UK public finances and the financial crisis
Carl Emmerson and Gemma Tetlow
Presentation given at workshop on “European public finances through
the financial crisis”, ZEW Centre for European Economic Research,
Mannheim, Germany, 11 June 2014.
© Institute for Fiscal Studies
Outline
• Background: the state in the UK
• UK economy before, during and after the crisis
• Fiscal policy before the crisis
• Fiscal effects of the crisis
• Fiscal (and monetary) response to the crisis
– Changes to taxation, spending and the fiscal framework
– Distributional effect of changes to taxation and welfare spending
– Did the tax and spending changes make the system more or less
efficient?
• Note:
– UK fiscal years run from April to March
– UK public finance aggregates differ from Maastricht definitions
© Institute for Fiscal Studies
UK spent around 40% of GDP publicly pre-crisis
Total managed expenditure, 1948 to 2007
Percentage of GDP
55
50
45
40
35
Source: Office for Budget Responsibility’s public finances databank.
© Institute for Fiscal Studies
2005-06
2002-03
1999-00
1996-97
1993-94
1990-91
1987-88
1984-85
1981-82
1978-79
1975-76
1972-73
1969-70
1966-67
1963-64
1960-61
1957-58
1954-55
1951-52
1948-49
30
Composition of spending over time
Total managed expenditure, selected years
100%
Share of public spending
90%
23.6
22.2
23.4
80%
7.5
2.2
5.2
7.2
5.4
3.4
5.4
5.7
12.2
13.3
14.4
17.2
15.8
14.4
10.4
13.4
11.7
1989-90
1999-00
2007-08
50%
10.0
3.6
4.9
10.0
40%
12.3
70%
60%
30%
20%
10%
0%
© Institute for Fiscal Studies
11.6
13.5
Weak contributory principle:
most
ishas
ondefence
meansOffset
Healthspending
by
spending
declining
become
or health-tested
benefits
and
increasingly
debt interest
important
spendingand
near-universal pensions
Other
Debt interest
Transport
Public order and safety
Defence
Education
Health
Pensioner benefits
Working age benefits
Source: Authors’ calculations based on data from HM Treasury and Department
for Work and Pensions.
Changing composition of revenues
Net taxes and national insurance contributions, selected years
100%
Share of total net taxes and NICs
90%
27.7
25.2
23.9
Other
2.7
11.0
3.3
9.8
4.5
7.9
Capital taxes
15.6
16.8
15.6
17.3
16.8
80%
70%
60%
50%
40%
30%
VAT
19.5
NICs
Income tax
20%
10%
Onshore corporation tax
25.7
28.0
28.6
1989–90
1999–00
2007–08
0%
© Institute
Institute for
for Fiscal
Fiscal Studies
Studies
©
Notes
Source:
andFigure
sources:
2.5see
of IFS
Table
Green
2.5 of
Budget:
The IFS
February
Green Budget:
2014. February 2014.
GDP growth had averaged 3.2% a year over the
decade up to 2007–08
Real GDP growth rate, 1956 to 2012
8
Growth rate (%)
6
4
2
0
-2
© Institute for Fiscal Studies
Source: Office for National Statistics, Quarterly National Accounts (series ABMI).
2010-11
2007-08
2004-05
2001-02
1998-99
1995-96
1992-93
1989-90
1986-87
1983-84
1980-81
1977-78
1974-75
1971-72
1968-69
1965-66
1962-63
1959-60
1956-57
-4
Inflation had been low and stable since the mid1990s but rose during the crisis
Growth in prices, 1949 to 2007
25
Retail Prices Index
Consumer Prices Index
Growth rate (%)
20
15
10
5
0
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
-5
© Institute for Fiscal Studies
Source: Office for National Statistics (series DODO, DODP, DODQ, CZVJ, CRAB,
CHAW, D7BT, KAB9, KAC4, KAC7).
Employment rates had been rising steadily since
mid-1990s
Employment rate among those aged 16 to 64, 1971 to 2013
100
Men
Women
Employment rate (%)
90
All
80
70
60
50
Hours worked per worker
had been declining over time
and continued to do so
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
40
© Institute for Fiscal Studies
Source: Office for National Statistics (series LF24, MGSV, LF25).
Unemployment peaked at much lower level than
seen during previous recessions
Unemployment rate among those aged 16 to 64, 1971 to 2013
14
Men
Women
All
Unemployment rate (%)
12
10
8
6
4
2
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
0
© Institute for Fiscal Studies
Source: Office for National Statistics (series MGSX, MGSY, MGSZ).
Average real earnings have fallen
Growth in prices and average weekly earnings, 2007 to 2013
125
Retail Prices Index
Consumer Prices Index
Whole economy earnings
Private sector earnings
Public sector earnings
Index, 2007=100
120
115
110
105
© Institute for Fiscal Studies
Source: Office for National Statistics (series DODO, DODP, DODQ, CZVJ, CRAB,
CHAW, D7BT, KAB9, KAC4, KAC7).
2013
2012
2011
2010
2009
2008
2007
100
UK fiscal policy prior to the crisis
• Two fiscal rules
– Golden rule: current budget must be in balance or surplus over the
course of an economic cycle
– Sustainable investment rule: debt must not exceed 40% of GDP
– No official sanctions for breaching these
– Perception that “the goalposts were moved” – redating the cycle
• Economic and fiscal forecasts produced by HM Treasury, officially
controlled by the Chancellor of the Exchequer
• Public service spending totals set in cash terms for 3-year periods
– 2007 Comprehensive Spending Review: covered 2008–09 to 2010–11
– Intended to be ‘tight’: cutting public service spending as % of GDP
• Default was for (most) tax thresholds and benefit rates to increase
in line with Retail Price inflation each year
– Few reforms had been announced pre-crisis but not yet implemented:
reduction in generosity of disability insurance, increase in pension
eligibility age for women
© Institute for Fiscal Studies
Pre-crisis plan was for fiscal consolidation by
2012–13
Public sector receipts and total managed expenditure, 1997 to 2018
55
% of GDP
50
Revenues
Spending
Revenue forecast, Mar 2008
Spending forecast, Mar 2008
45
40
35
1997-98
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
30
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Borrowing was forecast to fall to 1¼% of GDP...
Alternative measures of borrowing, 1948 to 2012
14
Public sector net borrowing
Borrowing, forecast Mar 2008
Treaty deficit
Borrowing (% GDP)
12
10
8
On eve of the crisis: UK
had one of largest
structural deficits in OECD
and had done less than
most to improve this over
the preceding decade.
6
4
2
0
-2
-4
1948-49
1951-52
1954-55
1957-58
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1984-85
1987-88
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12
-6
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
...and debt was forecast to peak just below 40%
Alternative measures of debt, 1948 to 2012
240
Debt (% GDP)
200
160
Public sector net debt
PSND, forecast Mar 2008
Treaty debt ratio
National debt
120
On eve of the crisis: UK
also had one of the
highest levels of debt in
OECD (although lower
than most other G7).
80
40
1948-49
1951-52
1954-55
1957-58
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1984-85
1987-88
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12
0
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank.
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than
previously expected
© Institute for Fiscal Studies
A large hit to future potential output?
Level of real GDP (index, GDP in
2007–08 = 100)
135
130
125
120
115
110
Trend (March 2008)
Actual (March 2008)
Actual (March 2014)
Trend (March 2014)
Real GDP back to precrisis level in 2014, but
GDP per capita not set to
bounce back until 2016
105
100
95
90
© Institute for Fiscal Studies
Source: Authors’ calculations based on HM Treasury and Office for Budget
Responsibility forecasts and Office for National Statistics data on outturns.
Trend
GDP:
17%
lower
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than
previously expected
• Tax revenues fell as GDP fell in cash/real terms
– Small fall as % of GDP due to fiscal drag and compositional changes
– Falls in housing prices and transactions reduced stamp duty revenues
– Falls in stock prices reduced capital taxes and associated with lower
bonus payments
– Financial sector contraction reduced corporation tax revenues
© Institute for Fiscal Studies
Spending and revenues, without action
Public sector receipts and total managed expenditure, 1997 to 2018
55
Revenues - without action
% of GDP
50
45
40
35
1997-98
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
30
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than
previously expected
• Tax revenues fell as GDP fell in cash/real terms
– Small fall as % of GDP due to fiscal drag and compositional changes
– Falls in housing prices and transactions reduced stamp duty revenues
– Falls in stock prices reduced capital taxes and associated with lower
bonus payments
– Financial sector contraction reduced corporation tax revenues
• Around half of spending set in advance in cash terms and upward
pressure on cyclical spending during recession
– Spending increased a lot as % of GDP
– Policy default would have been for spending to remain high as % GDP
without “action”
© Institute for Fiscal Studies
Spending and revenues, without action
Public sector receipts and total managed expenditure, 1997 to 2018
55
Revenues - without action
Spending - without action
% of GDP
50
45
Borrowing would
have been over
10% of GDP
40
35
1997-98
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
30
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Borrowing
Alternative measures of borrowing, 1948 to 2018
14
Public sector net borrowing
Borrowing (without policy action)
Borrowing (% GDP)
12
10
Structural borrowing
would have been
9.0% of GDP higher
than anticipated precrisis
8
6
4
2
0
-2
-4
1948-49
1951-52
1954-55
1957-58
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1984-85
1987-88
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12
2014-15
2017-18
-6
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than
previously expected
• Tax revenues fell as GDP fell in cash/real terms
– Small fall as % of GDP due to fiscal drag and compositional changes
• Around half of spending set in advance in cash terms and upward
pressure on cyclical spending during recession
– Spending increased a lot as % of GDP
– Policy default would have been for spending to remain high as % GDP
without “action”
• Without “action”
– Borrowing would have remained above 10% of GDP
– Unsustainable fiscal position
© Institute for Fiscal Studies
Fiscal policy response to the crisis (1)
• Two new fiscal targets adopted in May 2010
– Fiscal mandate: cyclically-adjusted current budget must be forecast
to be in balance or surplus at the end of the rolling five-year forecast
horizon
• Currently being met
– Supplementary target: debt must be falling as a share of GDP
between 2014–15 and 2015–16
• Currently on course to be missed
© Institute for Fiscal Studies
Fiscal policy response to the crisis (2)
• The “no policy change” baseline
– Tax and benefit rates/thresholds uprated as set out in legislation
(mainly RPI-indexed)
• Include pre-announced policy changes
– Public service spending growth
• Pre-announced cash plans up to 2010–11
• 1.8% a year real terms growth from 2011–12 to 2014–15 (pencilled into March 2008
Budget)
• Grows in line with GDP thereafter
• Short-term fiscal stimulus followed by fiscal tightening
– Stimulus in 2008–09 and 2009–10
– Stimulus reversed and tax rises/spending cuts started in April 2010
– Tax rises largely complete by April 2014
– Spending cuts to continue to March 2019
© Institute for Fiscal Studies
12% from tax rises
8% from investment spending cuts
14% from welfare spending cuts
52% from other current spending
Cure
Composition of the policy response
% of GDP
12
Other current spend
10
Debt interest
8
Benefit spend
6
March
2014: 49%
done
Investment spend
Tax
4
2
0
-2
© Institute for Fiscal Studies
Source: Authors’ calculations based on HM Treasury and Office for Budget
Responsibility figures.
Reduce
borrowing
by 10.3%
of GDP
Spending and revenues, with action
Now aiming for tighter
fiscal position than
planned pre-crisis
Public sector receipts and total managed expenditure, 1997 to 2018
55
% of GDP
50
Revenues - without action
Spending - without action
Revenues - with action
Spending - with action
45
40
35
1997-98
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
30
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Debt forecast to peak in 2015–16
Alternative measures of debt, 1948 to 2018
250
Debt (% GDP)
200
Public sector net debt
Treaty debt ratio
National debt
150
100
50
1948-49
1951-52
1954-55
1957-58
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1984-85
1987-88
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12
2014-15
2017-18
0
© Institute for Fiscal Studies
Source: Office for Budget Responsibility’s public finances databank.
Aside: Fiscal institutions after the crisis
• Office for Budget Responsibility (OBR) created in May 2010
– Independent fiscal council: accountable to Parliament, not the
government
– Produces fiscal and economic forecasts based on announced policy
– Tasked with assessing compliance with the new fiscal targets
• OBR has significantly increased the transparency and credibility of
official fiscal and economic forecasts
© Institute for Fiscal Studies
Aside: Monetary policy response
• Bank of England significantly loosened monetary policy
– Interest rates: cut from 5.75% in July 2007 to 0.5% by March 2009
– Central bank asset purchases started in March 2009 at £75bn, rising
to £375bn by July 2012
• Sterling devalued significantly
– By 25% against trade-weighted basket of currencies
© Institute for Fiscal Studies
Specific measures
• Deep cuts to spending on some areas of public services
© Institute for Fiscal Studies
Planned cuts to public spending
Between 2010–11 and 2018–19 and after economy-wide inflation
• Total spending cuts of 4.4%
• But
– debt interest spending rising
– social security spending, particularly on pensioners, rising
– other non-departmental spending such as on PAYG spending public
service pensions and UK contribution to the EU budget rising
• Departmental spending on public services cut by 19.9%
© Institute for Fiscal Studies
Whitehall departments: ‘winners’
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
International Development
35.3
Energy and Climate Change
9.4
NHS (Health)
4.3
Transport
-7.4
Education
-8.2
Defence
-10.4
Total DEL
-11.0
-80
© Institute for Fiscal Studies
-60
-40
-20
0
20
40
Real budget increase 2011–12 to 2015–16
Note: Figures show cumulative change in total DEL after economy-wide inflation.
Adjusted for consistency, including for business rate retention policy, movement of
cost of operations into the special reserve, financial transactions associated with
‘Right to Buy’ policy, and the Green Investment Bank.
Whitehall departments: ‘losers’
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
Total DEL
Business, Innovation and Skills
-11.0
-19.1
CLG Local Government
-28.4
Home Office
-28.8
Environment, Food and Rural Affairs
-30.3
Culture, Media and Sport
-33.4
Justice
-35.3
Work and Pensions
-35.4
CLG Communities -59.5
-80 -60 -40 -20
0
20
Real budget increase 2011–12 to 2015–16
© Institute for Fiscal Studies
Note: Figures show cumulative change in total DEL after economy-wide inflation.
Adjusted for consistency, including for business rate retention policy, movement of
cost of operations into the special reserve, financial transactions associated with
‘Right to Buy’ policy, and the Green Investment Bank.
40
Specific measures
• Deep cuts to spending on some areas of public services
• Very large tax increases partially offset by some large tax cuts
© Institute for Fiscal Studies
Decomposing the net tax increases
Measures since Budget 2008 estimated to be a £24 billion net takeaway
25
20
15
£ billion, 2014–15
10
5
0
-5
-10
-15
-20
-25
VAT
NICs
North sea
taxes
Tax instrument
Source:
© Institute for Fiscal Studies
Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Decomposing the net tax increases
Measures since Budget 2008 estimated to be a £24 billion net takeaway
25
20
15
£ billion, 2014–15
10
5
0
-5
-10
-15
-20
-25
VAT
NICs
North sea Income
taxes
tax
Tax instrument
Source:
© Institute for Fiscal Studies
Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Decomposing the net tax increases
Measures since Budget 2008 estimated to be a £24 billion net takeaway
25
20
15
£ billion, 2014–15
10
5
0
-5
-10
-15
-20
-25
VAT
NICs
North sea Income
taxes
tax
Fuel
duties
On-shore
CT
Other
taxes
Tax instrument
Source:
© Institute for Fiscal Studies
Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Decomposing the net tax increases
Measures since Budget 2008 estimated to be a £24 billion net takeaway
arising from an £74 billion takeaway and a £50 billion giveaway from 483
measures
25
Takeaway
Giveaway
Net
20
15
£ billion, 2014–15
10
5
0
-5
-10
-15
-20
-25
VAT
NICs
North sea Income
taxes
tax
Fuel
duties
On-shore
CT
Other
taxes
Tax instrument
Source:
© Institute for Fiscal Studies
Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Changes to the tax system (1/2)
• Increasing rates of NICs and main rate of VAT not particularly bad
ways to raise large sums of money
– VAT increase is in part a windfall tax on those with savings so, if
thought to be one-off, could be efficient
– but UK VAT base very narrow: increase in main rate increases
distortions for both producers and consumers
– both weaken work incentives
• Cutting main rate of corporation tax and getting rid of low profit
rate is a good way to cut taxes
• Recent reforms have made direct personal tax schedule less coherent
– many have been taken out of income tax at considerable cost, but over
one million low earners who don’t pay income tax still pay National
Insurance
– system of pensions tax relief for those on high incomes has been made
less efficient, more complicated and, arguably, unfair
© Institute for Fiscal Studies
Marginal income tax and employee
NICs rate
Personal tax schedule
70%
60%
Transferable allowance
withdrawn
“Personal allowance
tapered away”
50%
40%
30%
20%
10%
2009–10
2015–16
Income tax allowance and
NI threshold moving further apart
0%
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Gross annual income (£1,000s)
© Institute for Fiscal Studies
Note: 2015–16 system assumes married to a non-income tax paying partner.
Changes to the tax system (2/2)
• Housing taxation shifted from council tax towards stamp duty
– bad as stamp duty strong contender for the UK’s worst tax
– lack of reform of council tax: still regressive with respect to property
values and, in England, based on 1991 values
• Rates of fuel duties have been cut substantially without a long-run
strategy
– currently 58p/l and falling in real terms
– motor vehicles becoming more efficient and congestion worsening
– every year the Chancellor cancels the next planned increase
© Institute for Fiscal Studies
Changing composition of revenues
100%
Share of total net taxes and NICs
90%
23.3
27.7
25.2
23.9
2.7
11.0
3.3
9.8
4.5
7.9
5.0
5.7
15.6
17.4
15.6
16.8
17.3
16.8
19.5
19.0
25.7
28.0
28.6
29.6
80%
70%
60%
50%
40%
30%
20%
10%
0%
Highest proportion of
Other
net taxes and NICs
from capital
Capital
taxes taxes
since at least 1978
Onshore corporation
tax
VAT
Increasingly coming from a
relatively
small number of
NICs
high income people
Top 1%
Income
tax contributed:
11% in 1979
21.3% in 1999-2000
27.5% in 2011-12
1989–90 1999–00 2007–08 2018–19
© Institute for Fiscal Studies
and sources:
2.5 of (2014).
The IFS
Source:Notes
Crawford,
Keynes see
andTable
Emmerson
Green Budget: February 2014.
Specific measures
• Deep cuts to spending on some areas of public services
• Very large tax increases partially offset by some large tax cuts
• Large cuts to benefit spending focussed on working age individuals
© Institute for Fiscal Studies
Changes to the benefit system
• Pensioner benefits largely protected from cuts
– most working age benefits now indexed less generously, pensioner
benefits indexed more generously
– cuts to housing benefit and disability benefits don’t apply to pensioners
(and they are little affected by cuts to child-related benefits)
• Cuts to health-related benefits involve attempt to restrict benefits
to least healthy through more stringent, more frequent, testing
• Increase in the earliest age at which individuals can receive a state
pension has been brought forward and further increases mooted
– coherent response to the public finance challenge of rising longevity
• Work incentives, on average, strengthened by benefit reforms
© Institute for Fiscal Studies
Cure: all in this together?
Impact of tax and benefit reforms implemented January 2010 - April
2015 inclusive, no Universal Credit, by income decile
0%
Change in net income
-1%
-2%
-3%
-2.9%
-4%
-5%
-6%
-7%
-8%
-9%
Poorest 2
3
4
5
6
Income decile group
7
8
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Phillips (2014).
© Institute for Fiscal Studies
9
Richest
All
Cure: all in this together?
Impact of tax and benefit reforms implemented January 2010 - April
2015 inclusive, no Universal Credit, by family type
4%
Change in net income
2%
0%
-2%
-4%
-6%
-8%
Working-age without children
-10%
Pensioner households
-12%
Households with children
-14%
Poorest 2
3
4
5
6
7
Income decile group
8
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Phillips (2014).
© Institute for Fiscal Studies
9 Richest
All
Cure: all in this together?
Impact of tax and benefit reforms implemented January 2010 - April
2015 inclusive, no Universal Credit, by family type
4%
Change in net income
2%
0%
-2%
-4%
-6%
-8%
Working-age without children
-10%
Pensioner households
-12%
Households with children
-14%
Poorest 2
3
4
5
6
7
Income decile group
8
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Phillips (2014).
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9 Richest
All
Effect on work incentives
• Fall in real earnings between 2010 and 2015 would have led to a
significant, though not enormous, weakening of work incentives
• Tax & benefit reforms have an ambiguous impact on work incentives
– strengthened by: cuts to (some) out-of-work benefits and, for most
earners, increases in tax allowances
– weakened by: increases in tax rates, increases to (some) out-of-work
benefits and, for higher earners, cut to tax thresholds
– complicated effects of cuts to in-work support
• Adam and Browne (2013) find that, on average, the reforms
strengthen incentives to be in work and more than offset effects of
falling real earnings
– strengthened less for those with children than those without
• Benefit cuts primarily responsible for that average strengthening
– but not dramatic given scale of cuts, partly because of nature of tax
credit reforms
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Conclusions
• Pre-crisis
– planned to reduce structural borrowing from 2.7% to 1.2% of GDP
• Trend GDP now expected to be substantially lower
• Without action, structural borrowing would have risen by 9% of GDP
• 9-year fiscal consolidation plan
– 10.3% of GDP
– 88% from spending cuts
• Deep cuts to spending on some areas of public services
– share of budget going on NHS continues to grow
• Very large tax increases partially offset by some large tax cuts
– some changes have improved operation of tax system, but many have
worsened it
• Large cuts to benefit spending focussed on working age individuals
– on average strengthen work incentives
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UK public finances and the financial crisis
Carl Emmerson and Gemma Tetlow
Presentation given at workshop on “European public finances through
the financial crisis”, ZEW Centre for European Economic Research,
Mannheim, Germany, 11 June 2014.
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