UK Fiscal Strategy
Presentation to Wim Drees Foundation for Public
Finance
Conrad Smewing
Deputy Director, Fiscal Policy and Statistics
April
2011
UNCLASSIFIED
Overview of presentation
1. Origin of the UK fiscal deficit
2. Fiscal policy response and framework reform
3. Implications and recent developments
UNCLASSIFIED
Imbalances in the UK economy
Private sector debt in the UK
•
500
Per cent of GDP
450
Gross interest-bearing liabilities
400
350
Increasing reliance on
government, consumer debt
and financial sector drove
imbalances:
•
By 2007 UK had the
largest structural deficit
of any G7 economy.
•
The UK’s current
account went from near
balance in 1997, to more
than a 3% deficit by
2006.
•
Financial services’
share of GDP rose from
6½% in 1997 to 8½% in
2007, while
manufacturing’s share
nearly halved.
300
250
200
150
100
50
0
Non-financial companies
Households
Financial companies
Source: Office for National Statistics.
UNCLASSIFIED
Persistent pre-crisis fiscal deficit
49
Receipts and expenditure
47
45
43
41
39
37
35
1978-79
1982-83
1986-87
1990-91
Public sector current receipts
UNCLASSIFIED
1994-95
1998-99
2002-03
Total managed expenditure
2006-07
Impact of crisis exposes large structural
deficit
135
Nominal GDP Forecasts - 2006-07 = 100
49
Receipts and expenditure
47
130
125
45
120
43
115
c. 10% fall
41
110
105
39
OBR March 2011
100
37
HMT Budget 2007
95
35
90
1978-79 1981-82 1984-85 1987-88 1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
UNCLASSIFIED
Public sector current receipts
Total managed expenditure
Consequences
600
Total financial sector assets less branches (% GDP)
UK
500
France
400
Ireland
Germany
300
Austria
Spain
Portugal
Norway
200
Belgium
Greece
Slovenia
100
Finland
U.S
Bulgaria
Italy
Romania
Czech Rep
Lithuania
Slovakia
0
0
1
2
3
4
5
6
Structural deficit in 2010 (% GDP)
UNCLASSIFIED
7
8
9
10
Policy implications
• High level of public borrowing risks undermining fairness,
growth and economic stability in the UK.
• Tackling the deficit is essential as it will:
o reduce the UK’s vulnerability to further shocks or a loss of market
confidence, which could force a much sharper correction;
o underpin private sector confidence, supporting growth and job creation
over the medium term;
o help keep long-term interest rates down, helping families and
businesses through the lower costs of loans and mortgages;
o keep debt and debt interest paid by the Government – and ultimately
the taxpayer – lower than would otherwise have been the case; and
o avoid accumulating substantial debts to fund spending that benefits
today’s generation at the expense of tomorrow’s, which would be
irresponsible and unfair.
UNCLASSIFIED
Overview of presentation
1. Origin of the UK fiscal deficit
2. Fiscal policy response and framework reform
3. Implications and recent developments
UNCLASSIFIED
Government strategy
• Early, decisive action to reduce the deficit.
o Setting plans to restore the public finances to a sustainable path.
Consolidation plans result in debt peaking in 2013-14.
• Significant fiscal framework reform to rebuild credibility.
o Creating the Office for Budget Responsibility, to provide independent,
transparent and credible forecasts.
o Introducing a clear, forward-looking fiscal mandate, to guide
decisions over medium term.
• Reform of financial sector regulation to help prevent build-up of
systemic risks
o Overhaul of tripartite system of financial regulation, will legislate to
create a Financial Policy Committee within the BoE and a Prudential
Regulation Authority.
o Independent Commission on Banking published interim report on 11th
April.
• Structural reform to support economic growth
o Government published a micro-economic
“Plan for Growth” alongside
UNCLASSIFIED
Budget 2011 to complement macroeconomic stability
Fiscal consolidation plan
• The Government plans a total consolidation of £126 billion by 2015-16 (6.6
per cent of GDP).
• Taking the consolidation as a whole, 76 per cent will be delivered by
lower spending by 2015-16.
• This is consistent with OECD and IMF research, which suggests that fiscal
consolidation efforts that largely rely on spending restraint promote
growth.
Total consolidation
Per cent of GDP
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Policy inherited by the Government
Spending
Tax
Spending share of consolidation (per cent)
Total discretionary consolidation
Spending
Tax
Spending share of consolidation (per cent)
0 .1
0.1
0 .6
0.4
0.3
59
UNCLASSIFIED
1 .7
0.9
0.8
54
2 .7
1.4
1.3
53
2 .5
1.5
1.0
61
3 .7
2.3
1.4
62
3 .4
2.2
1.1
67
5 .1
3.4
1.7
67
4 .0
2.8
1.2
71
6 .1
4.4
1.7
73
6 .6
5.0
1.6
76
Pace of consolidation in line with other
countries given scale of deficit
3
3
Structural tightening in 2011
Structural tightening in 2012
Portugal
2.5
Mexico
2
Irelan
Australia
UK
China
1.5
Russia
India
1
Turkey
France
Brazil
0.5
Germany
Canada
Italy
S. Africa
0
0
2
4
6
-0.5
-1
-1.5
8
U.S
10
Structural deficit percentage point tightening 2011 to 2012
Structural deficit percentage point tightening 2010 to 2011
Spain
2.5
2
Australia
UK
Germany
1
India
Japan
Greece
Portugal
France
0.5
Italy
China
12
Argentina
Turkey
Indonesia
0
0
-0.5
-1
2010 structural deficit
Canada
1.5
Japan
Indonesia
U.S
2 Brazil
4
S. Africa
Spain
Irelan
6
8
10
Mexico
Russia
-1.5
2011 structural deficit
Source: IMF Fiscal Monitor April 2011
UNCLASSIFIED
12
Policy Implementation
49
48
47
46
45
• Implementation of consolidation plans now underway Spending
• Plans as far as
Receipts and expenditure
possible protect most
Per cent of GDP
Forecasts
productive public
investment expenditure
44
• Spending Review set
fixed departmental
budgets for 2011-12 to
2014-15
43
42
41
40
39
38
37
36
35
34
33
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
2013-14
2015-16
Public Sector Current Receipts (Budget 2011)
Total Managed Expenditure (Budget 2011)
Taxation: majority of tax consolidation has been
implemented, including the increase in standard rate of
VAT by 2.5 percentage points, to 20 perUNCLASSIFIED
cent.
• Public Expenditure
Cabinet Committee to
oversee departments’
implementation
• Reform of AME,
including legislation
introduced on Welfare
Reform and Pensions
and Savings Bills
Framework Reform:
Office for Budget Responsibility
•
The creation of the OBR has added to the credibility of the UK’s fiscal framework.
•
The OBR has produced all the official forecasts of the economy and public finances
since the General Election, independently of ministers.
•
The OBR has now been placed on a permanent, legislative footing through the
Budget Responsibility and National Audit Act 2011, which received Royal Assent on
22 March.
UNCLASSIFIED
Framework reform: fiscal mandate
•
Previous backward-looking fiscal rules allowed Government to enter crisis
with weak fiscal position.
•
The new mandate is forward-looking, based on independent OBR forecast, to
ensure fiscal policy always set to deliver medium-term sustainability.
•
The fiscal mandate is based on:
•
o
the current balance, to protect the most productive investment expenditure; and
o
a cyclically-adjusted aggregate, to allow some flexibility at a time of economic
uncertainty.
Mandate for fiscal policy:
o
a forward-looking deficit mandate, to achieve cyclically-adjusted current
balance by the end of the rolling, five-year forecast period. At this Budget,
2015-16.
o
supplemented by a target for public sector net debt as a percentage of GDP to
be falling at a fixed date of 2015-16.
The mandate provides the flexibility for fiscal policy to support the
UNCLASSIFIED
economy in the face of unexpected
shocks, with the Government held to
account by the independent OBR.
Overview of presentation
1. Origin of the UK fiscal deficit
2. Fiscal policy response and framework reform
3. Implications and recent developments
UNCLASSIFIED
Implications for public finances
Public sector net debt
Consolidation in the cyclically-adjusted current budget
80
1
Per cent of GDP
Per cent of GDP
0
75
-1
70
-2
65
-3
60
-4
-5
55
-6
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
50
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Cyclically-adjusted surplus on current budget (OBR pre-Budget forecast 2010)
OBRpre-Budget forecast 2010
Cyclically-adjusted surplus on current budget (Budget 2011)
UNCLASSIFIED
Budget 2011
2015-16
Bond yields
UNCLASSIFIED
Budget 2011
•
June Budget 2010 and the Spending Review took first steps in addressing
extraordinary rise in the deficit prior to and during the crisis.
•
Current uncertainty reinforces the case for stability in the Government’s
plans. Therefore action at Budget 2011 has a neutral impact on the public
finances.
•
Announced action to support growth, fairness and tax simplification:
o Cut in fuel duty and further cut in corporation tax rate
o Further increase in income tax personal allowance
•
Alongside the Budget, Government published a Plan for Growth, building on
the macroeconomic stability created by the Government’s deficit reduction
plan.
•
Taking account of the policy measures announced by the Government, the
OBR forecast continues to be for a sustained recovery.
UNCLASSIFIED