PBR 2009: filling in some details Robert Chote www.ifs.org.uk

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PBR 2009: filling in some details

Robert Chote www.ifs.org.uk

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What we will be looking out for

• Forecasts for economic growth

• Forecasts for the public finances

• The repair job

– How big is the hole?

– Speed and composition

Implications for spending

• Some political positioning

• Institutional reform: the Fiscal Responsibility Bill

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Economic growth – but don’t forget the level

2009

HM Treasury

(Budget 2009)

–3¾%

Bank of England

(Inflation Report

November 2009

–4.8%

Average of new independent forecasts

–4.6%

2010

2011

Level of GDP in

2011 relative to

2008

+1%

+3¼%

+0.4%

+1.5%

+3.1%

–0.4%

+1.2%

+2%

–1.5%

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Public finance forecasts: borrowing

Budget 2009 forecasts for public sector net borrowing

2009 –10 2010 –11 2011 –12 2012 –13 2013 –14

Cash £175bn £173bn £140bn £118bn £97bn

% GDP 12.4% 11.9% 9.1% 7.2% 5.5%

• On current trends borrowing this year in line with forecast

• Getting within c.£15bn would be good in a normal year

• Weaker-than-expected real GDP will push up %GDP ratio, but this may be offset by higher-than-expected whole economy inflation

• Government will want to show deficit halving in 4 years

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Public finance forecasts: debt

Budget 2009 forecasts for public sector net debt (%GDP)

2009 –10 2010 –11 2011 –12 2012 –13

Excluding bailout costs

Including bailout costs

55.4%

59.0%

65.0%

68.4%

70.9%

74.0%

74.5%

77.5%

2013 –14

76.2%

79.0%

• Does HMT still expect debt to peak in 2013 –14 – and at what level?

• How far will expected cost of financial interventions be reduced?

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The repair job: the Treasury’s diagnosis

• The financial crisis means that the economy and the value of our houses and financial assets will be significantly and permanently smaller in cash terms than it had previously expected

• This will permanently reduce tax receipts and increase public spending as shares of national income

• This will increase the amount we have to borrow to bridge the gap between the two – even after the economy has recovered

• The Budget implied the crisis had added £90bn a year or 6.4% of GDP to structural deficit. Will the CX revise this estimate?

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The repair job: the story so far

• Tories want to tighten more aggressively from next year

• How will Darling/Brown respond?

• Tax measures to ease spending squeeze?

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Sources: HM Treasury; IFS calculations.

The outlook for public spending

• Over the next spending review (2011 –12, 2012–13 and 2013–

14) Budget 2009 plans (published and leaked) imply:

– Total public spending broadly flat in real terms

– Investment spending cut 17.3% a year

– Non-investment spending up 0.7% a year

– Departmental Expenditure Limits cut 2.9% a year

– ¾ of rise in DELs as % GDP during good years reversed by 2013–

14

• Will we get a DEL estimate – or will we have to guess?

• Will we get any departmental settlements announced?

• Any clues on spending/tax mix beyond 2013 –14?

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Some political positioning

• Labour will want to paint Tories as withdrawing fiscal support from the economy when recovery not yet rooted...

• ...even though that is what they are planning to do anyway

• Tories will say that the Government is imperilling recovery by tackling deficit too slowly – will probably cite Dubai as risk

• Labour know that the Tories are reluctant to oppose tax increases on the rich, so might they push the boundary a bit more?

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Institutional reform

• Improving credibility of fiscal pledges seen as important to reassure potential buyers of government debt

• Government has promised ‘Fiscal Responsibility Act’, putting pledge to reduce deficit in law

• But why should this be more convincing than old rules and Code for Fiscal Stability? Need to bolster faith in forecast

• Conservatives propose outside body. Labour has rejected this and says Parliament will scrutinise. More powers or resources?

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PBR 2009: filling in some details

Robert Chote www.ifs.org.uk

© Institute for Fiscal Studies

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