The new fiscal framework: an assessment
Rowena Crawford, Carl Emmerson and Gemma Tetlow
© Institute for Fiscal Studies
The story so far
Percentage of national income
55
50
Total spending – no policy change
Revenues – no policy change
Total spending − latest forecast
Revenues − latest forecast
45
40
35
© Institute for Fiscal Studies
Notes and sources: see Figure 2.1 of The IFS Green Budget: February 2011.
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
1997–98
30
The story so far
Percentage of national income
55
50
Total spending – no policy change
Revenues – no policy change
Total spending − latest forecast
Revenues − latest forecast
45
40
35
© Institute for Fiscal Studies
Notes and sources: see Figure 2.1 of The IFS Green Budget: February 2011.
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
1997–98
30
The new fiscal framework
• Two new fiscal targets:
– The fiscal mandate
– The supplementary target
• Set up independent Office for Budget Responsibility (OBR)
– Prepare economic and fiscal forecasts
– Assess the extent to which the fiscal mandate has been, or is likely to
be achieved
– Analyse the sustainability of the public finances
– Assess the accuracy of its previous fiscal and economic forecasts
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The fiscal mandate (1/2)
• “To achieve cyclically-adjusted current budget balance by the end
of the rolling, five-year forecast horizon”
• Essentially a new ‘golden rule’
– Appropriate for governments to borrow to finance investment
spending but not day-to-day spending
– Allows borrowing to be higher when the economy is thought to be
temporarily weak
– (Both desirable features)
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The fiscal mandate (2/2)
• “To achieve cyclically-adjusted current budget balance by the end
of the rolling, five-year forecast horizon”
• Difference in how the new fiscal mandate is operationalised
– Forward-looking
– Potential problems of interpretation
• A greater than 50% chance of meeting the mandate is equivalent
to a forecast cyclically-adjusted current budget surplus
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Will the fiscal mandate be ‘met’?
Forecast cyclically-adjusted current budget under...
3
Percentage of national income
Current policy
Inherited policy
2
1
0
-1
-2
-3
-4
-5
© Institute for Fiscal Studies
Notes and sources: see Figure 2.2 of The IFS Green Budget: February 2011.
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
-6
The supplementary target
• “public sector net debt as a percentage of national income to be
falling at a fixed date of 2015-16”
© Institute for Fiscal Studies
Will the supplementary target be met?
Forecast public sector net debt under...
Percentage of national income
100
Current policy
90
Inherited policy
80
70
60
50
40
30
20
10
© Institute for Fiscal Studies
Notes and sources: see Figure 2.6 of The IFS Green Budget: February 2011.
2040–41
2037–38
2034–35
2031–32
2028–29
2025–26
2022–23
2019–20
2016–17
2013–14
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
0
Will these targets ensure fiscal sustainability?
• No
• Fiscal mandate
– Constrains forecasts not outturns
– Needs careful monitoring to ensure forward looking nature not
manipulated (existence of the OBR should help)
• Supplementary target
– Is only binding in one year
– Will become obsolete after 2015-16
© Institute for Fiscal Studies
Replacing the supplementary target
• The government intends to introduce a new target for debt as a
share of national income
– Based on an assessment by the OBR of the long-term sustainability of
the public finances
• Issues to consider:
– Long term pressures on the public finances: e.g. demographics
– Consider a broader measure of indebtedness than public sector net
debt: include other long term liabilities such as pension promises?
– Perhaps target level of pre-committed annual payments rather than
total level of indebtedness?
© Institute for Fiscal Studies
The Office for Budget Responsibility (1/2)
• Improved the presentation, transparency and credibility of official
forecasts
• Welcome increases in transparency:
– Explanation of the fiscal forecasting process
– Publication of key economic assumptions underlying fiscal forecasts
– Central forecasts (no unquantified degree of ‘caution’ built in)
• Further improvements in transparency possible
– Particularly regarding their macroeconomic forecasts
– How and why do forecasts differ from those of the Bank of England?
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The Office for Budget Responsibility (2/2)
• Degree of interaction between the OBR and government
– Interaction could damage the perception of the OBR as independent
+ Interaction aids policy making
 Interaction should continue but need to be open about it
• Not allowed to consider alternative policy scenarios
+ Avoids danger of being drawn into political discussion
– Would inform public debate (especially prior to elections)
 Certainly want ‘no policy change’ forecasts published
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Summary
• New fiscal mandate
– Desirable in its forward looking nature
– Will require careful monitoring to ensure not abused
– OBR forecasts it will be met under current policies
• Supplementary target
– OBR forecasts it will be met under current policies
– Will need replacing
• Office for Budget Responsibility
– Has improved the presentation, transparency and credibility of
official forecasts
– Should help ensure fiscal sustainability in future
© Institute for Fiscal Studies
The new fiscal framework: an assessment
Rowena Crawford, Carl Emmerson and Gemma Tetlow
© Institute for Fiscal Studies