Eliminating the deficit in this parliament?
Carl Emmerson
Presentation at IFS Public Finance Lecture, London
7 January 2015
© Institute for Fiscal Studies
Deficit to be eliminated by 2018?
• March 2015 Budget forecast an overall surplus in 2018–19
• Before the general election the Prime Minister stated:
– “There’s a balanced plan to clear the deficit….. by 2018 we’ll be
running a surplus”
– David Cameron, Conservative Party Manifesto Launch, 14 April 2015
(http://press.conservatives.com/post/116374071635/david-cameronspeech-conservative-party-manifesto)
• New fiscal mandate requires the government to achieve a surplus
on the headline public finances by 2019–20
– and maintain a surplus thereafter
– unless economic growth falls below 1%
© Institute for Fiscal Studies
Eliminating the deficit in this parliament?
12
% of national income
10.2
10
8.6
8
7.0 7.1
6.7
5.7
6
4
4.9
3.9
2.7
2.5
2
1.2
0.2
0
© Institute for Fiscal Studies
Source: Office for Budget Responsibility.
2018–19
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
Financial year
2019–20
-0.5
-2
Eliminating the deficit?
12
Financial
Plans imply
crisis
first
led to
largest
budgetbudget
surplus since
deficit
2000–01
since WWII
% of national income
10
8
6
4
2
0
-2
-4
Financial year
© Institute for Fiscal Studies
Source: Office for Budget Responsibility.
2019–20
2015–16
2010–11
2005–06
2000–01
1995–96
1990–91
1985–86
1980–81
1975–76
1970–71
1965–66
1960–61
1955–56
1948
1950
-6
Public sector debt high by recent historical
standards
% of national income
100
80
60
40
20
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
0
Financial year
© Institute for Fiscal Studies
Notes and sources: see Figure 5.2 of The IFS Green Budget: February 2015.
Public sector debt high by recent historical
standards
% of national income
300
But was higher from:
1830–31 to 1869–70
1916–17 to 1967–68
250
200
Debt hasn’t exceeded
80% of national income
since 1967–68
150
100
50
Financial year
© Institute for Fiscal Studies
Notes and sources: see Figure 5.2 of The IFS Green Budget: February 2015.
2010
1990
1970
1950
1930
1910
1890
1870
1850
1830
0
Is a budget surplus always a good idea?
• All else equal lower debt would
– reduce debt interest payments
– provide greater scope to increase debt in the event of an adverse
shock
• But governments might want to borrow in some periods:
– investment spending
– output stabilisation
– adjusting gradually to shocks
– forecast errors
– tax-rate smoothing
© Institute for Fiscal Studies
1948
1951
1954
1957–58
1960–61
1963–64
1966–67
1969–70
1972–73
1975–76
1978–79
1981–82
1984–85
1987–88
1990–91
1993–94
1996–97
1999–00
2002–03
2005–06
2008–09
2011–12
2014–15
2017–18
2020–21
% of national income
Deficit to be eliminated with tax rises and larger
spending cuts
50
48
46
44
42
40
38
36
34
32
30
Tax
Spend
© Institute for Fiscal Studies
Source: Office for Budget Responsibility.
Significant tax rise over the next few years
• July 2015 Budget (£15.9bn of tax rises, £9.4bn of tax cuts)
– increase in tax on dividend income (£2.0bn)
– increase in insurance premium tax (£1.7bn)
– increase in vehicle excise duty (£1.4bn)
– restriction of pension tax relief for those on high incomes (£1.3bn)
– restriction of interest deductibility on buy-to-lets (£0.7bn)
• November 2015 Autumn Statement (£7.5bn tax rise)
– apprenticeship levy on employers with large paybills (£3.1bn)
– raising of referendum threshold for council tax rises (£2.2bn)
– increase in stamp duty for second homes & buy-to-lets (£0.9bn)
© Institute for Fiscal Studies
Significant cuts to working age benefits
• Government still planning £12bn cut to annual benefit spending
by end of the parliament
– but less than half delivered by 2017–18
– £4bn from freeze to 2020, £4-5bn additional cuts to universal credit,
£1½bn cuts to housing benefit spending (plus other smaller changes)
• Benefit spending excluding state pensions in 2020–21 forecast to
be at its lowest as a share of national income for 30 years
© Institute for Fiscal Studies
Long-run impact of tax and benefit changes
All changes introduced May 2015-April 2019 fully in place
1%
0%
Change in net income
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
Poorest
© Institute for Fiscal Studies
2
3
4
5
6
7
Income decile group
8
9
Richest
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Hood (2015).
All
Change in departmental spending
108
106
Real terms, 2015–16=100
104
102
100
98
96
94
92
IFS: Conservative manifesto
90
IFS: Labour manifesto
88
Autumn Statement 2015
86
2015–16
2016–17
2017–18
© Institute for Fiscal Studies
Notes and sources: Crawford, et al (2015).
2018–19
2019–20
2020–21
Capital spending to rise, day-to-day spending to
be squeezed
• Departmental spending to be cut by 2% in real terms by 2019–20:
12% cumulative cut since 2010–11
• Day-to-day spending across all departments set to be cut by 3% in
real terms by 2019–20: 12% cumulative cut since 2010–11
• Departmental capital spending is to be increased by 5% in real
terms up to 2019–20 but was cut over the last parliament
– 2010–11 to 2015–16: cut by 17%
– 2010–11 to 2019–20: set to be cut by 13%
© Institute for Fiscal Studies
Day-to-day spending cuts: 2015–16 to 2019–20
Cabinet office
International development
Health
Defence
Education
Total RDEL
Home Office
Scotland, Wales, N.I
Culture
Defra
Justice
DWP,HMT,HMRC
Business
Transport
Local government DEL
-60%
SR: looking for
£10bn (3%) cut to
overall RDEL
SR: looking for £16bn
(18%) cut to other (not
devolved) RDEL
-50%
-40% -30% -20% -10%
0%
10%
Change in resource DEL, 2015–16 to 2019–20
HMT estimates councils’ spending power to be reduced by 7%, on
average. But could vary substantially across England.
© Institute for Fiscal Studies
20%
30%
Day-to-day spending cuts since 2010–11
Cabinet office
International development
Health
Defence
Education
Total RDEL
Home Office
Scotland, Wales, N.I
Culture
Defra
Justice
DWP,HMT,HMRC
Business
Transport
Local government DEL
18%
39%
10%
-12%
-3%
-12%
-26%
-12%
-36%
-45%
-45%
-44%
-42%
2015–16 to 2019–20
-70%
-79%
-100%
© Institute for Fiscal Studies
2010–11 to 2019–20
-80%
-60%
-40%
-20%
0%
20%
Change in resource DEL (cumulative)
40%
60%
Summary
• New fiscal mandate requires budget surplus from 2019–20
onwards
– unless growth drops below 1% per year
– advantages to reducing debt-to-GDP ratio, but there are reasons in
favour of government borrowing in at least some years
• Plans imply the fiscal mandate being met
– significant tax rises and cuts to working-age welfare
• Total day-to-day spending on departments to be cut less quickly
over this parliament than last
– but many departments still facing large cuts: e.g. transport and
justice
© Institute for Fiscal Studies
Eliminating the deficit in this parliament?
Carl Emmerson
Presentation at IFS Public Finance Lecture, London
7 January 2015
© Institute for Fiscal Studies