Public finances: Osborne sails close to
the wind
Gemma Tetlow
© Institute for Fiscal Studies
IFS hosts two ESRC Research Centres
Public Finances: Overview
• Borrowing increased throughout medium-term horizon
• Largely due to lower than previously forecast level of “potential”
output in UK economy: permanent problem
• A policy response of two halves
– 2011–12 to 2014–15: reshuffling of existing tax and spend
– 2015–16 and 2016–17: significant additional spending cuts
• Policy action sufficient to ensure still forecast to meet fiscal
targets
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Forecasting changes
• Borrowing increased in medium-term by about £30 billion a year
• Revenues lower by £40 billion a year
– Lower receipts from...
• Wages and salaries
• Corporate profits and bonuses
• Household consumption
• Lower asset and commodity prices
– Higher receipts from...
• Investment
• Spending lower by £10 billion a year
– Lower interest rates reduce debt interest spending
– Higher unemployment increases welfare spending
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Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
Level of GDP
(Index, actual 2009–10 GDP = 100)
130
125
Actual GDP (Mar 2011)
Potential ("trend") GDP - March 2011
Actual GDP (Nov 2011)
120
115
110
105
Lower growth this year
and forecast for next year
100
2009-10
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2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
GDP returns
to trend in
2017–18
Level of GDP
(Index, actual 2009–10 GDP = 100)
130
125
120
Actual GDP (Mar 2011)
Potential ("trend") GDP - March 2011
Actual GDP (Nov 2011)
Potential ("trend") GDP - November 2011
3½% loss
of trend
output
115
110
105
Most of this expected to be a
permanent loss of output
100
2009-10
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2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
Level of GDP
(Index, actual 2009–10 GDP = 100)
130
125
120
Actual GDP (Mar 2011)
Potential ("trend") GDP - March 2011
Actual GDP (Nov 2011)
Potential ("trend") GDP - November 2011
Potential ("trend") GDP - March 2008
9½% loss
of trend
output
3½% loss
of trend
output
115
110
105
100
2009-10
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2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Size of the problem: change over time
Percentage of national income
8
£94bn
£86bn £78bn
£86bn £84bn
£91bn
7
6
5
4
3
2
1
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
OBR
November
2011
OBR Budget
2011
OBR
November
2010
OBR Budget
June 2010
HMT Budget
March 2010
HMT PBR
2009
HMT Budget
2009
HMT PBR
2008
0
Size of the problem: change over time
£114bn
Percentage of national income
8
£47bn £94bn
£86bn £78bn
£86bn £84bn
£91bn
7
6
5
4
3
2
1
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
OBR
November
2011
OBR Budget
2011
OBR
November
2010
OBR Budget
June 2010
HMT Budget
March 2010
HMT PBR
2009
HMT Budget
2009
HMT PBR
2008
0
Problems meeting the fiscal mandate
Cyclically-adjusted current
budget, %GDP
2
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
1
0
-1
-2
-3
-4
-5
March 2011
November 2011 - no policy action
November 2011 - with policy
-6
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
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A response of two halves
£ billion
Autumn statement 2011
2011–12
2012–13
2013–14
2014-15
0.0
0.1
0.1
–0.2
Tax giveaway
Tax takeaway
Spending giveaway
Spending takeaway
Net tax increase
Net spending
increase
Net giveaway
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Note: Figures may not sum due to rounding.
Sources: HM Treasury; IFS calculations.
2015-16
A response of two halves
£ billion
Autumn statement 2011
2011–12
2012–13
2013–14
2014-15
Tax giveaway
+0.4
+1.3
+1.0
+1.0
Tax takeaway
–0.3
–1.0
–1.2
–1.2
Spending giveaway
0.0
+1.4
+2.5
+3.1
Spending takeaway
0.0
–1.6
–2.3
–3.2
Net tax increase
0.0
0.3
–0.1
–0.1
Net spending
increase
0.0
–0.3
0.3
–0.1
Net giveaway
0.0
0.1
0.1
–0.2
© Institute for Fiscal Studies
Note: Figures may not sum due to rounding.
Sources: HM Treasury; IFS calculations.
2015-16
A response of two halves
£ billion
Autumn statement 2011
2011–12
2012–13
2013–14
2014-15
2015-16
Tax giveaway
+0.4
+1.3
+1.0
+1.0
+1.1
Tax takeaway
–0.3
–1.0
–1.2
–1.2
–1.1
Spending giveaway
0.0
+1.4
+2.5
+3.1
+0.0
Spending takeaway
0.0
–1.6
–2.3
–3.2
–8.3
Net tax increase
0.0
0.3
–0.1
–0.1
–0.0
Net spending
increase
0.0
–0.3
0.3
–0.1
–8.3
Net giveaway
0.0
0.1
0.1
–0.2
–8.3
© Institute for Fiscal Studies
Note: Figures may not sum due to rounding.
Sources: HM Treasury; IFS calculations.
Fiscal tightening, March 2011
March 2011: £91bn hole in
public finances
Percentage of national income
9
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
4
3
2
1
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies
Sources: HM Treasury; Author’s calculations.
Fiscal tightening, November 2011: more to do
Nov 2011: £114bn hole in
public finances
Percentage of national income
9
8
Other current spend
Debt interest
Benefits
Investment
Tax increases
7
6
5
4
3
2
1
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies
Sources: HM Treasury; Author’s calculations.
Fiscal tightening, November 2011: more to do,
some more done
Nov 2011: £114bn hole in
public finances
Percentage of national income
9
Extra spend
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
4
80%
3
2
1
20%
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies
Sources: HM Treasury; Author’s calculations.
Less headroom against the fiscal mandate
Cyclically-adjusted current
budget, %GDP
2
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
1
0
-1
-2
-3
-4
-5
March 2011
November 2011 - no policy action
November 2011 - with policy
-6
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
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Perilously close on the supplementary target
Public sector net debt, %GDP
80
Supplementary target: “public sector net
debt as a percentage of GDP to be falling at a
fixed date of 2015–16 ”
78
76
74
72
70
68
66
64
62
November 2011 - no policy action
November 2011
60
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
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7-year
6-year squeeze on public service spending
16.2% cut
over 7 years
9.3% cut
over 7 years
10
5
0
ConLib
Historic
1980–81
Labour
1970–71
-5
7 year moving average
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Note: Figure shows total public spending less spending on welfare
benefits and debt interest.
2015–16
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1975–76
1965–66
1960–61
1955–56
-10
1950–51
Annual percentage real increase
15
DELs: The grand old Duke of York?
Percentage of national income
30
Spending Review 2010
EFO Nov 2011 projections
25
20
15
© Institute for Fiscal Studies
Note: Figure shows Departmental Expenditure Limits (DELs) as a share of
national income under current policies, assuming no further changes to
Annually Managed Expenditure policies.
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
1999–2000
1998–99
10
Public Finances: Summary
• Reduced outlook for potential output of the UK economy
• Fed through into permanently higher borrowing, without policy
action
• A policy response of two halves
– 2011–12 to 2014–15: reshuffling of existing tax and spend
– 2015–16 and 2016–17: significant additional spending cuts
• Policy action sufficient to ensure still forecast to meet fiscal rules
– Less room for manoeuvre against fiscal mandate than had in March
– Substantially less room for manoeuvre against the supplementary
target
© Institute for Fiscal Studies