Pre-Budget Report 2008:
The Gord giveth and the Gord taketh away
Robert Chote
Institute for Fiscal Studies
BBC Seminar, Tuesday 18th November 2008
www.ifs.org.uk/budgets/pbr2008/index.php
The big questions
• How deep and how long will the recession be?
• How far will government debt and borrowing rise?
• What will the short-term fiscal stimulus package look like?
• What will Darling say about the subsequent tightening?
“Oh Lord, help me to be pure – but not yet.”
St Augustine of Hippo
© Institute for Fiscal Studies, 2008
The Treasury view at Budget time
2007-08 2008-09 2009-10
Economic growth
(change on previous year)
Pub sector net borrowing
(share of GDP)
Public sector net debt
(share of GDP)
2010-11
2011-12 2012-13
3%
1.75%
2.5%
2.5%
2.5%
2.5%
2.6%
2.9%
2.5%
2.0%
1.6%
1.3%
37.1%
38.5%
39.4%
39.8%
39.7%
39.3%
• Short and shallow economic slowdown
• Borrowing peaks this year, then falls as spending squeezed and tax burden rises
• Debt peaks below 40% ceiling set out in “sustainable investment rule”
© Institute for Fiscal Studies, 2008
But since then…
•
Outlook for economic growth has weakened dramatically
2007
2008
2009
2010
Treasury (Budget 2008)
3%
1.75%
2.25%
2.5%
European Commission (Autumn 08)
3%
0.9%
-1%
0.4%
•
House prices down 12% (Halifax) and turnover down sharply
•
Stock market down 30%, but turnover quite high
© Institute for Fiscal Studies, 2008
Upward pressure on borrowing
• Recession depresses tax revenues and increases social security bills
• Falls in housing market and stock market depress tax revenues
• Government has given away £3.9 billion since the Budget
– Increase in income tax personal allowance (£2.7bn)
– Delay in fuel duty increase (£0.6bn)
– Stamp duty holiday (£0.6bn)
• Higher-than-expected September inflation pushes up benefit bills
• Unexplained “structural” deterioration?
© Institute for Fiscal Studies, 2008
Some evidence already this year
• Government borrowing up 70% so far, not 20% as Budget forecast
• On course for £64bn deficit rather than the £43bn predicted in March
• Could rise further on Thursday if corporation tax numbers are bad
© Institute for Fiscal Studies, 2008
Higher borrowing: a structural problem?
•
Borrowing likely to rise even further next year as recession deepens
•
Debt heading well above 40% of national income even without Northern Rock etc
•
But Euro Commission thinks much of the increase “structural” and unlikely to disappear
as economy returns to “normal” – perhaps because economy takes permanent hit
General government balance
(% of national income)
•
2007
2008
2009
2010
Cyclical
+0.7%
+0.4%
-0.6%
-1.1%
Structural
-3.5%
-4.6%
-5.0%
-5.4%
Total
-2.8%
-4.2%
-5.6%
-6.5%
Will the Treasury agree or argue (as they usually do) that problem mostly temporary?
© Institute for Fiscal Studies, 2008
Fiscal history repeats itself
Cyclically adjusted public sector net borrowing
Conservative
Labour
-4%
-2%
0%
2%
4%
6%
March 2008 Budget
8%
-1
3
12
-1
1
20
10
-0
9
20
08
-0
7
20
06
04
-0
3
20
02
-0
1
20
00
-9
9
20
98
-9
7
19
96
-9
5
19
94
-9
3
19
92
-9
1
19
90
-8
9
19
88
-8
7
19
86
-8
5
19
84
-8
3
19
82
-8
1
19
80
-7
9
19
78
-7
7
© Institute for Fiscal Studies, 2008
19
76
19
19
74
-7
5
10%
-0
5
European Commission
(November 2008)
20
Percentage of national income
-6%
Note: Inferred from European Commission forecasts for general government borrowing.
Source: HM Treasury; European Commission; Author’s calculations.
How well placed are we to borrow more?
• Government debt lower than level inherited from the Conservatives
excluding Northern Rock - but very similar including Northern Rock
• In 2007 our structural budget deficit was:
– 2nd biggest of 7 G7 countries
– 4th biggest of 26 OECD countries
• In 2007 our government debt was:
– 2nd lowest of 7 G7 countries
– 11th highest of 28 OECD countries
• Most industrial country governments have done more to reduce their
structural budget deficits and debts than UK since 1997
© Institute for Fiscal Studies, 2008
The policy response: a game of two halves
• Short term fiscal stimulus
– Government must decide whether to borrow even more in the short term to
help boost the economy through tax cuts and spending increases
• Long term fiscal tightening
– If European Commission right about the structural deficit, on existing
policies the Government will need to raise about 3% of national income
(£45bn) from tax increases and/or spending cuts once economy stabilises
– Any short-term stimulus will add to the necessary tightening
© Institute for Fiscal Studies, 2008
Fiscal stimulus: principles
•
Conventional wisdom to use interest rates to manage spending in the
economy and fiscal policy as last resort (still Conservative position)
•
But banks may be unwilling or unable to pass on interest rate cuts to
consumers and businesses, who in turn may be reluctant to borrow
•
So perhaps we should use fiscal stimulus now to spread risks? Growing (but
far from universal) consensus that giveaway should be around 1% of GDP
•
A good fiscal stimulus would be:
– targeted (spent not saved; preferably on domestic goods, so helps if global)
– timely (boosts spending before recession reaches trough)
– temporary (otherwise increases risk of higher interest rates and falling pound)
•
Temporary stimulus need not mean temporary measures
© Institute for Fiscal Studies, 2008
Fiscal stimulus: options
•
Maintain or extend some of this year’s ‘one-off’ giveaways
– Higher personal income tax allowance and fuel duty delay
– Extension of stamp duty holiday looks less likely
•
Increase public investment
– ensures giveaway spent domestically
– difficult to spend well quickly
•
Higher benefits and tax credits for those on lower incomes
– more likely to spend extra income & compensates 10p losers further
– difficult to make temporary: requires subsequent tax increase elsewhere?
•
Boost firms’ investment allowances
– might be a sensible long-term reform
– again requires subsequent tax increase elsewhere
•
Temporary VAT reduction followed by permanent VAT increase
– strong encouragement to spend now and improve public finances
– not politically viable?
© Institute for Fiscal Studies, 2008
The long term: tightening and new rules
• How explicit will Darling be about the size and shape of the tightening?
• He will have to pencil in spending projections for 2011-12 to 2013-14
– Spending currently set to average 2% a year in real terms. Lower?
• Pre-announced tax increases?
• What will he do with the fiscal rules?
–
–
–
–
Keep the same rules, but say they won’t be met for a while?
Intermediate goals and tougher long-term objective?
Rewrite the exam question?
Institutional reform: greater independence in forecasts?
© Institute for Fiscal Studies, 2008
Summary
• Economy and asset markets much weaker than Budget forecast
• Borrowing and debt to rise rapidly, breaching existing fiscal rules
• Fiscal stimulus package: targeted, timely and temporary?
• Future fiscal tightening: how much will they detail now?
© Institute for Fiscal Studies, 2008
Opposition proposals
Conservatives
• Temporary NI cut for some firms hiring individuals who have been
receiving out-of-work benefits for 3 months or more
– might not get enough extra into work to be self-financing
– but any net giveaway could help economy
Liberal Democrats:
• Abolish council tax, increase tax on polluters, those making large
capital gains, and higher income pension savers (on average lower
national income tax offset by new local income tax)
– redistribution from savers to spenders could help economy
– unclear that package is revenue neutral: any net giveaway would boost
economy but would need subsequent action
© Institute for Fiscal Studies, 2008