FSR 2011 Presentation Final
-
Upload
dinju-gamit -
Category
Documents
-
view
221 -
download
0
Transcript of FSR 2011 Presentation Final
-
7/31/2019 FSR 2011 Presentation Final
1/31
Fiscal sustainability report 2011Robert Chote
Chairman
13 July 2011
-
7/31/2019 FSR 2011 Presentation Final
2/31
Preamble
OBR set up in 2010 to provide independent andauthoritative analysis of the UK public finances
FSR is our first assessment of the long-term health andsustainability of the public finances, complementing ourmedium-term forecasts
BRC responsible for the conclusions, drawing on timeand expertise of full-time OBR staff, governmentdepartments and advisory panel
Chancellor received draft analysis on 30 June and finalreport on 12 July
No pressure to change conclusions from ministers orapparatchiks
-
7/31/2019 FSR 2011 Presentation Final
3/31
Our approach in the report
Look at the impact of past government activity Measures of assets and liabilities on the public sectorbalance sheet
Make use of new Whole of Government Accounts (WGA)data
Look at the potential impact of future governmentactivity 50-year projections of spending, revenues and financial
transactions
Make projections of budget deficits and public sector net
debt Judge sustainability and quantify possible need for fiscaltightening
-
7/31/2019 FSR 2011 Presentation Final
4/31
Our approach in the report
Look at the impact of past government activity Measures of assets and liabilities on the public sectorbalance sheet
Make use of new Whole of Government Accounts (WGA)data
Look at the potential impact of future governmentactivity 50-year projections of spending, revenues and financial
transactions
Make projections of budget deficits and public sector net
debt Judge sustainability and quantify possible need for fiscaltightening
Four points: 50-year projections inevitably have big uncertainties around
them Unchan ed olic not alwa s strai htforward to define
-
7/31/2019 FSR 2011 Presentation Final
5/31
Public sector net debt and net worth
-20
-10
0
10
20
30
40
50
60
70
80
90
1986-87 1990-91 1994-95 1998-99 2002-03 2006-07 2010-11 2014-15
Percent
ofG
Public sector net debt Public sector net worth
EFO forecast
-
7/31/2019 FSR 2011 Presentation Final
6/31
Public service pension liabilities inWGA
Public service pension liabilities rose 331 billionin 2009-10
But almost 260 billion of the increase reflected afall in the discount rate from 3.2% to 1.8%, nothigher expected payments
The discount rate will rise again to 2.9% in 2010-11
802
1133
0
200
400
600
800
10001200
March 2009 March 2010
billions
-
7/31/2019 FSR 2011 Presentation Final
7/31
Private finance initiative capitalliabilities
29.9
40
5.10
10
20
30
40
50
On balancesheet in PSND
On balancesheet in WGA
Total on andoff balance
sheet
billioninMarch2010
-
7/31/2019 FSR 2011 Presentation Final
8/31
Provisions and contingent liabilities
WGA liabilities include 107bn (7% of GDP) ofprovisions
Costs where probability of incurring less than 100% butmore than 50%
Main items: nuclear decommissioning and clinicalnegligence
WGA also notes 207bn (14.4% of GDP) ofcontingent
liabilities
Costs where probability of incurring is less than 50% butmore than 0%
Main items: 175bn of financial sector guarantees andundertakings
-
7/31/2019 FSR 2011 Presentation Final
9/31
Stocks and flows
WGA are a welcome boost to transparency with widercoverage
They will become increasingly useful as time seriesbuilds up
But balance sheets alone of limited value in judgingsustainability
They omit future flows arising from future government
activity:
Future spending on public services and transfers
Future tax revenues
When in doubt, go with the flows
-
7/31/2019 FSR 2011 Presentation Final
10/31
Assumptions: demography
Ageing population pastrises in life expectancy andfalls in fertility plus babyboom bulge
ONS population projections
Our central projectionassumes: 65+ proportion rises from
17% in 2011 to 26% in
2061 Net inward migration
averages roughly halfrecent levels
We also show sensitivity toolder and younger age
Figuresrefer toannualgrowthrates
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
9 0
1 0 0
2 0 1 1 2 0 6 1
PercentofUKpopulation
0 - 1 5 1 6 - 5 4 5 5 - 6 4 6 5 - 8 4 8 5 +
2 . 7
0 . 9
0 . 2
0 . 1
0 . 2
-
7/31/2019 FSR 2011 Presentation Final
11/31
Assumptions: economy
Whole economy productivity growth averages 2% ayear, in line with long-run historical experience
Also show sensitivity to 1.5% and 2.5% productivitygrowth
CPI inflation at 2%, consistent with Bank of Englandtarget
GDP deflator rises 2.7% a year
-
7/31/2019 FSR 2011 Presentation Final
12/31
Assumptions: unchanged policy
Income tax / NICs allowances rise by earnings post2015-16 Price up-rating would push 3.9m extra people into higher
rate tax and would increase receipts by 2.6% of GDP by2030-31
Most working age benefits rise by earnings post 2015-16 Price up-rating would reduce benefit generosity relative to
average living standards and would cut costs by 1.6% ofGDP by 2030-31
-
7/31/2019 FSR 2011 Presentation Final
13/31
Assumptions: unchanged policy
Income tax / NICs allowances rise by earnings post2015-16 Price up-rating would push 3.9m extra people into higher
rate tax and would increase receipts by 2.6% of GDP by2030-31
Most working age benefits rise by earnings post 2015-16 Price up-rating would reduce benefit generosity relative to
average living standards and would cut costs by 1.6% ofGDP by 2030-31
Receipts and income losses from proposed asset salesnot included in central projection as details currentlytoo vague to estimate with reasonable accuracy. Butrisks discussed in online annex.
-
7/31/2019 FSR 2011 Presentation Final
14/31
Assumptions: unchanged policy
Income tax / NICs allowances rise by earnings post 2015-16 Price up-rating would push 3.9m extra people into higher
rate tax and would increase receipts by 2.6% of GDP by2030-31
Most working age benefits rise by earnings post 2015-16 Price up-rating would reduce benefit generosity relative to
average living standards and would cut costs by 1.6% ofGDP by 2030-31
Receipts and income losses from proposed asset salesnot included in central projection as details currently toovague to estimate with reasonable accuracy. But risksdiscussed in online annex.
Assume public services spending rises with per capitaGDP, but show scenario in which unchanged policy
means raising health spending by 3% a year in realterms to offset weaker productivity growth
-
7/31/2019 FSR 2011 Presentation Final
15/31
Results: non-interest spending
2010-11 2015-16 2020-21 2030-31 2040-41 2050-51 2060-61
Health 8.2 7.4 7.7 8.5 9.1 9.5 9.8
Long-term care 1.3 1.2 1.3 1.5 1.8 1.9 2.0
Education 6.3 5.0 5.1 5.2 5.0 5.0 5.0State pensions 5.7 5.5 5.2 6.1 6.8 6.9 7.9
Pensioner benefits 1.2 1.0 1.0 1.2 1.2 1.2 1.2
Public service pensions 2.0 2.0 1.9 1.8 1.6 1.5 1.4
Total age-related spending 24.6 22.0 22.1 24.3 25.6 26.0 27.3
Other social benefits 6.2 4.9 5.1 5.1 5.0 5.0 5.0
Other spending 13.3 9.4 9.4 9.4 9.4 9.4 9.4Spending 44.2 36.3 36.6 38.8 40.0 40.4 41.7
Per cent of GDP
FSR ProjectionEstimate
-
7/31/2019 FSR 2011 Presentation Final
16/31
Gross public service pensionpayments
0.0
0.5
1.0
1.5
2.0
2.5
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
Perce
ntofGDP
Existing pensioners and deferreds Existing actives past service
Existing actives future service Future new entrants
EFO
forecastFSR projection
-
7/31/2019 FSR 2011 Presentation Final
17/31
Results: non-interest revenues
2010-112015-162020-212030-312040-412050-512060-61
Income tax 10.3 10.7 10.8 10.8 10.9 10.8 10.9
NICs 6.5 6.6 6.6 6.5 6.5 6.4 6.4Corporation tax 2.9 2.9 2.9 2.8 2.8 2.8 2.8
VAT 5.8 6.1 6.2 6.3 6.4 6.3 6.4
Capital taxes 1.0 1.2 1.3 1.4 1.5 1.6 1.7
Other taxes 10.4 10.1 10.2 10.3 10.4 10.4 10.4
Revenue 37.0 37.6 37.9 38.2 38.4 38.2 38.5
Per cent of GDP
Estimate FSR projection
-
7/31/2019 FSR 2011 Presentation Final
18/31
Non-demographic influences onrevenues
Outside our central projection, we look at severalrevenue streams:
income tax: revenues would increase if income growth isskewed toward the top of the income distribution
transport taxes: better fuel efficiency could reduce revenue
North sea revenues: projected to decline as production falls
climate change levy / EU ETS: revenues look likely to rise
tobacco duty: revenues fall if consumption continues falling
Net effect: revenues could fall by up to 2% of GDP by2030-31
-
7/31/2019 FSR 2011 Presentation Final
19/31
Long term revenue and spendingprojections
30
35
40
45
50
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
Perce
ntofGDP
Non-interest spending Non-interest revenue
EFO
forecastFSR projection
-
7/31/2019 FSR 2011 Presentation Final
20/31
Primary budget balance
-6
-4
-2
0
2
4
6
2015-2016
2020-2021
2025-2026
2030-2031
2035-2036
2040-2041
2045-2046
2050-2051
2055-2056
2060-2061
percentofG
-
7/31/2019 FSR 2011 Presentation Final
21/31
Impact of student loans on PSND
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
Increase fees and
maintenance loans by
earnings
Increase fees and
maintenance loans by
inflation
Percen
tofGD
EFOforecast FSR projection
-
7/31/2019 FSR 2011 Presentation Final
22/31
Public sector net debt
-50
0
50
100
150
200
250
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
PercentofGDP
Constant primary balance
EFO
forecast
FSR projection
-
7/31/2019 FSR 2011 Presentation Final
23/31
Public sector net debt
-50
0
50
100
150
200
250
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
PercentofGDP
Central Constant primary balance
EFO
forecast
FSR projection
-
7/31/2019 FSR 2011 Presentation Final
24/31
Public sector net debt
-50
0
50
100
150
200
250
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
PercentofGDP
CentralConstant primary balance
Real health spending per person growth of 3 per cent per annum
EFO
forecast
FSR projection
-
7/31/2019 FSR 2011 Presentation Final
25/31
Economic feedbacks
Budget deficits provide helpful boost to the economywhen private spending unusually depressed
But higher debt and deficits over the long term mayreduce national saving, increase interest rates and
crowd out investment
This could reduce GDP and worsen fiscal position
Historical correlations suggest central projection deficitpath would reduce GDP, but only modestly
But not necessarily good guide to the future
-
7/31/2019 FSR 2011 Presentation Final
26/31
Sensitivity analysis
Considerable uncertainty around any 50 yearprojections
Outlook for debt would be worse if: Population structure older
Productivity growth slower
Long run interest rates higher relative to long rungrowth rates
Higher net migration would improve outlook asimmigrants more likely to be of working age
But effect will erode as immigrants reach oldage
-
7/31/2019 FSR 2011 Presentation Final
27/31
Achieving sustainability
Satisfy inter-temporal budget constraint Permanent tightening of 3% of GDP from 2016-17
Fiscal gap: achieve PSND of 40% of GDP in
2060-61 Permanent tightening of 1.5% of GDP from 2016-17
Permanent tightening of 3.9% of GDP from 2016-17 ifper capital health spending rises 3% a year in realterms
If structural budget position 1% of GDP better orworse in 2015-16 than we forecast in March,necessary fiscal tightening less or greater by thesame amount
Could tighten 0.5% of GDP per decade rather than
1.5% one-off
-
7/31/2019 FSR 2011 Presentation Final
28/31
Timing the response: one-off
-3
-2
-1
0
1
2
3
4
2016-2017 2024-2025 2032-2033 2040-2041 2048-2049 2056-2057
0
10
20
30
40
50
60
70
Required adjustment (LHS) PSND (RHS)
perc
entofGDP
percentofGDP
-
7/31/2019 FSR 2011 Presentation Final
29/31
Timing the response: decade bydecade
-3
-2
-1
0
1
2
3
4
2016-2017 2024-2025 2032-2033 2040-2041 2048-2049 2056-2057
0
10
20
30
40
50
60
70
Required adjustment (LHS) PSND (RHS)
per
centofGD
percentof
GDP
-
7/31/2019 FSR 2011 Presentation Final
30/31
Timing the response: holding debtflat
-3
-2
-1
0
1
2
3
4
2016-2017 2024-2025 2032-2033 2040-2041 2048-2049 2056-2057
0
10
20
30
40
50
60
70
Required adjustment (LHS) PSND (RHS)
percentofGD
percentofGDP
-
7/31/2019 FSR 2011 Presentation Final
31/31
Conclusions
WGA bring a welcome increase in transparency
Balance sheets limited as a guide to sustainability
Ageing population increases fiscal costs, here andabroad
More tightening likely to be needed post-
consolidation
Long term projections uncertain, but should notbe ignored