Public finances: outlook and risks
Carl Emmerson, Soumaya Keynes and Gemma Tetlow
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Disease and cure (December 2012)
Dec 2012: 8.2% national income (£129bn) hole in public finances,
offset by 9.2% national income (£144bn) consolidation over 8 years
Percentage of national income
10
Other current spend
Debt interest
Benefits
Investment
Tax increases
9
8
7
6
5
85%
4
3
2
1
15%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
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Notes and sources: see Figure 5.8 of The IFS Green Budget: February 2013.
Returning spending and revenues to pre-crisis
levels
Percentage of national income
55
Total spending (no action)
TME (December 2012)
Receipts (no action)
Receipts (December 2012)
50
45
40
35
© Institute for Fiscal Studies
Notes and sources: see Figure 5.9 of The IFS Green Budget: February 2013.
2017–18
2016–17
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
1999–00
1998–99
1997–98
1996–97
30
How much fiscal consolidation is needed in the
medium-term?
• Estimating how much medium-term fiscal consolidation is needed
is difficult
– Official estimates of the size of the hole in the public finances have
changed over time
– View about medium-term public finance position is sensitive to view
taken on how much scope there is for economic recovery
– Also depends on how tax revenues and spending respond as economy
recovers
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Size of the problem and the planned solution:
changes over time
Size of the problem
Percentage of national income
10
Planned fiscal consolidation
9
8
7
6
5
4
3
2
1
© Institute for Fiscal Studies
Notes and sources: see Figures 5.5 and 5.6 of The IFS Green Budget:
February 2013. Additional calculations using Budgets, Pre-Budget Reports
and Economic and Fiscal Outlooks since March 2008.
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
HMT PBR 2008
HMT Budget
2008
0
Forecast for borrowing deteriorated between
November 2010 and December 2012
Change in official borrowing forecasts between Nov 2010 and Dec 2012
80
Increase in borrowing (without policy action)
70
60
£ billion
50
40
30
20
10
0
-10
-20
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
© Institute for Fiscal Studies
Notes and sources: see Table 5.2 of The IFS Green Budget: February 2013.
Additional author calculations.
George Osborne has allowed the automatic
stabilisers to operate during this parliament…
Change in official borrowing forecasts between Nov 2010 and Dec 2012
80
Increase in borrowing (without policy action)
Increase in borrowing (with policy action)
70
60
£ billion
50
40
30
20
10
0
-10
-20
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
© Institute for Fiscal Studies
Notes and sources: see Table 5.2 of The IFS Green Budget: February 2013.
Additional author calculations.
…but has announced measures to offset
structural borrowing increase by 2017–18
Change in official borrowing forecasts between Nov 2010 and Dec 2012
80
Increase in borrowing (without policy action)
Increase in borrowing (with policy action)
70
60
£ billion
50
40
30
20
10
0
-10
-20
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18
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• Increase in cyclical borrowing in 2017–18
Notes and sources: see Table 5.2 of The IFS Green Budget: February 2013.
has not
been
offset
Additional
author
calculations.
Wide range of views among forecasters about
amount of spare capacity in UK economy
Structural borrowing could be
1.6% of national income larger
OBR
Fathom Consulting
EIU
Schroders Investment Management
Nomura
Scotiabank
Barclays Capital
BCC
Santander
CBI
Lombard Street
Commerzbank
IMF
Oxford Economics
Capital Economics
Structural borrowing could be
2.0% of national income smaller
-3.1%
Average of independent
forecasters (excl. OBR):
–3.0%
0% -1% -2% -3% -4% -5% -6% -7%
Output gap (% of trend GDP)
© Institute for Fiscal Studies
Notes and sources: see Figure 5.14 of The IFS Green Budget: February 2013.
How will tax revenues and spending respond as
the economy recovers?
• Full public finance forecasts are presented in Appendix A, using
four different macro scenarios
– OBR
– Oxford Economics central
– Oxford Economics ‘corporate reawakening’
– Oxford Economics ‘Eurozone break-up’
• Focus here on main areas where forecasts differ from the OBR’s
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Borrowing could be higher than the OBR forecasts
• Borrowing could be higher in 2012–13 than 2011–12 (on like-forlike basis)
– IFS baseline forecast is for borrowing this year of £125.4bn
– This is £4.9bn higher than the OBR’s December 2012 forecast: due to
lower expected tax receipts (–£3.1bn) and higher spending by central
government departments (+£1.6bn)
– Implies greater than 50/50 chance that borrowing will be higher this
year than last (when it was £121.4bn)
• But, economically, medium & long-run are what matters – these
risks include:
– Tax revenues could grow less quickly than OBR expects
– Future adverse shocks (e.g. Eurozone break-up)
– Government may prove unable/unwilling to implement the large
planned cuts to public spending
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Borrowing could be lower than the OBR forecasts
• Tax revenues could grow more quickly than OBR expects
– Baseline forecast is for higher growth in VAT and corporation tax
• Trend output could be higher: implying lower structural borrowing
– As in Oxford Economic central scenario
• Future positive shocks
– If corporate confidence and investment picks up more quickly,
economy and tax revenues could grow more rapidly
• Post-election tax rises
– Incoming governments have raised taxes by an average of £7.5bn a
year in the 12 months following the last six general elections
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Summary of alternative public finance forecasts:
Cyclically-adjusted current budget surplus
% of national income
3.0
2.0
1.0
OBR, December 2012
IFS: baseline
IFS: Oxford Economics central case
IFS: Oxford Economics 'corporate reawakening'
IFS: Oxford Economics 'eurozone break-up'
1.2% of
GDP
(£19bn)
0.0
-1.0
-2.0
-3.0
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
-4.0
-5.0
-6.0
2012–13
2013–14
2014–15
2015–16
2016–17
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Notes and sources: see Figure 5.15 of The IFS Green Budget: February 2013.
2017–18
Summary of alternative public finance forecasts:
Public sector net debt
Supplementary target: public sector net
debt as a share of national income should
be falling at a fixed date of 2015−16
% of national income
120
110
OBR, December 2012
IFS: baseline
IFS: Oxford Economics central case
IFS: Oxford Economics 'corporate reawakening'
IFS: Oxford Economics 'eurozone break-up'
100
90
80
70
60
2012–13
2013–14
2014–15
2015–16
2016–17
© Institute for Fiscal Studies
Notes and sources: see Figure 5.16 of The IFS Green Budget: February 2013.
2017–18
Key points
• IFS baseline forecast is that borrowing will be £4.9 billion higher in
2012–13 than 2011–12 on a like-for-like basis
• Fiscal policy in this parliament is set to be more expansionary than
suggested by forecasts from November 2010
– Chancellor has allowed automatic stabilisers to operate, offsetting just
£1 billion of the £65 billion rise in forecast borrowing for 2014–15
• But borrowing increase has been offset in the next parliament by
further planned squeeze on public spending
• Exact size of problem and medium-term action required is
uncertain – both upside and downside risks exist
• Debt has increased significantly over last 4 years; further adverse
shocks could easily drive it above 100% of national income
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