PBR 2009: filling in some details
Robert Chote www.ifs.org.uk
© Institute for Fiscal Studies

• 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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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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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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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 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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• 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.

• 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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• 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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• 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