Green Budget public finance forecasts
Robert Chote, Carl Emmerson and Gemma Tetlow
© Institute for Fiscal Studies
Green Budget baseline forecast
• Current budget deficit and public sector net borrowing
– Higher in each of the next five years than forecast in the PBR
– Additional 1.3% of national income borrowing in 2013–14
• Debt
– Rises to 62.1% of national income by 2013–14, compared to 57.4% in
PBR
• Budget judgement
– Additional £20 billion of higher taxes or lower spending need to be
implemented by end of next Parliament to expect to achieve the
improvement in the public finances set out in the PBR
– Outlook currently very uncertain
– But better to announce measures that subsequently prove not to be
needed than to risk a loss of investor confidence
© Institute for Fiscal Studies
Forecasts for 2008–09
£ billion
PBR
Green Budget
November 2008
January 2009
Difference
Current receipts
545.5
538.9
–6.6
Current expenditure
586.7
586.7
0.0
Current budget surplus
–41.2
–47.8
–6.6
Net investment
36.5
36.5
0.0
PSNB
77.6
84.3
+6.6
© Institute for Fiscal Studies
2008–09: Explaining the difference in receipts
• Income tax (–£4.1bn)
• VAT (–£1.1bn)
• Stamp duty (–£0.6bn)
• Capital gains tax (–£1.0bn)
© Institute for Fiscal Studies
2008–09: Explaining the difference in receipts
• Income tax (–£4.1bn)
– Assume particularly low income growth among the top 1%
• VAT (–£1.1bn)
• Stamp duty (–£0.6bn)
• Capital gains tax (–£1.0bn)
© Institute for Fiscal Studies
2008–09: Explaining the difference in receipts
• Income tax (–£4.1bn)
• VAT (–£1.1bn)
– Fall in cash receipts since November has been even sharper than PBR
forecast, and accelerating
• Stamp duty (–£0.6bn)
• Capital gains tax (–£1.0bn)
© Institute for Fiscal Studies
2008–09: Explaining the difference in receipts
• Income tax (–£4.1bn)
• VAT (–£1.1bn)
• Stamp duty (–£0.6bn)
– Incorporate Treasury assumption that housing transactions in
2008–09 less than half 2007–08 level
– 16% decline in house prices in 2008
– 30% stock market fall during 2008
• Capital gains tax (–£1.0bn)
© Institute for Fiscal Studies
2008–09: Explaining the difference in receipts
• Income tax (–£4.1bn)
• VAT (–£1.1bn)
• Stamp duty (–£0.6bn)
• Capital gains tax (–£1.0bn)
– Assume hit to receipts from stock market fall, which Treasury
forecast, happens earlier
© Institute for Fiscal Studies
Medium-term forecast: baseline assumptions
• Economy performs broadly as the Treasury expects
• Corporation tax
– Morgan Stanley central forecast of negative corporate profits growth
in 2008–09 and 2009–10
– Lagged effect on tax receipts means cash fall until 2010–11
– Receipts grow thereafter to return to long-run average
© Institute for Fiscal Studies
Medium-term forecast: corporation tax receipts
4.0
Percentage of national income
3.5
3.0
2.5
2.0
1.5
Long-run average
1.0
HM Treasury, Pre-Budget Report, November 2008
Green Budget, Morgan Stanley 'central' forecast
0.5
Green Budget, baseline
Financial year
© Institute for Fiscal Studies
13-14
12-13
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
0.0
Medium-term forecast: total receipts
40.0
39.5
Percentage of national income
39.0
38.5
38.0
37.5
37.0
36.5
36.0
PBR 2008 forecast
35.5
Green Budget 2009 baseline
Financial year
© Institute for Fiscal Studies
13-14
12-13
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
35.0
Medium-term forecast: spending and borrowing
• Spending: assume PBR plans delivered from 2011–12 onwards
• Current budget deficit
– 2008–09: £6.6bn larger than PBR 2008 forecast
– 2009–10: £6.4bn larger than PBR 2008 forecast
– Medium-term: falls from 5.7% of GDP in 2009–10 to 2.4% in 2013–14
(1.3% of GDP higher than PBR forecast)
• Public sector net borrowing
– 2008–09: £84bn
– 2009–10: £125bn
– Medium-term: falls from 8.4% of GDP in 2009–10 to 4.2% in 2013–14
(1.3% of GDP higher than PBR forecast)
• Public sector net debt: rises to 62.1% of GDP in 2013–14
– Higher than PBR forecast of 57.4%
© Institute for Fiscal Studies
But the outlook is uncertain…
• What if trend growth rate is somewhat lower?
– Morgan Stanley ‘central’ case: similar economic growth to 2011–12,
thereafter economy back at trend and so less scope for further
bounce-back
• Downside risks
– Morgan Stanley ‘pessimistic’ case: deeper recession and trend growth
rate considerably lower
• A more favourable outlook
– Morgan Stanley ‘optimistic’ case: no permanent loss of potential
output, activity bounces back strongly in 2010 and beyond
© Institute for Fiscal Studies
Public sector net borrowing: alternative scenarios
0
Percentage of national income
2
4
6
8
10
12
14
© Institute for Fiscal Studies
HM Treasury, Pre-Budget Report, November 2008
Green Budget, HM Treasury assumptions
Green Budget, Morgan Stanley 'central' case
Green Budget, Morgan Stanley 'pessimistic' case
Green Budget, Morgan Stanley 'optimistic' case
13–14
12–13
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
Financial year
Implications for public sector net debt
100
HM Treasury, Pre-Budget Report, November 2008
Green Budget, HM Treasury assumptions
Green Budget, Morgan Stanley 'central' case
Green Budget, Morgan Stanley 'pessimistic' case
Green Budget, Morgan Stanley 'optimistic' case
90
Percentage of national income
80
70
60
50
40
30
20
10
Financial year
© Institute for Fiscal Studies
13–14
12–13
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
0
Budget judgement
• The outlook for the next few years is uncertain
• Short-term: should there be a further stimulus?
– Raises issues beyond the scope of the Green Budget
– If fiscal stimulus desired, should be targeted and temporary
• Medium-term:
– Additional £20 billion of spending cuts or tax increases need to be
implemented by the end of the next Parliament to expect to achieve
the strengthening that PBR 2008 was looking for
– The cost of inaction should action be required higher than the cost of
announcing a tightening that is later found not to be needed
© Institute for Fiscal Studies