Pre-Budget Report 2008: A return to bust?
Carl Emmerson
Institute for Fiscal Studies
BBC Seminar, Monday 17th November 2008
(updated for new monthly public finance data on Thursday 20th November 2008)
www.ifs.org.uk/budgets/pbr2008/index.php
Summary conclusions
• March 2008 Budget forecast
– borrowing to fall from combination of increased tax burden and cuts in
spending as a share of national income
– on course to continue to meet both fiscal rules
• Sharp deterioration in outlook for economy and public finances
– borrowing and debt to rise
– on course to break one or both fiscal rule(s): rules suspended and new
ones expected
• Possible fiscal stimulus package
– effective package would have to be targeted, timely and temporary
• Future fiscal tightening?
– expected combination of new tax raising measures / deeper cuts in public
spending as a share of national income
© Institute for Fiscal Studies, 2008
The big picture: going forwards
Percentage of national income
March 2008 Budget projections for receipts and spending
Labour I
42%
Labour II
41%
40%
39%
38%
37%
36%
Total expenditure
35%
Current receipts
34%
13–14
12–13
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
96–97
33%
Financial year
© Institute for Fiscal Studies, 2008
Note: Budget 2008 GDP projections adjusted for FISIM.
Source: HM Treasury; ONS; Author’s calculations.
Public spending
Real increase (LH axis)
42%
6%
Level (RH axis)
41%
13–14
12–13
11–12
10–11
34%
09–10
-1%
08–09
35%
07–08
0%
06–07
36%
05–06
1%
04–05
37%
03–04
2%
02–03
38%
01–02
3%
00–01
39%
99–00
4%
98–99
40%
97–98
5%
Percentage of national
income
7%
96–97
Percentage real increase
March 2008 Budget projections for Total Managed Expenditure
Financial year
© Institute for Fiscal Studies, 2008
Note: Budget 2008 GDP projections adjusted for FISIM.
Source: HM Treasury; ONS; Author’s calculations.
X
No return to boom and bust?
Output gap since 1979
8%
March 2008 Budget
Percentage of trend output
6%
Alternative ouput gap
4%
2%
0%
-2%
-4%
-6%
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
-8%
Year and quarter
© Institute for Fiscal Studies, 2008
Note: Alternative output gap assumes 2½% trend growth and constant interest rates at 3%.
Sources: HM Treasury; Bank of England; Author’s calculations.
Worsening government finances (1)
Cyclically-adjusted public sector net borrowing
Percentage of national income
-6%
March 2008 Budget
European Commission (November 2008)
-4%
-2%
0%
2%
4%
6%
8%
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
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
10%
Financial year
© Institute for Fiscal Studies, 2008
Note: Inferred from European Commission forecasts for general government borrowing.
Source: HM Treasury; European Commission; Author’s calculations.
Worsening government finances (2)
Public sector net debt, excluding Northern Rock,
Bradford & Bingley, and other bank recapitalisations
Percentage of national income
60%
50%
40%
30%
20%
40% ceiling
March 2008 Budget
European Commission (November 2008)
10%
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
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
0%
Financial year
© Institute for Fiscal Studies, 2008
Note: Inferred from European Commission forecasts for general government debt.
Source: HM Treasury; European Commission; Author’s calculations.
Fiscal stimulus could help?
•
Usually rely on interest rates to manage demand
– but might be less effective during a credit crunch
•
‘Automatic stabilisers’ also help
– increased benefit spending and depressed tax receipts in a downturn
– but unlikely to be optimal
•
New measures so far:
– increased income tax personal allowance (£2.7bn in 2008–09); fuel duties frozen
from September (£550m per six months); 1 year stamp duty cut (£600m)
•
Further active fiscal loosening could help, if:
– targeted (boost spending on domestic goods)
– timely (during the recession)
– temporary (increased long-term borrowing risks higher interest rates)
•
Long-term fiscal tightening
– expected combination of spending cuts as a share of national income and further
tax raising measures
© Institute for Fiscal Studies, 2008
Opposition proposals
Conservatives
• Temporary NI cut for some firms hiring individuals who have been
receiving out-of-work benefits for 3 months or more
– might not get enough extra into work to be self-financing
– but any net giveaway could help economy
Liberal Democrats:
• Abolish council tax, increase tax on polluters, those making large
capital gains, and higher income pension savers (on average lower
national income tax offset by new local income tax)
– redistribution from savers to spenders could help economy
– unclear that package is revenue neutral: any net giveaway would boost
economy but would need subsequent action
© Institute for Fiscal Studies, 2008
Further options
• Increase public investment
– ensures giveaway spent domestically
– difficult to spend well quickly
• Giveaways to those on lower incomes
– more likely to spend extra income & compensates 10p losers further
– difficult to make temporary: requires subsequent tax increase elsewhere?
• Boost firms investment allowances
– might be a sensible long-term reform
– again requires subsequent tax increase elsewhere
• Temporary VAT reduction followed by permanent VAT increase
– strong encouragement to spend now and improve public finances
– not politically viable?
© Institute for Fiscal Studies, 2008
Summary conclusions
• March 2008 Budget forecast
– borrowing to fall from combination of increased tax burden and cuts in
spending as a share of national income
– on course to continue to meet both fiscal rules
• Sharp deterioration in outlook for economy and public finances
– borrowing and debt to rise
– on course to miss one or both fiscal rules: rules suspended and new ones
expected
• Possible fiscal stimulus package
– effective package would have to be targeted, timely and temporary
• Future fiscal tightening?
– expected combination of new tax raising measures / deeper cuts in public
spending as a share of national income
© Institute for Fiscal Studies, 2008
Pre-Budget Report 2008: A return to bust?
Carl Emmerson
Institute for Fiscal Studies
BBC Seminar, Monday 17th November 2008
(updated for new monthly public finance data on Thursday 20th November 2008)
www.ifs.org.uk/budgets/pbr2008/index.php
Some numbers
• Economic growth (%)
– Budget 2008 forecasts: 2008 = 1¾ to 2¼; 2009 = 2¼ to 3; 2010 = 2½ to 3
– November 2008 BoE: 2008 = –1½; 2009 = ½
• Public sector net borrowing
– Budget 2008 forecast: 2008–09 = £42.5bn
– trend from first seven months + new measures: 2008–09 = £68bn
• Public sector net debt (% of national income, excluding Northern Rock,
Bradford and Bingley and other bank recapitalisations)
– Budget 2008 forecast: 2008–09 = 38.5%; peaking at 39.8% in 2010–11
– could break 40% this year
© Institute for Fiscal Studies, 2008