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The public finances going forward

The public finances going forward. Robert Chote, Carl Emmerson and Gemma Tetlow Institute for Fiscal Studies. Green Budget baseline forecast. Golden rule current budget deficit forecast to persist until 2011–12

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The public finances going forward

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  1. The public finances going forward Robert Chote, Carl Emmerson and Gemma Tetlow Institute for Fiscal Studies

  2. Green Budget baseline forecast • Golden rule • current budget deficit forecast to persist until 2011–12 • golden rule more likely to be missed than met unless cycle beginning 2006–07 runs for a decade or longer • Sustainable investment rule • debt forecast to exceed 40% of national income from 2010–11 • Budget judgement • to expect debt to remain below 40% of national income, and to maintain improvement in current budget sought in the PBR, would require a tax increase of £8 billion

  3. Recent Green Budget judgements To bring about improvement forecast by Treasury over next 5 years: • 2003, 2004 and 2005 • we argued for a tightening of around 1.0% of GDP • delivered in PBR 2005 • 2006 • we argued for a small tightening of around 0.2% of GDP • delivered in Budget and PBR 2006 • 2007 • we argued for no tightening • “the Treasury’s revenue forecasts have been over-optimistic for six years now, and history suggests that at some point it will be due for a run of better luck” • 2006–07 outturn better than we or HMT predicted • 2008 • unfortunately outlook has worsened again

  4. Forecasts for 2007–08 £ billion

  5. Forecasts for 2007–08 £ billion

  6. Baseline assumptions • Economy performs broadly as Treasury expects • Corporation tax • Morgan Stanley central forecast of no profits growth in 2008–09 • receipts return to long-run average by 2012–13 • Stamp duty revenues • January 2008 stockmarket decline • futures market expects a 7½% house price fall in 2008 • Spending • non debt interest spending as CSR through to 2010–11 • nominal growth in spending as forecast by PBR thereafter

  7. Receipts forecasts

  8. Corporation tax forecast optimistic? Note: Includes Petroleum Revenue Tax

  9. Current spending forecasts

  10. 2010–11 spending forecast optimistic? • Child poverty • to be half 1998–99 level? • £3.4bn extra required for 50/50 chance of success • NHS • progress towards ‘world-class’ healthcare system? • shortfall of £6bn-£10bn relative to Derek Wanless’s reviews • Local government services • cash increases in council tax to be below 5%? • planned real-terms cut in main grant

  11. Meeting the golden rule? Current budget balance

  12. Meeting the golden rule?

  13. Meeting the golden rule?

  14. Keeping debt below 40% GDP?

  15. But don’t tighten now? • The outlook is uncertain • it always is, and currently significant downside risk • Bad news will be temporary • lesson from revenues over Labour’s second term • Economy looks weak • Bank could offset any small fiscal tightening with slightly lower interest rates • Difficult call, but some action now prudent

  16. Budget judgement • To aim for: • debt to remain below 40% of national income • a current budget surplus by 2009–10 • same current budget surplus in 2012–13 as PBR • Tax raising measures worth £8 billion required by 2009–10

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