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


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%


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


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


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


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


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


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


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)


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


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?


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


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


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


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%


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


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


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)

disease and cure in the uk: the fiscal impact of the crisis and the policy response · ·...

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