Disease and cure in the UK: The fiscal impact
p
of the crisis and the policy response
Carl Emmerson (with Robert Chote,
Chote Rowena Crawford and Gemma Tetlow)
Presentation at ECFIN country seminar “The UK economy, post-recession:
Same as it ever was?”, Brussels, Tuesday 29th June 2010
© Institute for Fiscal Studies
12
Extra cyclical
Extra structural
Budget 2008
10
8
6
Permanentt
P
damage =
5.8% of GDP
(£86bn)
4
2
© Institute for Fiscal Studies
Sources: Authors’ calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
8
2017–18
2016–17
6
2015–16
2014–15
4
2013–14
2012–13
2011–12
2010–11
0
2009–10
0
2008–09
Percenttage of national in
ncome
Di
Diagnosis
i
Di
Diagnosis:
i change
h
over time
i
Percen
ntage of national inccome
8
£47bn
£94bn
£86bn
£78bn
£86bn
PBR 2008
Budget 2009
PBR 2009
Budget March
2010
Budget June
2010
7
6
5
4
3
2
1
0
© Institute for Fiscal Studies
Sources: Authors’ calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
1987 Q1
1
1988 Q1
1
1989 Q1
1
1990 Q1
1
1991 Q1
1
1992 Q1
1
1993 Q1
1
1994 Q1
1
1995 Q1
1
1996 Q1
1
1997 Q1
1
1998 Q1
1
1999 Q1
1
2000 Q1
1
2001 Q1
1
2002 Q1
2003 Q1
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
2012 Q1
2013 Q1
2014 Q1
2015 Q1
Perce
entage off trend ou
utput
Ab
bust without
ih
ab
boom??
8
6
HMT output gap
Alternative scenario
4
2
0
-2
-4
-6
© Institute for Fiscal Studies
Source: Authors’ calculations based on June 2010 Budget.
Di
Diagnosis:
i an alternative
l
i
Perce
entage off trend ou
utput
12
PSNB
CA PSNB - current HMT view
CA PSNB - alternative view
10
8
6
4
2
0
-2
© Institute for Fiscal Studies
Source: Authors’ calculations based on June 2010 Budget.
2014-15
2010-11
2006-07
2002-03
1998-99
1994-95
1990-91
1986-87
1982-83
1978-79
1974-75
1970-71
-4
C
Cure:
LLabour’s
b ’ plans
l
Percen
ntage of national inccome
8
Unknown
7
Spending cuts
T iincreases
Tax
6
5
4
3
70%
2
1
30%
0
2010-11
© Institute for Fiscal Studies
2011-12
2012-13
2013-14
2014-15
Sources: Authors’ calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
2015-16
2016-17
C
Cure:
new coalition
li i Government’s
G
’ additions
ddi i
Percen
ntage of national inccome
8
Additional spending cuts
Additional tax increases
L b
Labour
spending
di cuts
t
Labour tax increases
7
6
5
4
80%
85%
20%
15%
2014-15
2015-16
3
2
1
0
2010-11
© Institute for Fiscal Studies
2011-12
2012-13
2013-14
Sources: Authors’ calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
2016-17
C
Cure:
new coalition
li i Government’s
G
’ plans
l
Percen
ntage of national inccome
8
Spending cuts
7
Tax increases
6
5
4
74%
77%
26%
23%
2014-15
2015-16
3
2
1
0
2010-11
© Institute for Fiscal Studies
2011-12
2012-13
2013-14
Sources: Authors’ calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
2016-17
Cure: debt sustainable but not back to pre-crisis
l l for
levels
f a generation
i
Budget 2008
160
Budget June 2010 – no policy action
Budget June 2010
120
Budget June 2010 – including impact
of demographic pressures
80
40
© Institute for Fiscal Studies
Source: Authors’ calculations based on the March 2008 and June 2010
Budget.
2039–40
2034–35
2029–30
2024–25
2019–20
2014–15
2009–10
2004–05
1999–2000
1
1994–95
1989–90
1984–85
1979–80
0
1974–75
Percentaage of naational inccome
200
Distributional impact of post crisis tax and benefit reforms
0%
-2%
-4%
-6%
-8%
8%
Announced before June 2010 Budget
-10%
Announced in June 2010 Budget
-12%
12%
-14%
© Institute for Fiscal StudiesNote:
Deciles exclude households containing individuals with incomes above £100,000.
Source: Browne (2010).
All
Richest
9
Ove
er £100k
Income decile group
8
7
6
5
4
3
2
-16%
Poorest
Perrcentage of change in net income
C
Cure:
allll iin this
hi together?
h ?
Distributional impact of post crisis tax and benefit reforms
0%
-2%
-4%
-6%
-8%
8%
Announced before June 2010 Budget
-10%
Announced in June 2010 Budget
-12%
12%
-14%
© Institute for Fiscal StudiesNote:
Deciles exclude households containing individuals with incomes above £100,000.
Source: Browne (2010).
All
Richest
9
Ove
er £100k
Income decile group
8
7
6
5
4
3
2
-16%
Poorest
Perrcentage of change in net income
C
Cure:
allll iin this
hi together?
h ?
C
Cure:
public
bli service
i spending
di set ffor a squeeze
10
5
0
© Institute for Fiscal Studies
Note: Figure shows total public spending less spending on welfare benefits
and debt interest
2015–16
2010–11
2005–06
2000–01
1995–96
6 year moving average
1990–91
1985–86
Historic
1980–81
ConLib
1975–76
Labour
1965–66
1955–56
1950–51
-10
1970–71
-5
1960–61
Ann
nual perce
entage reall increase
15
C
Cure:
much
h pain
i to come ffor unprotected
d DEL
DELs
Index: Labour 2
2010-11 = 100
150
DEL
Overseas Aid
NHS
Unprotected DEL
125
+36%
100
-14%
75
-25%
50
2010-11
2010
11
© Institute for Fiscal Studies
2011-12
2011
12
2012-13
2012
13
2013-14
2013
14
Note: Assumes no real growth in NHS spending. Unprotected DEL also
assumes a £5 billion AME margin in 2014–15.
2014-15
2014
15
2015-16
2015
16
Th Ch
The
Chancellor’s
ll ’ new fi
fiscall targets
• R
Rule
l 1
1: b
balanced
l
d structural
t t l currentt b
budget
d tb
by end
d off fforecastt
horizon
– forecast horizon runs to 2015–16 at the moment
– requires additional fiscal tightening of 0.1% of GDP in addition to
“filling the hole”
– OBR forecasts
f
t suggestt on course to
t over-achieve
hi
the
th target
t
t by
b 0.8%
0 8%
of GDP, approximately 60% chance that meet target
• Rule 2: debt as a share of GDP falling by end of forecast horizon
– OBR forecasts show debt falling as % GDP from 2014–15
© Institute for Fiscal Studies
Th Ch
The
Chancellor’s
ll ’ new fi
fiscall targets: critique
ii
(1)
• Advantages
Ad
t
off th
the fi
firstt rule
l
– forward-looking not inappropriately constrained by past borrowing
performance
• Disadvantages of the first rule
– easy continually to add an extra year of fiscal squeeze in last year of
f
forecast
t horizon
h i
• Budget stated that end of forecast horizon will shorten in future
– advantage: reduces the scope for pencilling additional future
tightening in every statement
– disadvantage: if the horizon becomes too short, it becomes incredible
that target will be sensibly met (e
(e.g.
g Maastricht criteria)
© Institute for Fiscal Studies
Th Ch
The
Chancellor’s
ll ’ new fi
fiscall targets: critique
ii
(2)
• S
Second
d rule
l is
i nott a sufficiently
ffi i tl constraining
t i i fiscal
fi l target
t
t in
i the
th
longer term
– if first rule met,, second rule unlikely
y to be binding
g under p
plausible
scenarios for future investment spending
– sensibly, Chancellor plans to announce a debt target “once the
exceptional rise in debt has been addressed”
addressed
– OBR to provide assessment of outlook for overall indebtedness
© Institute for Fiscal Studies
Th OBR
The
OBR: where
h
next??
• IInterim
t i OBR required
i d tto advise
d i Ch
Chancellor
ll on: “th
“the permanentt
OBR’s roles and responsibilities, aims and objectives, and
appropriate size, status, and funding”
• International experience offers no standard template
• Key decisions:
– Scope – should it seek mainly to “keep the forecasts honest” or give
advice on any issues it sees affecting fiscal sustainability?
– Relationship with Treasury – independence versus inter
inter-linkage
linkage
• Transfer existing Treasury forecasting function to independent body?
• Duplicate existing Treasury forecasting function in independent body?
• Independent experts sign off output of existing Treasury forecasters?
© Institute for Fiscal Studies
C
Conclusions
l i
• P
Permanentt hit tto public
bli fi
finances ffrom fi
financial
i l crisis
i i estimated
ti t d att
£84 billion a year
• Response is a £91 billion fiscal tightening by 2014
2014–15,
15, comprising
a £24 billion tax rise and a £67 billion spending cut
• Overall post crisis tax and benefit reforms progressive and very
f
focussed
d on richest
i h t 2%
– despite the package of measures unveiled in June 2010 Budget hitting
those on lower current incomes harder than those on higher incomes
• Current policies imply deep cuts to spending on public services
– longest and deepest sustained cuts to spending on public services
since at least WW2
• Issues remain with both the Government’s fiscal rules and how the
new Office for Budget Responsibility should operate
© Institute for Fiscal Studies
Disease and cure in the UK: The fiscal impact
p
of the crisis and the policy response
Carl Emmerson (with Robert Chote,
Chote Rowena Crawford and Gemma Tetlow)
Presentation at ECFIN country seminar “The UK economy, post-recession:
Same as it ever was?”, Brussels, Tuesday 29th June 2010
© Institute for Fiscal Studies
C
Cure:
b
borrowing
i back
b k to pre-crisis
i i levels
l l
Budget 2008
Budget June 2010 – no policy change
Budget June 2010
10
8
6
4
2
© Institute for Fiscal Studies
Sources: Authors’ calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
2017–18
8
2016–17
7
2015–16
6
2014–15
5
2013–14
4
2012–13
3
2011–12
2
2010–11
1
2009–10
0
2008–09
9
0
2007–08
8
Percentaage of national inccome
12
C
Cure:
LLabour’s
b ’ DEL iincreases to b
be reversed
d
March Budget
June Budget
25
20
15
© Institute for Fiscal Studies
Note: Figure shows Departmental Expenditure Limits (DELs) as a share of
national income under current policies.
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
10
1998-99
Percentaage of naational inccome
30
S
Spending
di Review
R i
2010:
2010 allocating
ll
i the
h pain
i
• C
Currentt policies
li i iimply
l unprotected
t t d DEL cuts
t off 25% in
i reall terms
t
by 2014–15 compared to Labour’s 2010–11 baseline
– £13bn of AME cuts would reduce this to 20%
– would need to come from £270bn of AME spending included in the
spending review (4.8%)
– b
butt likely
lik l from
f
£154bn
£154b off spending
di once state
t t pensions,
i
council
il ttax
financed spending and public corporation spending excluded (8.4%)
• Plausible SR2010 settlements?
– NHS spending ‘protected’, ODA target met
– Spending on schools and defence cut by 10% by 2014–15
– Other unprotected DELs would need to be cut by 33%: includes areas
such as higher education, home office, justice, transport and housing
– Or cutting
g AME by
y a further £13 billion would leave these other
unprotected areas facing cuts of 25%
© Institute for Fiscal Studies
S
Spending
di Review
R i
2010:
2010 the
h DEL v AME trade-off
d ff
Cut tto Annually Manage
ed Expenditure
n (2010-11
1 prices)
£ billion
30
NHS spending 'protected',
overseas aid target met
20
£13bn of AME
cuts 20% cut to
cuts,
unprotected DEL
10
No further AME
cuts, 25% cut to
unprotected DEL
0
15
20
25
Cumulative percentage cut to unprotected DEL
© Institute for Fiscal Studies
Note: Assumes no real growth in NHS spending, and a £5bn AME margin
in 2014–15.
30
M i the
Meeting
h fi
fiscall mandate?
d ?
60% chance of a surplus on the structural current budget under current policies
Percen
ntage of naational inccome
6
4
2
0
-2
-4
-6
-8
09–10
09
10
© Institute for Fiscal Studies
10–11
10
11
11–12
11
12
12–13
12
13
13–14
13
14
14–15
14
15
Source: Office for Budget Responsibility
(http://budgetresponsibility.independent.gov.uk/d/fan_charts_intervals.xls)
15–16
15
16