likely to highlight that lower inflation reduces forecast
debt interest spending
• But overall lower inflation bad for the public finances
– freezing most working age benefits and 1% cap on public sector pay
would deliver smaller real saving
– fixed cash spending plans for public services more generous in real terms
– in cash terms saving from lower debt interest spending more-than-offset
by lower VAT revenues
• One response would be to trim departmental spending limits
– could reduce cash limits and leave planned real spending cut unchanged
© Institute for Fiscal Studies
Medium-term risks: revenues
• Earnings 1% lower costs £5 billion
– Bank of England’s latest forecast has earnings more than 1% lower than
their November forecast
• FTSE All-Share 7% lower than assumed by OBR’s autumn forecast
– £2 billion hit to capital tax revenues unless the stock market recovers
• Oil prices falls directly depress revenues from North Sea oil and gas
production
– OBR estimates slightly more than offset by increased revenues elsewhere
– but low oil price places pressure on Chancellor to reduce North Sea taxes
© Institute for Fiscal Studies
Medium-term risks: spending
• Cuts this parliament significantly less than expected
– And less than last parliament
• But
– Spending falling to historically low levels
– Public sector pay due to fall to lowest level relative to private sector
for decades
– Additional demographic and cost pressures
© Institute for Fiscal Studies
Planned cuts to spending
Debt interest
Non-debt interest spending
900
800
700
600
500
400
300
200
100
0
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
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
2019–20
£ billion (2013–14 prices)
Total spending
2010‒11 to 2019‒20:
Total spending: ‒1.8% (‒£13.8bn)
Debt interest: +6.7% (+£2.9bn)
Non-debt interest: ‒2.3% (‒£16.8bn)
© Institute for Fiscal Studies
Non-debt interest spending
Social security + TCs
Public service spending
800
700
600
500
Total social security: –1.1% (–£2.3bn)
400
GB pensioner benefits: +10.0% (+£10.6bn)
300
Non-pensioner benefits: –13.1% (–£12.9bn)
200
100
0
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
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
2019–20
£ billion (2015–16 prices)
Planned cuts to spending
2010‒11 to 2019‒20:
Non-debt interest: ‒2.3% (‒£16.8bn)
Social security: –1.1% (– £2.3bn)
Public services: ‒2.8% (‒£14.4bn)
© Institute for Fiscal Studies
Non-debt interest spending
Social security + TCs
Public service spending
800
700
600
500
400
300
Central government departmental spending: ‒12.4% (‒£49.6bn)
200
‘Unprotected’ central government spending (not NHS, Education,
100
DfID or Defence): ‒25.8% (‒£45.7bn)
0
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
2013–14
2014–15
2015–16
2016–17
2017–18
2018–19
2019–20
£ billion (2015–16 prices)
Planned cuts to spending
2010‒11 to 2019‒20:
Non-debt interest: ‒2.3% (‒£16.8bn)
Social security: –1.1% (– £2.3bn)
Public services: ‒2.8% (‒£14.4bn)
© Institute for Fiscal Studies
Measures already in the pipeline (1/2)
(April 2016 unless otherwise stated)
•
Benefit cuts including freeze to most working age benefits until April 2020
•
1% cut to social rents each year for four years
•
1% ceiling on public sector pay awards for four years
•
Above inflation increases in personal allowance and higher rate threshold
– to £10,800 £11,000 and £42,700 £43,000
•
National Living Wage introduced at £7.20/hr (vs £6.70 min wage for <25s)
•
Increases in company car tax
•
Increases in tobacco duties
•
Employment Allowance increased to £3,000
•
Corporation tax rate cut to 19% in April 2017 and 18% in April 2020
–
annual investment allowance increased to be £200k
•
Apprenticeship levy introduced at 0.5% of wage bill above £3 million
•
Bank levy to be cut each January through to 2021
•
Various temporary business rate reliefs expire during 2016
© Institute for Fiscal Studies
Measures already in the pipeline (2/2)
(April 2016 unless otherwise stated)
•
New personal savings allowance of £1,000 for basic rate taxpayers and
£500 for higher rate taxpayers
– cash ISAs to move to a net rather than gross annual contribution limit
•
New £5,000 dividend tax allowance introduced, dividend tax rates up
•
Pensions lifetime allowance cut to £1m; annual allowance tapered away
from £40k at £150k to £10k at £210k
•
Contracting out for DB schemes ended
•
Single tier pension introduced
•
Inheritance tax threshold frozen until April 2021, new main residence
allowance introduced at £100k in April 2017 rising to £175k in April 2020
•
Increased rate of stamp duty on purchases of non-main residential property
•
Mortgage interest relief for non-corporate landlords restricted to basic rate
from April 2017
© Institute for Fiscal Studies
New policies?
• Promise to raise tax free personal allowance to £12,500 and higher
rate threshold to £50,000 by 2020
– costs £8 billion
• Low prices offer a chance to raise fuel duties
– 1p on petrol and diesel raises c £500m
• Restriction of interest deductibility for corporation tax is on the
cards
• Further relief for North Sea oil?
• Pension tax changes now look unlikely
– changes to lifetime and annual allowances possible
• Prime Minister has said that a “Help to save” scheme to encourage
those on low incomes to save will be announced
• More “stealth taxes”?
© Institute for Fiscal Studies
Summary
• Good reasons to aim to reduce debt as a share of national income
but commitment to deliver budget surpluses from 2019–20 risky
• Outlook for public finances weakened since the Autumn
– lower inflation, weaker outlook for earnings growth, poor stock
market performance all depress receipts
• Delivering planned cuts to public service spending won’t be easy
• Meeting commitment to cut income tax would come at
considerable cost
• Net takeaways likely if £10bn forecast surplus in 2019–20 is to be
retained
© Institute for Fiscal Studies
Budget 2016: a takeaway Budget to keep
on course to meet budget surplus target?
Carl Emmerson and Paul Johnson
Presentation to BBC journalists, 7 & 8 March 2016
© Institute for Fiscal Studies