Disease and cure in the UK: The fiscal impact of the crisis and the policy response · ·...
Transcript of Disease and cure in the UK: The fiscal impact of the crisis and the policy response · ·...
Disease and cure in the UK: The fiscal impact pof the crisis and the policy response
Carl Emmerson (with Robert Chote Rowena Crawford and Gemma Tetlow)Carl Emmerson (with Robert Chote, Rowena Crawford and Gemma Tetlow)
Presentation at ECFIN country seminar “The UK economy, post-recession: Same as it ever was?”, Brussels, Tuesday 29th June 2010
© Institute for Fiscal Studies
Di iDiagnosis
10
12
ncom
e Extra cyclical
Extra structural
6
8
atio
nal i
n
Budget 2008
P t
4
6
tage
of
n Permanentdamage = 5.8% of GDP(£86bn)
0
2
0 4 6 8
Perc
ent (£86bn)
2008
–09
2009
–10
20
10
–11
20
11
–12
20
12
–13
2013
–14
2014
–15
2015
–16
2016
–17
2017
–18
© Institute for Fiscal Studies Sources: Authors’ calculations using all Budgets and Pre-Budget Reports since March 2008 (all available at http://www.hm-treasury.gov.uk/).
Di i h iDiagnosis: change over time
£86bn£78bn£86bn£94bn£47bn7
8
com
e
5
6
atio
nal i
nc
3
4
ntag
e of
n
0
1
2
Perc
en
0
PBR 2008 Budget 2009 PBR 2009 Budget March 2010
Budget June 2010
© Institute for Fiscal Studies Sources: Authors’ calculations using all Budgets and Pre-Budget Reports since March 2008 (all available at http://www.hm-treasury.gov.uk/).
A b i h b ?A bust without a boom?
8
4
6
8
utpu
t
HMT output gap
Alternative scenario
2
4
f tr
end
ou
-2
0
enta
ge o
f
-6
-4
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Perc
e
19
87
Q1
19
88
Q1
19
89
Q1
19
90
Q1
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q1
19
95
Q1
19
96
Q1
19
97
Q1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q2
00
3 Q
20
04
Q2
00
5 Q
20
06
Q2
00
7 Q
20
08
Q2
00
9 Q
20
10
Q2
01
1 Q
20
12
Q2
01
3 Q
20
14
Q2
01
5 Q
© Institute for Fiscal Studies Source: Authors’ calculations based on June 2010 Budget.
Di i l iDiagnosis: an alternative
12
8
10
12
utpu
t
PSNBCA PSNB - current HMT viewCA PSNB - alternative view
4
6
8
f tr
end
ou
0
2
enta
ge o
f
-4
-2
1 5 9 3 7 1 5 9 3 7 1 5
Perc
e
19
70
-7
19
74
-7
19
78
-7
19
82
-8
19
86
-8
19
90
-9
19
94
-9
19
98
-9
20
02
-0
20
06
-0
20
10
-1
20
14
-1
© Institute for Fiscal Studies Source: Authors’ calculations based on June 2010 Budget.
C L b ’ lCure: Labour’s plans
7
8
com
e
Unknown
Spending cuts
T i
5
6
atio
nal i
nc Tax increases
3
4
ntag
e of
n
70%
1
2
Perc
en
30%0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
30%
© Institute for Fiscal Studies Sources: Authors’ calculations using all Budgets and Pre-Budget Reports since March 2008 (all available at http://www.hm-treasury.gov.uk/).
C li i G ’ ddi iCure: new coalition Government’s additions
7
8
com
e
Additional spending cuts
Additional tax increases
L b di t
5
6
atio
nal i
nc Labour spending cuts
Labour tax increases80% 85%
20% 15%
3
4
ntag
e of
n 20% 15%
1
2
Perc
en
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies Sources: Authors’ calculations using all Budgets and Pre-Budget Reports since March 2008 (all available at http://www.hm-treasury.gov.uk/).
C li i G ’ lCure: new coalition Government’s plans
7
8
com
e
Spending cuts
Tax increases
5
6
atio
nal i
nc
3
4
ntag
e of
n 74% 77%
1
2
Perc
en
26% 23%
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
© Institute for Fiscal Studies Sources: Authors’ calculations using all Budgets and Pre-Budget Reports since March 2008 (all available at http://www.hm-treasury.gov.uk/).
Cure: debt sustainable but not back to pre-crisis l l f ilevels for a generation
200
160
200
com
e
Budget 2008
Budget June 2010 – no policy action
120
atio
nal i
nc
Budget June 2010
Budget June 2010 – including impact
40
80
age
of n
a of demographic pressures
0
40
5 0 5 0 5 0 5 0 5 0 5 0 5 0Perc
enta
19
74
–7
19
79
–8
19
84
–8
19
89
–9
19
94
–9
19
99
–20
0
20
04
–0
20
09
–1
20
14
–1
20
19
–2
20
24
–2
20
29
–3
20
34
–3
20
39
–4
© Institute for Fiscal Studies
1
Source: Authors’ calculations based on the March 2008 and June 2010 Budget.
C ll i hi h ?Cure: all in this together?
Distributional impact of post crisis tax and benefit reformsDistributional impact of post crisis tax and benefit reforms
-2%
0%
ncom
e
Distributional impact of post crisis tax and benefit reformsDistributional impact of post crisis tax and benefit reforms
8%
-6%
-4%
e in
net
i
-12%
-10%
-8%
of c
hang
Announced before June 2010 Budget
Announced in June 2010 Budget
-16%
-14%
12%
rcen
tage
Poor
est 2 3 4 5 6 7 8 9
Ric
hest
er £
10
0k
AllPe
r
© Institute for Fiscal Studies
Ove
Income decile groupNote: Deciles exclude households containing individuals with incomes above £100,000. Source: Browne (2010).
C ll i hi h ?Cure: all in this together?
Distributional impact of post crisis tax and benefit reformsDistributional impact of post crisis tax and benefit reforms
-2%
0%
ncom
e
Distributional impact of post crisis tax and benefit reformsDistributional impact of post crisis tax and benefit reforms
8%
-6%
-4%
e in
net
i
-12%
-10%
-8%
of c
hang
Announced before June 2010 Budget
Announced in June 2010 Budget
-16%
-14%
12%
rcen
tage
Poor
est 2 3 4 5 6 7 8 9
Ric
hest
er £
10
0k
AllPe
r
© Institute for Fiscal Studies
Ove
Income decile groupNote: Deciles exclude households containing individuals with incomes above £100,000. Source: Browne (2010).
C bli i di fCure: public service spending set for a squeeze
15
10
l inc
reas
e
5
enta
ge r
eal
0
nual
per
ce
-10
-5
Ann
Labour ConLib Historic 6 year moving average
1950
–51
1955
–56
1960
–61
1965
–66
1970
–71
1975
–76
1980
–81
1985
–86
1990
–91
1995
–96
2000
–01
2005
–06
2010
–11
2015
–16
© Institute for Fiscal Studies Note: Figure shows total public spending less spending on welfare benefitsand debt interest
C h i f d DELCure: much pain to come for unprotected DELs
150150
= 10
0
DEL
Overseas Aid
NHS
+36%
125
2010
-11
= NHS
Unprotected DEL
100
Labo
ur 2
-14%
75
Inde
x:
-25%
502010-11 2011-12 2012-13 2013-14 2014-15 2015-16
© Institute for Fiscal Studies
2010 11 2011 12 2012 13 2013 14 2014 15 2015 16
Note: Assumes no real growth in NHS spending. Unprotected DEL also assumes a £5 billion AME margin in 2014–15.
Th Ch ll ’ fi lThe Chancellor’s new fiscal targets
R l 1 b l d t t l t b d t b d f f t• Rule 1: balanced structural current budget by end of forecast horizon
– forecast horizon runs to 2015–16 at the moment
– requires additional fiscal tightening of 0.1% of GDP in addition to “filling the hole”
OBR f t t t hi th t t b 0 8%– OBR forecasts suggest on course to over-achieve the target by 0.8% of GDP, approximately 60% chance that meet target
• Rule 2: debt as a share of GDP falling by end of forecast horizon
– OBR forecasts show debt falling as % GDP from 2014–15
© Institute for Fiscal Studies
Th Ch ll ’ fi l i i (1)The Chancellor’s new fiscal targets: critique (1)
Ad t f th fi t l• Advantages of the first rule
– forward-looking not inappropriately constrained by past borrowing performance
• Disadvantages of the first rule
– easy continually to add an extra year of fiscal squeeze in last year of f t h iforecast horizon
• Budget stated that end of forecast horizon will shorten in future
– advantage: reduces the scope for pencilling additional future– advantage: reduces the scope for pencilling additional future tightening in every statement
– disadvantage: if the horizon becomes too short, it becomes incredible that target will be sensibly met (e g Maastricht criteria)that target will be sensibly met (e.g. Maastricht criteria)
© Institute for Fiscal Studies
Th Ch ll ’ fi l i i (2)The Chancellor’s new fiscal targets: critique (2)
S d l i t ffi i tl t i i fi l t t i th• Second rule is not a sufficiently constraining fiscal target in the longer term
– if first rule met, second rule unlikely to be binding under plausible , y g pscenarios for future investment spending
– sensibly, Chancellor plans to announce a debt target “once the exceptional rise in debt has been addressed”exceptional rise in debt has been addressed
– OBR to provide assessment of outlook for overall indebtedness
© Institute for Fiscal Studies
Th OBR h ?The OBR: where next?
I t i OBR i d t d i Ch ll “th t• Interim OBR required to advise Chancellor on: “the permanent OBR’s roles and responsibilities, aims and objectives, and appropriate size, status, and funding”
• International experience offers no standard template
• Key decisions:
– Scope – should it seek mainly to “keep the forecasts honest” or give advice on any issues it sees affecting fiscal sustainability?
– Relationship with Treasury – independence versus inter-linkageRelationship with Treasury independence versus inter linkage
• Transfer existing Treasury forecasting function to independent body?
• Duplicate existing Treasury forecasting function in independent body?
• Independent experts sign off output of existing Treasury forecasters?
© Institute for Fiscal Studies
C l iConclusions
P t hit t bli fi f fi i l i i ti t d t• Permanent hit to public finances from financial crisis estimated at £84 billion a year
• Response is a £91 billion fiscal tightening by 2014–15, comprisingResponse is a £91 billion fiscal tightening by 2014 15, comprising a £24 billion tax rise and a £67 billion spending cut
• Overall post crisis tax and benefit reforms progressive and very f d i h t 2%focussed on richest 2%
– despite the package of measures unveiled in June 2010 Budget hitting those on lower current incomes harder than those on higher incomes
• Current policies imply deep cuts to spending on public services
– longest and deepest sustained cuts to spending on public services since at least WW2since at least WW2
• Issues remain with both the Government’s fiscal rules and how the new Office for Budget Responsibility should operate
© Institute for Fiscal Studies
Disease and cure in the UK: The fiscal impact pof the crisis and the policy response
Carl Emmerson (with Robert Chote Rowena Crawford and Gemma Tetlow)Carl Emmerson (with Robert Chote, Rowena Crawford and Gemma Tetlow)
Presentation at ECFIN country seminar “The UK economy, post-recession: Same as it ever was?”, Brussels, Tuesday 29th June 2010
© Institute for Fiscal Studies
C b i b k i i l lCure: borrowing back to pre-crisis levels
12 Budget 2008
10
12
com
e
Budget 2008Budget June 2010 – no policy changeBudget June 2010
6
8
tion
al in
c
2
4
age
of n
a
0
2
8 9 0 1 2 3 4 5 6 7 8Perc
enta
20
07
–08
20
08
–09
20
09
–10
20
10
–11
20
11
–12
20
12
–13
20
13
–14
20
14
–15
20
15
–16
20
16
–17
20
17
–18
© Institute for Fiscal Studies Sources: Authors’ calculations using all Budgets and Pre-Budget Reports since March 2008 (all available at http://www.hm-treasury.gov.uk/).
C L b ’ DEL i b dCure: Labour’s DEL increases to be reversed
30
25
30
com
e
March Budget
June Budget
20
25
atio
nal i
nc
15
age
of n
a
10
9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6Perc
enta
19
98
-9
19
99
-20
0
20
00
-0
20
01
-0
20
02
-0
20
03
-0
20
04
-0
20
05
-0
20
06
-0
20
07
-0
20
08
-0
20
09
-1
20
10
-1
20
11
-1
20
12
-1
20
13
-1
20
14
-1
20
15
-1
© Institute for Fiscal Studies Note: Figure shows Departmental Expenditure Limits (DELs) as a share of national income under current policies.
S di R i 2010 ll i h iSpending Review 2010: allocating the pain
C t li i i l t t d DEL t f 25% i l t• Current policies imply unprotected DEL cuts of 25% in real terms by 2014–15 compared to Labour’s 2010–11 baseline
– £13bn of AME cuts would reduce this to 20%
– would need to come from £270bn of AME spending included in the spending review (4.8%)
b t lik l f £154b f di t t i il t– but likely from £154bn of spending once state pensions, council tax financed spending and public corporation spending excluded (8.4%)
• Plausible SR2010 settlements?
– NHS spending ‘protected’, ODA target met
– Spending on schools and defence cut by 10% by 2014–15
– Other unprotected DELs would need to be cut by 33%: includes areas such as higher education, home office, justice, transport and housing
– Or cutting AME by a further £13 billion would leave these other g yunprotected areas facing cuts of 25%
© Institute for Fiscal Studies
S di R i 2010 h DEL AME d ffSpending Review 2010: the DEL v AME trade-off
3030
itur
e NHS spending 'protected', overseas aid target met
20
ed E
xpen
d1
pric
es)
£13bn of AME cuts 20% cut to
10ly M
anag
en
(201
0-11 cuts, 20% cut to
unprotected DEL
to A
nnua
l£
billi
on
No further AME cuts, 25% cut to
0
15 20 25 30
Cut
t unprotected DEL
© Institute for Fiscal Studies
Cumulative percentage cut to unprotected DEL
Note: Assumes no real growth in NHS spending, and a £5bn AME marginin 2014–15.
M i h fi l d ?Meeting the fiscal mandate?
60% chance of a surplus on the structural current budget under current policies60% chance of a surplus on the structural current budget under current policies
4
6
com
e
2
atio
nal i
nc
-2
0
ntag
e of
na
-6
-4
Perc
en
-8
-6
09–10 10–11 11–12 12–13 13–14 14–15 15–16
© Institute for Fiscal Studies
09 10 10 11 11 12 12 13 13 14 14 15 15 16
Source: Office for Budget Responsibility (http://budgetresponsibility.independent.gov.uk/d/fan_charts_intervals.xls)