Geeks bearing graphs?
Economists and economics at the IFS
Robert Chote, Director, Institute for Fiscal Studies
Outline
• Programme
• About the IFS
• Goals
• Activities
• People
• The Pre-Budget Report
“Readers, a reality check. Beware geeks bearing graphs. They’re just economists
guessing. And be honest: how interested are you in fiscal studies?”
(Greg Hurst, The Times)
© Institute for Fiscal Studies, 2008
Programme
10.00 – 10.45
10.45 – 11.30
11.30 – 11.45
11.45 – 12.30
12.30 – 13.30
13.30 – 14.15
14.15 – 15.00
15.00 – 15.15
15.15 – 16.00
16.00 – 16.45
Introduction and public finances, Robert Chote (IFS Director)
Pension policy, Gemma Tetlow (IFS)
Break
Higher education funding, Haroon Chowdry (IFS)
Panel session on careers in economics:
Stephanie Flanders (BBC)
Rupert Harrison (Conservatives)
Steve Webb MP (Liberal Democrats)
Lucy Chennells (Bank of England)
Lunch
The UK tax system, James Browne (IFS)
Break
Environmental taxation, Cormac O'Dea (IFS)
Inequality and poverty, Ali Muriel (IFS)
What is the IFS?
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An independent research institute – a charity.
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Our mission: “To contribute to better economic and social policies
through rigorous analysis of their impact on the behaviour of
individuals, families, firms and the government’s finances.”
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50 people. £4.5m turnover. Funded by Economic and Social
Research Council, charitable foundations, government departments,
international organisations & members. No paid consultancy.
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“Think Tank of the Year 2005” – Prospect Magazine
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Most respected think-tank among MPs – Communicate Research
“Its criticism is measured but firm where it believes the government is in error. It doesn’t allow
governments to get away with sham policies.”
(Polly Toynbee, The Guardian)
© Institute for Fiscal Studies, 2008
Why was the IFS created?
• “The IFS came into existence because four professional people from
the world of finance were appalled by the way in which the 1965
Finance Act, introducing capital gains tax, reached the Statute Book.”
Bill Robinson (Director, 1986-91)
• “…never again should a government, regardless of its political colour
and intentions, introduce far-reaching tax legislation without the
benefit of deep and thorough analysis of its second- and third-order
effects.”
John Chown (Co-founder)
“The IFS is studiously neutral when it comes to politics, which lends it extra value when the
Government has swapped analysis for spin.”
(City Comment, Daily Telegraph)
© Institute for Fiscal Studies, 2008
What do we work on?
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Tax system and the welfare state
Government finances and fiscal management
Productivity and innovation
Inequality and poverty
Education and human capital
Saving and consumption
Development micro-economics
Micro-econometrics: theory and practice
“All the parties treat the Institute for Fiscal Studies as if it were the Bible”.
(Jonathan Dimbleby, Any Questions)
© Institute for Fiscal Studies, 2008
Who uses our research?
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Policymakers
Parliamentarians
Media and general public
Advocacy groups
International organisations
Academics
Businesspeople
“The independent IFS provides evidence and facts that are essential for others to use for informed lobbying and
campaigning. It speaks with authority and clarity.”
(Martin Barnes, former Director, Child Poverty Action Group)
© Institute for Fiscal Studies, 2008
What do we try to achieve?
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Policy relevance
Analytical rigour
Best-practice use of quantitative evidence
Effective communication
Independence
Transparency
© Institute for Fiscal Studies, 2008
What sort of people work for us?
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Seeking policy influence, academic rigour and communication
Most from universities, some from government, central banks etc
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Gender:
50%
50%
Women
Men
Nationality:
55%
30%
10%
5%
British
Rest of Europe
Latin America / USA
Asia
Qualifications:
55%
90%
PhD (complete or in progress)
MSc (complete or in progress)
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“The Institute’s success is also in its way simple. First, it hires the brightest and the best…”
(Lord David Lipsey)
© Institute for Fiscal Studies, 2008
What do IFS alumni do?
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Civil service
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Dep Dir, Strategy Unit
Econ, British Embassy in Tokyo
Director of Strategy, D of health
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Economics Editor, BBC
Presenter, Today & Dragon’s Den
Economics Editor, Financial Times
Social policy leader writer, Guardian
Global organisations
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Professors: UCL, Surrey, Bristol, Warwick
Principal, St Hugh’s College, Oxford
Dir, Centre for Econ Performance, LSE
Private sector
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Media
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Academia
Chief UK Business Economist,
PriceWaterhouseCoopers
Director, Frontier Economics
Politics / think tanks
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Special advisor, Shadow Chancellor
Shadow Health Secretary, Lib Dems
Research Director, IPPR
Head of Tax Policy, OECD
Chief, Tax Policy Division, IMF
“Politicians, journalists, business people and the City, not to mention the Treasury
itself, look to the IFS to judge the Government’s conduct of budgetary policy.”
(David Smith, Economics Editor, Sunday Times)
© Institute for Fiscal Studies, 2008
The Pre-Budget Report
• Big deterioration in outlook for the economy
• Big deterioration in outlook for the public finances
• Short-term fiscal stimulus to ameliorate recession
• Long-term fiscal contraction to strengthen public finances
© Institute for Fiscal Studies, 2008
The Treasury view at Budget time
2007-08 2008-09 2009-10
Economic growth
(change on previous year)
Pub sector net borrowing
(share of GDP)
Public sector net debt
(share of GDP)
2010-11
2011-12 2012-13
3%
1.75%
2.5%
2.5%
2.5%
2.5%
2.6%
2.9%
2.5%
2.0%
1.6%
1.3%
37.1%
38.5%
39.4%
39.8%
39.7%
39.3%
• Short and shallow economic slowdown
• Borrowing peaks this year, then falls as spending squeezed and tax burden rises
• Debt peaks below 40% ceiling set out in “sustainable investment rule”
© Institute for Fiscal Studies, 2008
The Treasury view at PBR time
2007-08 2008-09 2009-10
Economic growth
(change on previous year)
Pub sector net borrowing
(share of GDP)
Public sector net debt
(share of GDP)
2010-11
2011-12 2012-13
3%
3%
1.75%
-0.25%
2.5%
-0.5%
2.5%
2%
2.5%
3%
2.5%
3%
2.6%
2.6%
2.9%
5.3%
2.5%
8.0%
2.0%
6.8%
1.6%
5.3%
1.3%
4.1%
37.1%
36.3%
38.5%
41.2%
39.4%
48.2%
39.8%
52.9%
39.7%
55.6%
39.3%
57.1%
• Economy shrinks for two financial years running
• Borrowing peaks at post-war high next year
• Debt rises until 2012-15 and stays above 40% ceiling for foreseeable future
© Institute for Fiscal Studies, 2008
Why is borrowing rising so much?
• Recession depresses tax revenues and increases social security bills
• Falls in housing market and stock market depress tax revenues
• Higher-than-expected September inflation pushes up benefit bills
• Short-term fiscal stimulus package and earlier tax cuts
And why does it stay so high for so long?
• Credit crunch leads to permanent loss of economic potential, so big
part of the increase in borrowing does not disappear with recovery
© Institute for Fiscal Studies, 2008
A demand shock on top of a supply shock
120
Output (2006-07 = 100)
115
110
105
Potential (Budget 08)
Actual (Budget 08)
100
Potential (PBR 08)
Actual (PBR 08)
© Institute for Fiscal Studies, 2008
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
95
No return to boom and bust?
Output gap since 1978
March 2008 Budget
November 2008 PBR with higher Budget 2008 trend output
November 2008 PBR
8%
Percentage of trend output
6%
4%
2%
0%
-2%
-4%
-6%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-8%
Year and quarter
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Forecasting changes since Budget 2008
Public sector net borrowing, £ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Budget 2008
42.5
38
32
27
23
Revisions
+25.8
+63½
+77½
+73
+70½
4% GDP loss
+22.3
+38
+43
+46
+49
Cyclical component
–2.3
+8
+16
+15
+10
+1
+3½
+3½
+3½
+3½
+7
+7
+7
+7
+8
+7
+1
+2
Equity prices
House prices
Other
+5
Discretionary changes
+9.3
+16½
–4½
–14
–22½
PBR 2008
77.6
118
105
87
70
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
Measures: giveaway and then takeaway
£ billion
2008–09
2009–10
2010–11
2011–12
2012–13
Tax giveaway
–6.9
–13.6
–5.5
–6.2
–6.6
Tax takeaway
+0.3
+1.2
+2.2
+9.1
+10.6
Spend giveaway
–2.7
–4.1
–0.7
–0.3
–0.3
Spend takeaway
0
+0.2
+8.8
+5.0
+5.0
Lower spend growth
0
0
0
+6.5
+13.9
Net tax increase
–6.6
–12.4
–3.3
+2.9
+4.0
Net spending cut
–2.7
–3.9
+8.1
+11.2
+18.6
Net takeaway
–9.3
–16.3
+4.8
+14.1
+22.5
© Institute for Fiscal Studies, 2008
Sources: HM Treasury; Author’s calculations.
The stimulus
• Normally rely on monetary policy to manage demand, but concern that
interest rate cuts may be unusually ineffective
• £16bn giveaway next year = 1% of GDP
• Biggest elements are temporary VAT cut and capital spending
• Government hopes that economy will shrink 0.5% less than otherwise
• Will the VAT cut work? Best guess may be that people spend the
same: buying 1% more ‘stuff’ at roughly 1% lower prices
• Any alternatives? Bigger giveaway to poor then take from richer
© Institute for Fiscal Studies, 2008
The contraction
• Spending squeeze much more important than tax increases
• £5 billion cut in spending in 2010-11 – ‘efficiency savings’
• Reduce growth rate over next 3 years from 1.8% a year to 1.1% a year
• Investment spending takes bigger hit than current spending
• Spending to fall by 2.5% of GDP or £37 billion in today’s money over
three years of next spending review
© Institute for Fiscal Studies, 2008
How big would a £37bn spending cut be?
“The Conservative Party is committed to making cash cuts of
£35 billion from Labour's public spending plans – cuts so large
they could only be found from cutting deep into front-line public
services, including schools, hospitals and the police.”
(Alistair Darling, 17 March 2005)
© Institute for Fiscal Studies, 2008
Tax increases
• Net tax increase only £4bn in 2013-14
• Much smaller than tax raising budgets of 1993
• Biggest revenue raiser is 0.5% rise in NICs rates - £5bn
© Institute for Fiscal Studies, 2008
NI change for those of working-age (April 2011)
15%
£150
10%
£100
5%
£50
0%
£0
£0
£5,000
£10,000
£15,000
£20,000
£25,000
£30,000
£35,000
£40,000
£45,000
-5%
-£50
Old NI rate
New NI rate
-10%
Extra NI paid
-£100
Annual earnings
Ignores employer NI, which also rises by 0.5 ppts
© Institute for Fiscal Studies, 2008
£50,000
Extra NI paid (£/yr)
Rate of employee NI
Assumes UEL follows BRT in April 2010
Tax increases
• Net tax increase only £4bn in 2013-14
• Much smaller than tax raising budgets of 1993
• Biggest revenue raiser is 0.5% rise in NICs rates - £5bn
• Also hoping for £3.2bn (full year) from income tax rises for rich
• But will they raise as much money as the Treasury hopes?
© Institute for Fiscal Studies, 2008
Income tax changes (April 2011)
70%
£7,000
Old IT MTR
New IT MTR
60%
income tax rate
Extra tax
50%
£5,000
40%
£4,000
30%
£3,000
20%
£2,000
10%
£1,000
0%
£0
£0
£25,000
£50,000
£75,000
£100,000
£125,000
Annual income
© Institute for Fiscal Studies, 2008
£150,000 £175,000
£200,000
Extra income tax/year
£6,000
The fiscal rules
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The rules
– Sustainable Investment Rule
• Maintain debt below 40% of national income in each and every year
– Golden Rule
• Borrow only to invest over the economic cycle
• In other words, cumulative current budget must be in balance or surplus
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Both were met over the 1997-98 to 2006-07 cycle
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Golden rule met by £20bn over last cycle; missed by £296bn over next
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Debt to stay well above 40% for foreseeable future
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Rules temporarily abandoned – reliant on market discipline
© Institute for Fiscal Studies, 2008
Questions looking forward
• Is Treasury right about:
– Depth and duration of recession?
– Size of permanent output loss?
– Amount that tax increases will raise?
– Underlying revenue growth as economy recovers?
• Will we need more stimulus and/or a bigger contraction?
• If so, how would do it?
© Institute for Fiscal Studies, 2008