Borrow now, cut spending later
Gemma Tetlow
© Institute for Fiscal Studies
IFS hosts two ESRC Research Centres
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
AS 2012
121
80
99
88
73
49
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
AS 2012
121
80
99
88
73
49
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Of which:
Revenues
10.4
16.3
25.5
30.1
38.8
Spending
1.4
1.9
1.1
–0.9
–2.9
80
99
88
73
49
AS 2012
© Institute for Fiscal Studies
121
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Lower tax revenues in part explained by weaker
forecast for growth
Comparison of forecasts for real GDP growth
Level of GDP
(Index, actual 2009–10 GDP = 100)
120
118
GDP (Mar 2012)
GDP (Dec 2012)
116
3.6% loss
of output
114
112
110
108
106
104
102
100
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
© Institute for Fiscal Studies
Sources: OBR; Author’s calculations.
Other forecasting changes
• Revenues
– Reducing revenues
• Changing composition of wage growth: now thought to reflect higher employment
but lower average earnings
• Lower asset prices and share/commercial property transactions
• Higher forecast industrial and commercial sector losses
• Lower forecast interest rates
– Increasing revenues
• Higher levels of residential property transactions
• Spending
– Reducing spending
• Lower forecast GDP deflator growth
• Lower forecast interest rates
• Lower forecast average earnings growth reduces state pension spending
© Institute for Fiscal Studies
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
AS 2012
121
80
99
88
73
49
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
Tax changes
0.9
–0.2
2.4
0.9
–0.3
AS 2012
80
99
88
73
49
Measures
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Major tax changes
• Tax giveaways
– Corporation tax: rate cut and temporary increase to annual investment
allowance
– Income tax personal allowance increased
– Fuel duty rate cut
• Tax takeaways
– Higher rate threshold cut
– Pensions tax relief lifetime limit and annual allowance reduced
– Bank levy increased
– Swiss tax deal
© Institute for Fiscal Studies
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
Tax changes
0.9
–0.2
2.4
0.9
–0.3
Spending changes
during SR2010 years
–8.8
–3.4
–5.0
80
99
88
73
49
Measures
AS 2012
© Institute for Fiscal Studies
121
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
Spending changes during SR2010 period
© Institute for Fiscal Studies
2012–13
2013–14
2014–15
–8.8
–3.4
–5.0
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
Welfare spending
Spending changes during SR2010 period
© Institute for Fiscal Studies
2012–13
2013–14
2014–15
0.0
0.0
–1.7
–8.8
–3.4
–5.0
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
2012–13
2013–14
2014–15
Welfare spending
0.0
0.0
–1.7
HMT announcements on departmental spending
–1.4
1.1
0.2
–8.8
–3.4
–5.0
Cut DEL reserve
Cut growth rate of RDEL
Cut overseas aid
Increase capital spending
Spending changes during SR2010 period
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
2012–13
2013–14
2014–15
Welfare spending
0.0
0.0
–1.7
HMT announcements on departmental spending
–1.4
1.1
0.2
Cut DEL reserve
–1.2
0.0
0.0
Cut growth rate of RDEL
0.0
–1.0
–2.4
Cut overseas aid
–0.2
–0.3
–0.4
–8.8
–3.4
–5.0
Increase capital spending
Spending changes during SR2010 period
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
2012–13
2013–14
2014–15
Welfare spending
0.0
0.0
–1.7
HMT announcements on departmental spending
–1.4
1.1
0.2
Cut DEL reserve
–1.2
0.0
0.0
Cut growth rate of RDEL
0.0
–1.0
–2.4
Cut overseas aid
–0.2
–0.3
–0.4
Increase capital spending
0.1
2.3
3.0
–8.8
–3.4
–5.0
Spending changes during SR2010 period
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
2012–13
2013–14
2014–15
Welfare spending
0.0
0.0
–1.7
HMT announcements on departmental spending
–1.4
1.1
0.2
Cut DEL reserve
–1.2
0.0
0.0
Cut growth rate of RDEL
0.0
–1.0
–2.4
Cut overseas aid
–0.2
–0.3
–0.4
Increase capital spending
0.1
2.3
3.0
–7.5
–4.5
–3.5
–8.8
–3.4
–5.0
OBR assumed departmental underspend
Resource underspend
Capital underspend
Single use military expenditure underspend
Spending changes during SR2010 period
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in spending plans for SR2010 period
£ billion
2012–13
2013–14
2014–15
Welfare spending
0.0
0.0
–1.7
HMT announcements on departmental spending
–1.4
1.1
0.2
Cut DEL reserve
–1.2
0.0
0.0
Cut growth rate of RDEL
0.0
–1.0
–2.4
Cut overseas aid
–0.2
–0.3
–0.4
Increase capital spending
0.1
2.3
3.0
–7.5
–4.5
–3.5
Resource underspend
–4.5
–2.0
–1.5
Capital underspend
–1.7
–1.5
–1.5
Single use military expenditure underspend
–1.3
–1.0
–0.5
–8.8
–3.4
–5.0
OBR assumed departmental underspend
Spending changes during SR2010 period
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
Tax changes
0.9
–0.2
2.4
0.9
–0.3
Spending changes
during SR2010 years
–8.8
–3.4
–5.0
80
99
88
73
49
Measures
AS 2012
© Institute for Fiscal Studies
121
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
–11.5
–3.6
–2.6
0.9
–0.3
Tax changes
0.9
–0.2
2.4
0.9
–0.3
Spending changes
during SR2010 years
–8.8
–3.4
–5.0
Sale of 4G licences
–3.5
99
88
73
49
Measures
AS 2012
© Institute for Fiscal Studies
121
80
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
–11.5
–3.6
–2.6
0.9
–0.3
Tax changes
0.9
–0.2
2.4
0.9
–0.3
Spending changes
during SR2010 years
–8.8
–3.4
–5.0
Sale of 4G licences
–3.5
Measures
Underlying
borrowing forecast
121
120.3
112.1
99.1
82.1
56.6
AS 2012
121
80
99
88
73
49
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
Changes in borrowing forecasts since Mar 2012
Public sector net borrowing, £ billion
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Budget 2012
126
92
98
75
52
21
Exc. Royal Mail Pens
126
120
98
75
52
21
Forecasting changes
–5
11.9
18.2
26.6
29.2
35.9
Implied borrowing
121
131.9
116.2
101.6
81.2
56.9
–11.5
–3.6
–2.6
0.9
–0.3
120.3
112.1
99.1
82.1
56.6
–11.8
–12.8
–11.1
–8.8
–7.7
Measures
Underlying
borrowing forecast
121
Reclassifying financial
transactions*
AS 2012 (exc. RMP)
121
108
99
88
73
49
AS 2012
121
80
99
88
73
49
© Institute for Fiscal Studies
Notes: Numbers might not sum due to rounding.
Source: HM Treasury; Office for Budget Responsibility; IFS calculations.
* Reclassification includes Asset Purchase Facility, Northern Rock and Bradford & Bingley
Public sector net debt, %GDP
Missing the debt target
84
82
80
78
76
74
72
70
68
66
64
62
60
Supplementary target: “public sector net
debt as a percentage of GDP to be falling at a
fixed date of 2015–16 ”
December 2012
December 2012 - excluding
measures and reclassifications
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
© Institute for Fiscal Studies
Source: Office for Budget Responsibility.
* Reclassification includes Asset Purchase Facility, Northern Rock and Bradford & Bingley
Dealing with the problem in 2017–18?
12
Deficit, %GDP
10
PSNB, Mar 2012
8
6
4
2
PSNB, Dec 2012 (no
policy or reclass.)
0
-2
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
Some of 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)
120
Actual GDP (Mar 2012)
Actual GDP (Dec 2012)
Potential ("trend") GDP - March 2012
Potential ("trend") GDP - December 2012
118
116
114
1.7% loss
of trend
3.6% loss
output
of output
112
110
108
106
104
102
100
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
•
© Institute for Fiscal Studies
About half of weak medium-term growth is
expected to be temporary
Sources: OBR; Author’s calculations.
Size of the problem has increased
Estimated underlying increase in structural borrowing since March 2008, %GDP
£129bn
8
£50bn £100bn £91bn £83bn £91bn £89bn £92bn £117bn £118bn
7
6
5
4
3
2
1
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
OBR December
2012
OBR Budget
2012
OBR November
2011
OBR Budget
2011
OBR November
2010
OBR Budget
June 2010
HMT Budget
March 2010
HMT PBR 2009
HMT Budget
2009
0
HMT PBR 2008
Percentage of national income
9
The cure (December 2012): 9.2% national income
consolidation over 8 years (£144bn)
Dec 2012: 8.2% national income (£129bn) hole in public finances
Percentage of national income
10
Additional spending squeeze
Other current spend
Debt interest
Benefits
Investment
Tax increases
9
8
7
6
5
4
3
2
1
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
•
Measures announced yesterday have little impact before 2017–18
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
The cure (December 2012): 9.2% national income
consolidation over 8 years (£144bn)
Dec 2012: 8.2% national income (£129bn) hole in public finances
Percentage of national income
10
Additional spending squeeze
Other current spend
Debt interest
Benefits
Investment
Tax increases
9
8
7
6
5
4
3
2
1
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
•
Measures announced yesterday have little impact before 2017–18
•
Additional spending cut in 2017–18: 1.1% of GDP (£17bn)
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
The cure (December 2012): 9.2% national income
consolidation over 8 years (£144bn)
Dec 2012: 8.2% national income (£129bn) hole in public finances
Percentage of national income
10
Other current spend
Debt interest
Benefits
Investment
Tax increases
9
8
7
6
85%
5
81%
4
3
2
1
19%
15%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
Dealing with the problem in 2017–18 and
meeting the fiscal mandate
12
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
PSNB, Mar 2012
Deficit, %GDP
10
8
6
PSNB, Dec 2012 (no
policy or reclass.)
4
2
CB deficit, Dec 2012 (no
policy or reclass.)
0
-2
CB deficit, Dec 2012
(with policy, no reclass.)
© Institute for Fiscal Studies
Sources: HM Treasury; OBR; Author’s calculations.
Dealing with the problem in 2017–18 and
meeting the fiscal mandate
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
12
PSNB, Mar 2012
Deficit, %GDP
10
PSNB, Dec 2012 (no
policy or reclass.)
8
6
CB deficit, Dec 2012 (no
policy or reclass.)
4
CB deficit, Dec 2012
(with policy, no reclass.)
2
0
CA CB deficit, Dec 2012
(with policy, no reclass.)
-2
CA CB deficit, Dec 2012
•
© Institute for Fiscal Studies
Fiscal mandate met (using a definition of current budget that
excludes reclassifications of financial transactions)
Sources: HM Treasury; OBR; Author’s calculations.
Conclusions
• Deficit on course to be lower this year than last
– Margin for error very small: could still turn out higher
– Would not be true without either departmental underspend or 4G
licence sale
• Excluding measures, borrowing has increased by £36bn by 2016–17
– Up to 2016-17: Chancellor has largely chosen to accept higher
borrowing and therefore on course to miss supplementary (debt) target
– In 2017/18: 60% of deterioration offset by spending cut (tba)
• OBR output gap implies about half of weaker growth over forecast
horizon is permanent
– If correct, fiscal mandate met and LR public finances strengthened by
yesterday’s announcements
– But size of output gap and outlook for public finances very uncertain
© Institute for Fiscal Studies
Borrow now, cut spending later
Gemma Tetlow
© Institute for Fiscal Studies
IFS hosts two ESRC Research Centres