UK reflections on the golden ruleobr.uk/pubs/GOLDEN-RULE-IN-THE-UK-290915.pdf · UK reflections on...
Transcript of UK reflections on the golden ruleobr.uk/pubs/GOLDEN-RULE-IN-THE-UK-290915.pdf · UK reflections on...
UK reflections
on the golden rule
Presentation to Austrian Fiscal Advisory Council seminar
Andy King
Chief of Staff
Office for Budget Responsibility
29 September 2015
The Office for Budget Responsibility
• Created in 2010 to provide independent and
authoritative analysis of the public finances
• Produces the budget and autumn statement forecasts of
the economy and public finances
• Assesses Government progress against fiscal targets
• Reports on the sustainability of the public finances and
the health of the public sector balance sheet
• Scrutinises the Government’s costing of policy measures
• Objective to make fiscal forecasts and costings unbiased
and clear, but we have no role in making or commenting
on Government policy
Institutional context: macroeconomic policy reforms
• Bank of England given operational independence
for monetary policy, to hit Govt inflation target
• Financial regulation would be brought together
under a single statutory authority
• Fiscal policy would be guided by two new fiscal
rules:
– Golden rule – borrow only to invest over the economic
cycle
– Sustainable investment rule – keep debt at a prudent level
over the economic cycle*
* The name of the rule and the 40% of GDP specification came later
Golden rule: Rationale and objectives
The ‘Silver Book’ argued:
• It would approximate to the principle of achieving
fairness between generations
• It would address past fiscal failings by removing
the bias against capital spending
• It would allow the automatic stabilisers to work, by
targeting balance over the economic cycle
• Coupled with debt rule, it would ensure the public
finances were on a long-term sustainable path
Sustainable investment rule: Rationale and objectives
The ‘Silver Book’ argued:
• It should focus on a net measure of public debt,
for the whole public sector, as a per cent of GDP
• While public debt plays important roles, high levels
of public debt reduce the buffer against shocks and
may impose other costs (e.g. via interest rates)
• While current levels of public debt were not high by
historical or international standards, a modest
reduction to 40 per cent of GDP was consistent
with balanced and responsible fiscal management
Real-time critiques: Dating the economic cycle
IFS Green Budget 2006:
“Re-dating the cycle at
such a convenient time
risks undermining the
credibility of the fiscal
framework. The golden
rule should be made more
forward-looking and less
reliant on a precisely
dated economic cycle. If
still required, the task of
estimating the output gap
could be handed to an
independent body.”
Real-time critiques: Backward-looking approach
Budget 2007 forecast for the golden rule from 1997-98
-6
-5
-4
-3
-2
-1
0
1
2
3
1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12
Average surplus on current budget since 1997-98
Cyclically-adjusted surplus on current budget
Source: HM Treasury
Budget 2007 forecast
Real-time critiques: Backward-looking approach
IFS Green Budget 2006:
“…defining a particular period as ‘a cycle’ and seeking to
balance the current budget over this period is not the only
way to allow the automatic stabilisers to function. This
approach is backward-looking in the sense that the amount
you can borrow today and in the near term depends on the
impact on borrowing of shocks and policy mistakes earlier in
the cycle. A more forward-looking approach would set policy
today consistent with meeting the rule in the future, whether
or not it was consistent with meeting it in the past.”
Real-time critiques: Backward-looking approach
Budget 2007 forecast for the golden rule from 1997-98
-6
-5
-4
-3
-2
-1
0
1
2
3
1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12
Average surplus on current budget since 1997-98
Cyclically-adjusted surplus on current budget
Source: HM Treasury
Budget 2007 forecast
Real-time critiques: Backward-looking approach
Latest data for the golden rule from 1997-98
-6
-5
-4
-3
-2
-1
0
1
2
3
1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12
Average surplus on current budget since 1997-98
Cyclically-adjusted surplus on current budget
Source: ONS, OBR
Real-time critiques: Optimistic revenue forecasts
Difference between official and external PSNB forecasts
-15
-10
-5
0
5
10
Budget1998
Budget1999
Budget2000
Budget2001
Budget2002
Budget2003
Budget2004
Budget2005
Budget2006
Budget2007
Budget2008
£ b
illio
n
Source: HM Treasury
Outside forecasters more pessimistic than the Treasury
Outside forecasters more optimistic than the Treasury
PSNB forecasts at a 4-year horizon
UK running structural deficit when the crisis struck
Contemporaneous and recent OECD estimates
-12 -10 -8 -6 -4 -2 0 2 4 6
New ZealandFinlandIceland
DenmarkNorwaySweden
LuxembourgAustraliaCanada
SwitzerlandSpain
GermanyNetherlands
BelgiumAustriaJapan
Czech RepublicItaly
IrelandPortugal
FranceUnited States
United KingdomHungaryGreece
Per cent of GDP
June 2014 forecast
-12 -10 -8 -6 -4 -2 0 2 4 6
New ZealandDenmark
FinlandIcelandSwedenIreland
SwitzerlandAustralia
SpainCanada
LuxembourgBelgium
NetherlandsNorwayAustria
GermanyPortugal
FranceItaly
GreeceUnited Kingdom
JapanUnited States
Czech RepublicHungary
Per cent of GDP
June 2007 forecast
Source: OECD
UK public sector debt rising before the crisis struck
Change in general govt net liabilities: 2004 to 2007
-40 -30 -20 -10 0 10 20
NorwayFinlandIcelandSweden
DenmarkIsrael
BelgiumSpain
New ZealandCanadaFrance
NetherlandsSlovenia
IrelandKorea
PolandItaly
SwitzerlandGermanyAustralia
Czech RepublicUnited States
JapanGreece
PortugalUnited Kingdom
LuxembourgAustriaEstonia
Slovak RepublicHungary
Per cent of GDPSource: OECD
Revenue forecasts and spending plans
-2
-1
0
1
2
3
4
5
6
SR20002000-01 vs 2003-04
SR20022002-03 vs 2005-06
SR20042004-05 vs 2007-08
CSR20072007-08 vs 2010-11
Per
cent
of G
DP
TME planned TME outturn
Receipts forecast Receipts outturn
Source: HM Treasury
Successive pre-crisis Spending Reviews
Revenue forecasts and spending plans
Successive pre-crisis Spending Reviews
-2
-1
0
1
2
3
4
5
6
SR20002000-01 vs 2003-04
SR20022002-03 vs 2005-06
SR20042004-05 vs 2007-08
CSR20072007-08 vs 2010-11
Per
cent
of G
DP
TME planned TME outturn
Receipts forecast Receipts outturn
Source: HM Treasury
Crisis-related structural hit to the public finances
90
100
110
120
130
140
150
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Act
ual
outp
ut
20
07
Q4 =
10
0
March 2008 actual
March 2008 potential
July 2015 actual
July 2015 potential
Source: HM Treasury, ONS, OBR
Range of implied external forecasts
for potential output in 2016
Pre-crisis and latest estimates of potential output
Temporary fiscal rules
November 2008: Temporary operating rule:
“to set policies to improve the cyclically adjusted current
budget each year, once the economy emerges from the
downturn, so it reaches balance and debt is falling as a
proportion of GDP once the global shocks have worked their
way through the economy in full”
Temporary fiscal rules
November 2008: Temporary operating rule:
“to set policies to improve the cyclically adjusted current
budget each year, once the economy emerges from the
downturn, so it reaches balance and debt is falling as a
proportion of GDP once the global shocks have worked their
way through the economy in full”
February 2010: Fiscal Responsibility Act:
Legislative duties:
– Borrowing to be more than halved to 5.5% of GDP or less in 2013-14
– Borrowing to be reduced as a share of GDP in each and every year from
2009-10 to 2015-16; and
– Public sector net debt to be falling as a share of GDP in 2015-16
The 2010 fiscal framework
Fiscal mandate:
• to achieve cyclically-adjusted current balance by the
end of the rolling, five-year forecast period
Supplementary debt target:
• for public sector net debt as a percentage of GDP to
be falling at a fixed date of 2015-16
Office for Budget Responsibility:
• an independent fiscal institution
Fiscal mandate: Rationale and objectives
June 2010 Budget argued:
• The fiscal mandate is based on:
– the current balance, to protect the most
productive public investment expenditure
– a cyclically adjusted aggregate, to allow some
fiscal flexibility at a time of economic uncertainty
• Unlike the golden rule, the fiscal mandate is:
– forward-looking, not backward-looking
– based on an independent OBR assessment of the structural
fiscal position
Supplementary target: Rationale and objectives
June 2010 Budget argued:
• “At this time of rapidly rising debt, the fiscal
mandate will be supplemented by a target for public
sector net debt… ensuring that the public finances
are restored to a sustainable path.”
• “once the exceptional rise in debt has been
addressed, a new target for debt as a percentage of
GDP will be set, taking account of the OBR’s
assessment of the long-term sustainability of the
public finances.”
Office for Budget Responsibility: Rationale and objectives
June 2010 Budget argued:
• In order to promote international and domestic
confidence in the sustainability of the public
finances, the Government had:
“created the new Office for Budget Responsibility
(OBR), which introduces independence, greater
transparency and credibility to the economic and
fiscal forecasts on which fiscal policy is based.”
Proposed fiscal rules
Draft Charter for Budget Responsibility sets out:
• In normal times: a target for a surplus on public sector
net borrowing in each subsequent year
• For the period outside normal times from 2015-16: a
surplus on public sector net borrowing by 2019-20
• Until 2019-20, the mandate is supplemented by a
target for public sector net debt as a percentage of
GDP to be falling in each year
Proposed fiscal rules
Draft Charter for Budget Responsibility sets out:
• These targets apply unless and until the Office for
Budget Responsibility assess, as part of their economic
and fiscal forecast, that there is a significant negative
shock to the UK. A significant negative shock is
defined as real GDP growth of less than 1% on a
rolling 4 quarter-on-4 quarter basis.
Current budget deficit and net investment
Budget 2007 outturns and forecast
0.0
0.6
1.2
1.8
2.4
3.0
3.6
-4
-2
0
2
4
6
8
1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12
Current budget deficit (LHS) Net investment (RHS)
Source: ONS, HM Treasury
Budget 2007
forecast
Current budget deficit and net investment
Latest current budget and Budget 2007 investment
0.0
0.6
1.2
1.8
2.4
3.0
3.6
-4
-2
0
2
4
6
8
1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12
Current budget deficit (LHS) Net investment (RHS)
Source: ONS, HM Treasury
Current budget deficit and net investment
Latest outturns
0.0
0.6
1.2
1.8
2.4
3.0
3.6
-4
-2
0
2
4
6
8
1979-80 1983-84 1987-88 1991-92 1995-96 1999-00 2003-04 2007-08 2011-12
Current budget deficit (LHS) Net investment (RHS)
Source: ONS, HM Treasury
International comparison
0
1
2
3
4
5
6
Germ
an
y
Belg
ium
Irela
nd
Ita
ly
Mexi
co
Tu
rke
y
Icela
nd
UK
Gre
ece
Sp
ain
Au
stri
a
Sw
itze
rlan
d
Po
rtu
ga
l
Jap
an
Slo
vak R
ep
Au
stra
lia
New
…
Den
ma
rk US
Neth
erl
and
s
Fin
land
Luxe
mb
ou
rg
Fra
nce
Cze
ch R
ep
Can
ad
a
Hu
nga
ry
No
rwa
y
Slo
ven
ia
Sw
ede
n
Ko
rea
Po
lan
d
Est
onia
Source: OECD
General government GFCFPer cent of GDP (2010-2014 average)
Government investment in the OECD
Infrastructure: Survey indicators
Source: 2014-15 Global Competitiveness Report
4.0
4.4
4.8
5.2
5.6
6.0
6.4
6.8
AUT FRA JPN GER US CAN UK ITA G7
20
14
-15
GC
R s
core
(o
ut
of
7) Road infrastructure
4.0
4.4
4.8
5.2
5.6
6.0
6.4
6.8
JPN FRA GER AUT US UK CAN ITA G7
20
14
-15
GC
R s
core
(o
ut
of
7) Rail infrastructure
4.0
4.4
4.8
5.2
5.6
6.0
6.4
6.8
US GER UK CAN JPN FRA ITA AUT G7
20
14
-15
GC
R s
core
(o
ut
of
7) Port infrastructure
4.0
4.4
4.8
5.2
5.6
6.0
6.4
6.8
US GER CAN FRA JPN UK AUT ITA G7
20
14
-15
GC
R s
core
(o
ut
of
7) Airport infrastructure