The crisis, the consolidation and Britain’s public finances Robert Chote Chairman St Catharine’s...

The crisis, the consolidation and Britain’s public finances

Robert ChoteChairman

St Catharine’s College, Cambridge, 30 April 2014

Outline• The Budget 2008 forecast

• What happened instead

• Impact on receipts and spending

• Balancing the budget: will it happen and how?

The outlook in March 2008• Financial crisis underway, but impact on

economy and public finances still expected to be modest

• “Because of the changes made by this Government to entrench stability and increase the flexibility and resilience of our economy, I am able to report that the British economy will continue to grow through this year and beyond.”

(Alistair Darling, 2008 Budget speech)

• Outside forecasters only a bit more pessimistic

March 2008 GDP growth forecastsCumulative real GDP growth forecast for calendar years 2008 and 2009

-8 -6 -4 -2 0 2 4 6Outturn

Economic PerspectivesDeutsche Bank

Dresdner Kleinwort WassersteinFortis Bank

RBS Global Banking & MarketsING Financial Markets

Standard Chartered BankExperian Business Strategies

Capital EconomicsLombard Street

UBSAverage Outside Forecast

BNP ParibasCommerzbank

Ingenious SecuritiesCitigroup

HermesHSBC

Global InsightGoldman Sachs

Lehman BrothersCEBR

Daiwa Securities SMBCABN AMRO

Morgan StanleyBeacon Economic Forecasting

Cambridge EconometricsHMT Forecast

Barclays CapitalCBI

Liverpool Macro ResearchITEM Club

Daiwa Institute of ResearchNIESR

Oxford EconomicsLloyds TSB

Public sector net borrowingBudget 2008

34

36

38

40

42

44

46

48

50

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

Per c

ent o

f GDP

Current receipts Total managed expenditure

Benign fiscal outlook reflected…• Real GDP growth dipping to 1¾% in 2008, then rising to 2½%

• Nominal GDP growth steady at 4¾ – 5½% a year

• Potential GDP growth steady at 2¾% a year (2½% assumed)

• Financial sector profits recovering after brief disruption

• Equity prices rising with money GDP

• House prices flat in 2008, then growing with earnings

• Housing transactions remaining at pre-crisis levels

• CPI inflation stable at 2% from second half of 2009 onwards

• Real earnings growth stable at around 2%

• Little movement in Gilt rates

But instead…Change from 07-08 to 12-13 Budget 08 Outturn

Real GDP +13.8% –2.6%

Nominal GDP +30.4% +7.9%

Nominal wages and salaries

+30.2% +8.7%

Nominal consumer spending

+29.1% +12.5%

Nominal financial profits +53.8% +7.1%

Nominal non-financial profits

+28.7% +3.4%

But instead…Change from 07-08 to 12-13 Budget 08 OutturnEmployment +720k +294kUnemployment +235k +754kConsumer prices index +11.2% +17.5%Retail prices index +15.6% +17.4%Equity prices +15.3% –4.7%House prices +19.7% –2.3%Housing transactions +10.7% –36.5%Sterling oil prices +£11 +£34

10-year gilt yields –0.1ppt –3.0ppt

Actual and potential GDP

80.0

90.0

100.0

110.0

120.0

130.0

140.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2008 Actual 2008 Potential 2014 Actual 2014 Potential

Real GDP = 100 in 2007 Q4

Actual and potential GDP

80.0

90.0

100.0

110.0

120.0

130.0

140.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2008 Actual 2008 Potential 2014 Actual 2014 Potential

Real GDP = 100 in 2007 Q4

Capital economics -6%

Fathom consulting -0.8%

Forecasts of potential GDP

60

70

80

90

100

110

120

199601 199903 200301 200603 201001 201303 201701

Mar-08Mar-10Jun-10*Mar-13Mar-14

Actual output = 100 in Q4 2007

*In June 2010 the OBR had not produced a historical potential output series

The ‘hole’ in the public financesDeterioration in medium-term structural budget balance relative to March 2008 Budget forecast

0123456789

10

HMT P

BR 2

008

HMT B

udge

t 200

9

HMT P

BR 2

009

HMT B

udge

t Mar

ch 20

10

OBR

Bud

get J

une

2010

OBR

Nov

embe

r 201

0

OBR

Bud

get 2

011

OBR

Nov

embe

r 201

1

OBR

Bud

get 2

012

OBR

Dec

embe

r 201

2

OBR

Bud

get 2

013

OBR

Dec

embe

r 201

3

OBR

Bud

get 2

014

Per c

ent o

f GDP

Policy measures post Budget 08

Source: Institute for Fiscal Studies

-2.00.02.04.06.08.0

10.012.0

Perc

cent

of G

DP

Labour



-2.00.02.04.06.08.0

10.012.0

Perc

cent

of G

DP

Labour Coalition - Budget 2010



-2.00.02.04.06.08.0

10.012.0

Perc

cent

of G

DP

Labour Coalition - Budget 2010 Coalition - post Budget 2010



NB: Measures include re-costing of previously implemented measures, notably 50p income tax rate

-2.00.02.04.06.08.0

10.012.0

Perc

cent

of G

DP

Labour Coalition - Budget 2010 Coalition - post Budget 2010

The 'hole'

March 10: 5.3%

June 10: 5.8%

March 14: 8.6%



NB: Measures include re-costing of previously implemented measures, notably 50p income tax rate

-2

0

2

4

6

8

10

12

2008-09 2009-102010-112011-12 2012-132013-142014-152015-162016-172017-182018-19

Tax Spending

Public sector net borrowingBudget 2008

34

36

38

40

42

44

46

48

50

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

Per c

ent o

f GDP

Current receipts Total managed expenditure

Public spending and receiptsBudget 2008 and March 2014 forecasts

34

36

38

40

42

44

46

48

50

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

Per c

ent o

f GDP

Total managed expenditure Current receipts


34

36

38

40

42

44

46

48

50

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

Per c

ent o

f GDP


Public spending and receiptsMarch 2014 forecast: including and excluding post Budget 2008 measures

Nominal GDP permanently lower

NGDP fell in this recession Changes over period of peak to trough fall in real GDP

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1979Q2 to 1981Q1 1990Q2 to 1991Q3 2008Q1 to 2009Q2

Real GDPNominal GDP

Nominal GDP since 2008 in the G7

-15.0%-10.0%-5.0%0.0%5.0%

10.0%15.0%20.0%

Canada France Germany Italy Japan UnitedKingdom

UnitedStates

Real GDP growth GDP deflator growth Nominal GDP growth

Spending or receipts problem?

• Nominal GDP fell 1.2% from 2007-08 to 2009-10, compared to the Budget 2008 forecast of a 10% rise

2009-10: error relative to Budget

2008 forecast

Cash % Nominal GDP*

Receipts –£96bn –2.3%

Spending +£25bn +6.7%

*excluding revisions to 2007-08 NGDP)

Public spending and receiptsBudget 2008

250350450550650750850950

1050

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

£ bi

llion


Public spending and receiptsMarch 2014

250350450550650750850950

1050

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

£ bi

llion


Public spending and receiptsBudget 2014 forecast: including and excluding post Budget 2008 measures

250350450550650750850950

1050

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

£ bi

llion


Receipts during the crisisChange in receipts between 2007-08 and 2009-10 (£bn)

Excise duties

Business rates

Council tax

VAT ex measures

NICSInterest and

dividends

VAT reduction

Income tax

Onshore CT

Capital taxes-12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0

Why did receipts fall 07-08 to 09-10?

• By a lot in cash terms:– Lower nominal GDP (including lower nominal labour

income, consumer spending and profits)

• But also somewhat as a share of NGDP:– Profits tend to be super-cyclical– Negative fiscal drag, thanks to weak earnings growth

and stubborn consumer inflation– Disproportionate hit to revenue-rich financial sector– Asset prices and transactions weak relative to NGDP– Discretionary VAT cut

The fall and rise in receiptsChange in share of GDP Crisis

(09-10 v 07-08)

Consolidation (18-19 v 09-

10)Income tax and NICs

VATOnshore corporation tax

UK oil and gasCapital taxes

Fuel and excise dutiesBusiness rates and council tax

Interest and dividendsOtherTotal –1.9 +2.0

Memo: policy measuresMemo: financial sector


(09-10 v 07-08)


10)Income tax and NICs

VATOnshore corporation tax

UK oil and gasCapital taxes

Fuel and excise dutiesBusiness rates and council tax

Interest and dividendsOtherTotal –1.9 +2.0

Memo: policy measures –0.7 +2.3Memo: financial sector –0.5 +0.1


(09-10 v 07-08)


10)Income tax and NICs –0.5 +0.2

VAT –0.4 +1.1Onshore corporation tax –0.7 –0.0

UK oil and gas –0.1 –0.3Capital taxes –0.7 +0.9

Fuel and excise duties +0.2 –0.5Business rates and council tax +0.3 –0.4

Interest and dividends –0.3 +0.5Other +0.2 +0.5Total –1.9 +2.0

Memo: policy measures –0.7 +2.3Memo: financial sector –0.5 +0.1

Public spending: rising or falling?Total managed expenditure, 2007-08=100

80

90

100

110

120

130

140

2007-08 2009-10 2011-12 2013-14 2015-16 2017-18

Index

Nominal real terms % GDP

Public spending during the crisis2009-10 versus 2007-08

Nominal % change Change in share of GDP

Budget 08

Outturn Budget 08

Outturn

Total spending, of which

+10.2% +14.7%

Public services/admin

(current + capital DEL)

Social security and tax credits

Central government debt interest



Budget 08

Outturn Budget 08

Outturn


+10.2% +14.7%



+9.8% +13.0%


+11.6% +19.6%


+1.3% +1.0%Why did nominal spending rise more quickly than expected?• Public services: underspend in 07-08 plus stimulus spending• Welfare: unemployment higher than expected• Debt interest: more borrowing but lower borrowing costs



Budget 08

Outturn Budget 08

Outturn


+10.2% +14.7% 0 +6.5



+9.8% +13.0% -0.1 +3.2


+11.6% +19.6% +0.1 +2.4


+1.3% +1.0% -0.2 0• Nominal spending and GDP were both expected to rise by c.10% in Budget 2008, leaving spending/GDP unchanged

• But nominal spending rose by around 15% while nominal GDP fell by 1.2%, so spending jumped sharply as a share of GDP

0

2

4

6

8

10

12

14

1983-84 1986-87 1989-90 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08 2010-11 2013-14 2016-17

Per c

ent o

f GDP

Children and working age Pensioners Total

Forecast

Source: DWP, HMRC, OBR

Welfare spending

Thousands 2007-08 2008-09 2009-10 2010-11State pension 0 -18 -18 -33

Housing benefit 21 165 557 833

JSA 66 270 636 440

DLA/PIP 15 24 40 33

Drivers of welfare spendingCaseloads compared with Budget 2008 forecasts

Drivers of welfare spendingInflation, earnings and nominal GDP per capita (% change)

Per cent 2008-09 2009-10

2010-11

2011-12

2012-13

Total change

between 2008-09

and 2012-13

RPI inflation 3.9 5.0 -1.4 4.6 5.6 18.8ROSSI

inflation 2.3 6.3 1.8 4.8 6.8 23.9CPI inflation 1.8 5.2 1.1 3.1 5.2 17.4

Average earnings growth

0.6 3.0 1.0 2.7 1.0 8.5

Growth in nominal GDP per

16+ person-1.2 -1.4 4.1 2.4 0.7 4.5Prior to 2011-12, means-tested benefits were generally uprated with ROSSI and

other benefits with RPI (in 2010-11 these were uprated by +1.5% rather than -1.4%). The baseline assumption since 2011-12 has been to uprate most benefits with CPI.

Debt interest: rising from low base

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1979/1980 1983/1984 1987/1988 1991/1992 1995/1996 1999/2000 2003/2004 2007/2008 2011/2012 2015/2016

Outturn Bud 08 BUD14

Debt stock and debt interest2007-08 2012-13 2018-19

Budget 2008

Cash PSND 535.6 731.2 -Average interest rate 4.7 4.6 -Debt interest 29.9 36.3 -

Budget 2014

Cash PSND 537.8 1185.2 1548.1Average interest rate 4.7 1.8 4.0Debt interest 30.2 47.6 75.2

Public spending and receiptsBudget 2008 and March 2014 forecasts

34

36

38

40

42

44

46

48

50

1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18

Per c

ent o

f GDP


Squaring the circleChange in share of

GDP2007-08 2018-19 Change

PSNB 2.6 -0.2 -2.8Welfare 10.2 11.2 1.0

Debt Interest 2.1 3.7 1.6Other AME 5.8 6.9 1.1Receipts 37.9 38.1 0.1

Departmental spending 22.5 16.1 -6.4of which: capital 2.7 1.9 -0.7

of which: resource 19.8 14.2 -5.7

The squeeze on public spending

19.8 20.8 22.2 21.6 20.7 20.1 19.2 18.5 17.5 16.2 14.9 14.2

2.7 2.93.5 2.9 2.3 2.0 2.0 2.2 2.1 2.0 1.9 1.9

18.120.4

21.4 21.7 21.9 22.5 22.3 21.9 22.0 22.0 22.0 21.8

0

5

10

15

20

25

30

35

40

45

50

55

60

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Per c

ent o

f nom

inal G

DP

Annually managed expenditure (AME) Capital investment (CDEL) Day-to-day spending on public services (RDEL)

Source: OBR, HMT

Memo: AME includes SingleUse Military Equipment


14

16

18

20

22

24

26

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Per c

ent

Forecast

Source: ONS, OBR

Government consumption of goods and services as a share of GDP


16.2 14.9 14.2

6.5 6.4 6.4 6.5 6.4 6.3 6.2

3.4 3.4 3.2 3.2 3.1 3.1 3.0

0.4 0.4 0.4 0.4 0.5 0.5 0.5

11.9 11.4 10.7 10.0 9.1 8.6 7.9

0

4

8

12

16

20

24

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Per c

ent o

f nom

inal G

DP

Other International development EducationNHS (Health) Implied PSCE in RDEL PSCE in RDEL

Source: HM Treasury Budget2014, HM Treasury Public Expenditure Statistical Analyses, July 2013

Plans for RDEL excluding depreciation upto 2015-16. Beyond 2015-16 based on implied PSCE in RDEL calculated from theGovernment assumptionfor TME. Other includes unallocated amounts.

Current Spending on public services and administration

Conclusion: will this happen?• Lots of uncertainties

– Macro forecast and fiscal forecast– Assessment of potential and ‘hole’ in public finances

• Policy choices

– We have to forecast on basis of Coalition policy, but– Conservatives want more welfare cuts– Labour see less need for balanced budget– Lib Dems: more borrowing and tax?

The crisis, the consolidation and Britain’s public finances Robert Chote Chairman St Catharine’s...

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