The public finances going forward
Robert Chote, Carl Emmerson,
Christine Frayne and Gemma Tetlow
Institute for Fiscal Studies
The fiscal rules
• 1998 Finance Act
• Golden rule
• Sustainable investment rule
• Are they adequately serving the purpose they
are meant to serve?
The golden rule
• Borrow only to invest
• Current budget balance or surplus
• Judged over the economic cycle
2010Q1
2009Q1
2008Q1
2007Q1
2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
-2.0
2000Q1
1999Q1
1998Q1
1997Q1
1996Q1
1995Q1
% of potential output
A changing cycle?
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Budget 05: 7 year cycle
-2.5
Source: HM Treasury ; Morgan Stanley
A changing cycle?
2.0
PBR 05 and Budget 06: 12 year cycle
1.0
0.5
0.0
-0.5
-1.0
-1.5
Budget 05: 7 year cycle
-2.0
2010Q1
2009Q1
2008Q1
2007Q1
2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
2000Q1
1999Q1
1998Q1
1997Q1
1996Q1
-2.5
1995Q1
% of potential output
1.5
Source: HM Treasury ; Morgan Stanley
A changing cycle?
2.0
PBR 05 and Budget 06: 12 year cycle
1.0
0.5
0.0
-0.5
-1.0
-1.5
Budget 05: 7 year cycle
-2.0
2010Q1
2009Q1
2008Q1
2007Q1
2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
2000Q1
1998Q1
1997Q1
1996Q1
1999Q1
PBR 06: 10 year cycle
-2.5
1995Q1
% of potential output
1.5
Source: HM Treasury ; Morgan Stanley
A changing cycle?
2.0
PBR 05 and Budget 06: 12 year cycle
1.0
MS filter: 7 year cycle
0.5
0.0
-0.5
-1.0
-1.5
Budget 05: 7 year cycle
-2.0
2010Q1
2009Q1
2008Q1
2007Q1
2006Q1
2005Q1
2004Q1
2003Q1
2002Q1
2001Q1
2000Q1
1998Q1
1997Q1
1996Q1
1999Q1
PBR 06: 10 year cycle
-2.5
1995Q1
% of potential output
1.5
Source: HM Treasury ; Morgan Stanley
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
Current budget balance
Financial Year
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
-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
Current budget balance
Financial Year
Source: HM Treasury
5
PBR 2006 cycle minus 2 years = –0.1% of GDP or –£5.5bn
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
Current budget balance
Financial Year
Source: HM Treasury
5
Morgan Stanley filter = –0.6% of GDP or –£58bn
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
Current budget balance
Financial Year
Source: HM Treasury; Morgan Stanley
The sustainable investment rule
• Debt at a stable and prudent level
• This cycle: ≤40% of national income every
year
• Undefined over next cycle
50
45
Actual
PBR 06
Budget 04
Budget 02
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
Source: HM Treasury; IFS
Green Budget forecasts
• Slightly weaker current budget in the short
term, stronger in the medium term
• Golden rule to be met over the current cycle
• Unchanged sustainable investment rule would
be more constraining over the medium term
Receipts forecasts
Treasury December 2006 Pre-Budget Report forecast
Percentage of national income
42
IFS Green Budget 2007 forecast
41
40
39
38
05–06
06–07
07–08
08–09
09–10
Financial year
10–11
11–12
Source: HM Treasury; IFS
Current spending forecasts
Percentage of national income
42
Treasury December 2006 Pre-Budget Report forecast
Green Budget January 2007 forecast
41
40
39
38
05–06
06–07
07–08
08–09
09–10
Financial year
10–11
11–12
Source: HM Treasury; IFS
Current budget balance
Percentage of national income
3.0
HM Treasury, Pre-Budget Report, December 2006
2.0
Green Budget 2007 baseline forecasts
1.0
0.0
-1.0
-2.0
-3.0
05–06
06–07
07–08
08–09
09–10
Financial year
10–11
11–12
Source: HM Treasury; IFS
Cumulative surplus on the current
budget
PBR cycle
(1997–98 to 2006–07)
PBR cycle minus 2 years
(1999–2000 to 2006–07)
Morgan Stanley filter
(2003–04 to 2009–10)
HMT
forecasts
PBR 06
GB
Jan. 2007
+£8.4bn
+£7.1bn
–£5.5bn
–£6.8bn
–£58bn
–£66bn
Source: HM Treasury; IFS; Morgan Stanley
Current budget balance
HM Treasury, Pre-Budget Report, December 2006
Green Budget 2007 baseline forecasts
Green Budget, Morgan Stanley central case
Green Budget, Morgan Stanley 'pessimistic scenario'
Percentage of national income
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
05–06
06–07
07–08
08–09
09–10
Financial year
10–11
11–12
Source: HM Treasury; IFS; Morgan Stanley
PBR 2006
Green Budget baseline forecasts
Green Budget, Morgan Stanley central case
Green Budget, Morgan Stanley 'pessimistic scenario'
42
41
40
39
38
37
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
36
2005-06
Percentage of national income
Will the investment rule be met?
Financial year
Source: HM Treasury; IFS; Morgan Stanley
Budget judgement
• Little difference between Green Budget
forecasts and Treasury
• Golden rule expected to be met over:
• current cycle
• next cycle of at least 5 years
• Unchanged sustainable investment rule
would be more constraining
• No new tax raising measures necessary
unless higher spending is planned over CSR
years