The UK public finances
Carl Emmerson
Presentation at Oxford Economics, UK Outlook Conference,
London, 1 November 2012
© Institute for Fiscal Studies
Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
Level of GDP
(Index, actual 2009–10 GDP = 100)
130
125
Actual GDP (March 2012)
120
115
110
105
100
2009–10
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2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
130
Level of GDP
(Index, actual 2009–10 GDP = 100)
Actual GDP (March 2012)
125
Potential ("trend") GDP – March 2012
120
115
110
105
100
2009–10
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2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Weak short-term growth thought to reflect a
permanent problem
Comparison of forecasts for real GDP growth and trend GDP
Level of GDP
(Index, actual 2009–10 GDP = 100)
130
125
Actual GDP (March 2012)
Potential ("trend") GDP – March 2012
Potential ("trend") GDP – March 2008
13% loss
of trend
output
120
115
110
105
100
2009–10
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2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
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2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
Total spending (no action)
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
Percentage of national income
The big fiscal picture
55
Receipts (no action)
50
45
40
35
30
The cure (March 2012): 8.1% national income
consolidation over 7 years (£123bn)
Mar 2012: 7.6% national income (£115bn) hole in public finances
Percentage of national income
9
Other current spend
Debt interest
Benefits
Investment
Tax increases
8
7
6
5
83%
4
3
2
1
17%
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
© Institute for Fiscal Studies
% not implemented by Apr 2012
The pain to come
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
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88%
88%
94%
75%
66%
27%
All fiscal
Tax
Total
Investment
tightening increases spending
cuts
cuts
Benefit
cuts
Other
current
spending
cuts
Source: Author‟s calculations using Figure 3.5 of The IFS Green Budget: February 2012.
Spending and revenues back to pre-crisis levels
Percentage of national income
55
Total spending (March 2012)
Receipts (March 2012)
Total spending (no action)
Receipts (no action)
50
45
40
35
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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
Economic developments since the Budget
• Outlook for growth has been revised down
– OBR March 2012 forecast growth of 0.8% in 2012 and 2.0% in 2013
– average of independent forecasters has moved from 0.5% and 1.7%
in March 2012 to –0.3% and 1.1% in October 2012
• Public finances have performed weakly over first half of 2012–13
– underlying borrowing is higher than in same months of 2011–12
– if central government receipts continue to grow at the same rate for
the rest of 2012–13, and all other receipts and spending come in as
forecast, then borrowing would be £15bn higher than forecast
• Unless all additional borrowing temporary further tax rises or
spending cuts would be required to reduce deficit as previously
intended
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Judging the health of the public finances:
The Chancellor‟s fiscal targets
• Fiscal mandate
– Structural current budget must be forecast to be in balance or
surplus at the end of the rolling five-year forecast horizon (currently
2016–17)
– Imbalances between spending and revenues that purely reflect
temporary economic weakness are alright
– Can borrow for investment
• Supplementary target
– Debt must be falling as a share of GDP in 2015–16
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Meeting the fiscal mandate
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
1
0
-1
-2
-3
March 2011
-4
-5
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2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
-6
2010-11
Cyclically-adjusted current budget,
%GDP
2
Meeting the fiscal mandate
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
1
0
-1
-2
-3
March 2011
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2016-17
2015-16
2013-14
2012-13
2011-12
-6
November 2011 - no
policy action
November 2011 - with
policy
Column1
2014-15
-5
2017-18
-4
2010-11
Cyclically-adjusted current budget,
%GDP
2
Meeting the fiscal mandate
Fiscal mandate: “cyclically adjusted
current budget balance by the end of the
rolling, five year forecast period”
1
0
-1
-2
-3
March 2011
-4
November 2011 - no policy action
-5
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2017-18
2016-17
2015-16
2013-14
2012-13
2011-12
2014-15
November 2011 - with policy
-6
2010-11
Cyclically-adjusted current budget,
%GDP
2
Debt back on a more sustainable path
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: No policy action
Debt: Current policy
Debt: Current policy – incl. estimated impact of ageing
1974–75
1977–78
1980–81
1983–84
1986–87
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
2013–14
2016–17
2019–20
2022–23
2025–26
2028–29
2031–32
2034–35
2037–38
2040–41
Percentage of national income
- but to remain above pre-crisis levels for a generation
© Institute for Fiscal Studies
Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
• Such cuts to public service spending not done in the UK before
– never more than 2 consecutive years of cuts previously
– spending plans imply April 2010 to March 2017 will be the tightest 7
years for public service spending since WWII
• Only comparable international experience is Ireland in late 1980s
• On the other hand cuts follow a period of big spending increases
– 12 consecutive years of real increases (1998–99 to 2009–10)
– by 2016–17 total public service spending will be the same as in
2004–05 in real terms (2000–01 as a % of national income)
© Institute for Fiscal Studies
7-year squeeze on public service spending
16.2% cut
over 7 years
9.3% cut
over 7 years
10
5
0
ConLib
Historic
1980–81
Labour
1970–71
-5
7 year moving average
© 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
1990–91
1985–86
1975–76
1965–66
1960–61
1955–56
-10
1950–51
Annual percentage real increase
15
Whitehall departments: „winners‟
International development
33.4
Energy and climate change
15.5
Work and pensions
0.9
NHS (England)
-0.2
Defence
-7.8
Education
-11.4
Average DEL cut
-11.7
-20
© Institute for Fiscal Studies
-10
0
10
20
30
40
Real budget increase 2011–12 to 2014–15
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011.
Whitehall departments : „losers‟
Average DEL cut
-11.7
Transport
Culture, media and sport
-15.1
-21.6
Home office
-25.6
Justice
-25.8
CLG: Local Government
Business, innovation and skills
Environment, food and rural affairs
-27.3
-29.0
-31.3
-80
-60
-40
-20
Real budget increase 2011–12 to 2014–15
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DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011.
0
Whitehall departments : „losers‟
Average DEL cut
-11.7
Transport
Culture, media and sport
-15.1
-21.6
Home office
-25.6
Justice
-25.8
CLG: Local Government
Business, innovation and skills
Environment, food and rural affairs
-27.3
-29.0
-31.3
CLG: Communities -67.8
-80
-60
-40
-20
Real budget increase 2011–12 to 2014–15
© Institute for Fiscal Studies
DEL = Departmental Expenditure Limits
Notes and sources: see Figure 6.4 of The IFS Green Budget: February 2011.
0
How far have we gone so far?
Whitehall departments: timing of cuts
2011–12
2012–13
2013–14
2014–15
Defence
Back-loaded
Transport
Total
CLG: Local Government
Education
CLG: Communities
-25%
© Institute for Fiscal Studies
0%
25%
50%
75% 100%
Percentage of required cuts achieved
Notes and sources: see Figure 6.6 of The IFS Green Budget: February 2011.
125%
How far have we gone so far?
Whitehall departments: timing of cuts
2011–12
2012–13
2013–14
2014–15
Defence
Transport
Total
CLG: Local Government
Frontloaded
Education
CLG: Communities
-25%
© Institute for Fiscal Studies
0%
25%
50%
75% 100%
Percentage of required cuts achieved
Notes and sources: see Figure 6.6 of The IFS Green Budget: February 2011.
125%
Can the tight spending plans be delivered?
400
350
300
250
200
Public service
spending
150
100
50
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Real spending (1998-99 = 100)
- How tight will they feel?
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
400
ODA
350
Health
300
Transport
250
200
Public service
spending
150
Education
100
50
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Real spending (1998-99 = 100)
- How tight will they feel?
Public order
and safety
Defence
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
400
ODA
350
Health
300
Transport
250
200
Public service
spending
150
Education
100
50
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Real spending (1998-99 = 100)
- How tight will they feel?
Public order
and safety
Defence
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Can the tight spending plans be delivered?
400
ODA
350
Health
300
Transport
250
200
Public service
spending
150
Education
100
50
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
Real spending (1998-99 = 100)
- How tight will they feel?
Public order
and safety
Defence
© Institute for Fiscal Studies
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
Average annual real change in
RDEL (%)
Trade-off between cuts to public service spending
and welfare cuts: 2015–16 and 2016–17
1
No RDEL cut,
£20bn welfare
cut
0
RDEL cut by 2.3% a
year, £8bn welfare cut
-1
-2
-3
RDEL cut by 3.8% a
year, no welfare cut
-4
-5
-25
© Institute for Fiscal Studies
-20
-15
-10
-5
0
Change in welfare spending (£bn, 2011–12 terms)
(or change in taxation or borrowing)
Note: HM Treasury and IFS calculations. Resource Departmental Expenditure
Limits (RDEL) is the non-investment component of the spending by central
government on the delivery and administration of public services.
5
Conclusions
• Financial crisis and recession opened up large hole in the UK‟s
public finances
• Government has a fiscal consolidation plan that lasts to 2016–17
– Four-fifths coming from spending cuts
• Risks to the fiscal consolidation plan
– Can cuts to public service spending be delivered?
• UK has not achieved such a sustained period of cuts to public
service spending since World War II
• Also few comparable examples internationally
• Areas facing biggest cuts are largely not those that saw big
spending increases under Labour
– What if the economy weakens further?
• Temporary economic weakness is alright but additional
permanent weakness is not
• More difficult decisions to be made in the next Spending Review
© Institute for Fiscal Studies
The UK public finances
Carl Emmerson
Presentation at Oxford Economics, UK Outlook Conference,
London, 1 November 2012
© Institute for Fiscal Studies
Growth is under performing
OBR Budget
forecast
Outturn
2012 Q1
0.3
-0.3
2012 Q2
0.0
-0.5
2012 Q3
0.6
?
2012 Q4
0.3
?
2013 Q1
0.6
?
2012-13
1.0
??
• Borrowing looks likely to overshoot in 2012-13
• Pressure on government to stimulate
– Timely, targeted and temporary
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Longer term public spending issues
• Demographic pressures (ageing population) put upward
pressure on spending
© Institute for Fiscal Studies
OBR age-related spending projections
% of national income
2016- 2021- 2041- 206117
22
42
62
Health
6.8
7.1
8.3
9.1
Long-term care
1.1
1.2
1.7
2.0
© Institute for Fiscal Studies
Sources: OBR Fiscal Sustainability Report 2012, Table 3.6
OBR age-related spending projections
% of national income
2016- 2021- 2041- 206117
22
42
62
Health
6.8
7.1
8.3
9.1
Long-term care
1.1
1.2
1.7
2.0
State pensions
5.6
5.3
7.0
8.3
Pensioner benefits
1.1
1.1
1.3
1.2
© Institute for Fiscal Studies
Sources: OBR Fiscal Sustainability Report 2012, Table 3.6
OBR age-related spending projections
% of national income
2016- 2021- 2041- 206117
22
42
62
Health
6.8
7.1
8.3
9.1
Long-term care
1.1
1.2
1.7
2.0
State pensions
5.6
5.3
7.0
8.3
Pensioner benefits
1.1
1.1
1.3
1.2
Public service pensions
2.2
2.0
1.5
1.3
Education
4.5
4.6
4.4
4.5
Total age-related spending
21.3
21.3
24.2
26.3
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Sources: OBR Fiscal Sustainability Report 2012, Table 3.6
International comparisons
• Cyclically-adjusted borrowing compared to 28 other advanced
economies
UK rank
2007 (pre-crisis)
4th highest
Greece, Ireland, Portugal
higher
Crisis peak
5th highest
Greece, Ireland, Iceland,
Spain higher
2016
15th highest
Increase: 2007-peak
9th largest
Decrease:
peak-2016
5th largest
Greece, Iceland, Ireland,
Portugal larger
© Institute for Fiscal Studies
Sources: IFS calculations using data from IMF, Fiscal Monitor, September 2011.
Conclusions
• Financial crisis and recession opened up large hole in the UK‟s
public finances
• Government has a fiscal consolidation plan that lasts to 2016–17
– Four-fifths coming from spending cuts
• Risks to the fiscal consolidation plan
– Can cuts to public service spending be delivered?
• UK has not achieved such a sustained period of cuts to public
service spending since World War II
• Also few comparable examples internationally
• Areas facing biggest cuts are largely not those that saw big
spending increases under Labour
– What if the economy weakens further?
• Temporary economic weakness is alright but additional
permanent weakness is not
• More difficult decisions to be made in the next Spending Review
© Institute for Fiscal Studies