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Public finances: outlook and risks<br />
Carl Emmerson, Soumaya Keynes and Gemma Tetlow<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong>
Percentage of national income<br />
Disease and cure (December 2012)<br />
Dec 2012: 8.2% national income (£129bn) hole in public finances,<br />
offset by 9.2% national income (£144bn) consolidation over 8 years<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Other current spend<br />
Debt interest<br />
Benefits<br />
Investment<br />
Tax increases<br />
85%<br />
15%<br />
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Figure 5.8 of <strong>The</strong> IFS Green Budget: February 2013.
Percentage of national income<br />
1996–97<br />
1997–98<br />
1998–99<br />
1999–00<br />
2000–01<br />
2001–02<br />
2002–03<br />
2003–04<br />
2004–05<br />
2005–06<br />
2006–07<br />
2007–08<br />
2008–09<br />
2009–10<br />
2010–11<br />
2011–12<br />
2012–13<br />
2013–14<br />
2014–15<br />
2015–16<br />
2016–17<br />
2017–18<br />
Returning spending and revenues to pre-crisis<br />
levels<br />
55<br />
50<br />
Total spending (no action) Receipts (no action)<br />
TME (December 2012) Receipts (December 2012)<br />
45<br />
40<br />
35<br />
30<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Figure 5.9 of <strong>The</strong> IFS Green Budget: February 2013.
How much fiscal consolidation is needed in the<br />
medium-term<br />
• Estimating how much medium-term fiscal consolidation is needed<br />
is difficult<br />
– Official estimates of the size of the hole in the public finances have<br />
changed over time<br />
– View about medium-term public finance position is sensitive to view<br />
taken on how much scope there is for economic recovery<br />
– Also depends on how tax revenues and spending respond as economy<br />
recovers<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong>
Percentage of national income<br />
HMT Budget<br />
2008<br />
HMT PBR 2008<br />
HMT Budget<br />
2009<br />
HMT PBR 2009<br />
HMT Budget<br />
March 2010<br />
OBR Budget June<br />
2010<br />
OBR November<br />
2010<br />
OBR Budget 2011<br />
OBR November<br />
2011<br />
OBR Budget 2012<br />
OBR December<br />
2012<br />
Size of the problem and the planned solution:<br />
changes over time<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Size of the problem<br />
Planned fiscal consolidation<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Figures 5.5 and 5.6 of <strong>The</strong> IFS Green Budget:<br />
February 2013. Additional calculations using Budgets, Pre-Budget Reports<br />
and Economic and <strong>Fiscal</strong> Outlooks since March 2008.
£ billion<br />
<strong>For</strong>ecast for borrowing deteriorated between<br />
November 2010 and December 2012<br />
Change in official borrowing forecasts between Nov 2010 and Dec 2012<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
Increase in borrowing (without policy action)<br />
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Table 5.2 of <strong>The</strong> IFS Green Budget: February 2013.<br />
Additional author calculations.
£ billion<br />
George Osborne has allowed the automatic<br />
stabilisers to operate during this parliament…<br />
Change in official borrowing forecasts between Nov 2010 and Dec 2012<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
Increase in borrowing (without policy action)<br />
Increase in borrowing (with policy action)<br />
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Table 5.2 of <strong>The</strong> IFS Green Budget: February 2013.<br />
Additional author calculations.
£ billion<br />
…but has announced measures to offset<br />
structural borrowing increase by 2017–18<br />
Change in official borrowing forecasts between Nov 2010 and Dec 2012<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Increase in borrowing (without policy action)<br />
Increase in borrowing (with policy action)<br />
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18<br />
• Increase in cyclical borrowing in 2017–18<br />
has not been offset<br />
Notes and sources: see Table 5.2 of <strong>The</strong> IFS Green Budget: February 2013.<br />
Additional author calculations.
Wide range of views among forecasters about<br />
amount of spare capacity in UK economy<br />
Structural borrowing could be<br />
1.6% of national income larger<br />
OBR<br />
Fathom Consulting<br />
EIU<br />
Schroders Investment Management<br />
Nomura<br />
Scotiabank<br />
Barclays Capital<br />
BCC<br />
Santander<br />
CBI<br />
Lombard Street<br />
Commerzbank<br />
IMF<br />
Oxford Economics<br />
Capital Economics<br />
Structural borrowing could be<br />
2.0% of national income smaller<br />
0%<br />
-3.1%<br />
Average of independent<br />
forecasters (excl. OBR):<br />
–3.0%<br />
-1% -2% -3% -4% -5% -6%<br />
Output gap (% of trend GDP)<br />
-7%<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Figure 5.14 of <strong>The</strong> IFS Green Budget: February 2013.
How will tax revenues and spending respond as<br />
the economy recovers<br />
• Full public finance forecasts are presented in Appendix A, using<br />
four different macro scenarios<br />
– OBR<br />
– Oxford Economics central<br />
– Oxford Economics ‘corporate reawakening’<br />
– Oxford Economics ‘Eurozone break-up’<br />
• Focus here on main areas where forecasts differ from the OBR’s<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong>
Borrowing could be higher than the OBR forecasts<br />
• Borrowing could be higher in 2012–13 than 2011–12 (on like-forlike<br />
basis)<br />
– IFS baseline forecast is for borrowing this year of £125.4bn<br />
– This is £4.9bn higher than the OBR’s December 2012 forecast: due to<br />
lower expected tax receipts (–£3.1bn) and higher spending by central<br />
government departments (+£1.6bn)<br />
– Implies greater than 50/50 chance that borrowing will be higher this<br />
year than last (when it was £121.4bn)<br />
• But, economically, medium & long-run are what matters – these<br />
risks include:<br />
– Tax revenues could grow less quickly than OBR expects<br />
– Future adverse shocks (e.g. Eurozone break-up)<br />
– Government may prove unable/unwilling to implement the large<br />
planned cuts to public spending<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong>
Borrowing could be lower than the OBR forecasts<br />
• Tax revenues could grow more quickly than OBR expects<br />
– Baseline forecast is for higher growth in VAT and corporation tax<br />
• Trend output could be higher: implying lower structural borrowing<br />
– As in Oxford Economic central scenario<br />
• Future positive shocks<br />
– If corporate confidence and investment picks up more quickly,<br />
economy and tax revenues could grow more rapidly<br />
• Post-election tax rises<br />
– Incoming governments have raised taxes by an average of £7.5bn a<br />
year in the 12 months following the last six general elections<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong>
% of national income<br />
Summary of alternative public finance forecasts:<br />
Cyclically-adjusted current budget surplus<br />
3.0<br />
2.0<br />
1.0<br />
0.0<br />
-1.0<br />
-2.0<br />
-3.0<br />
-4.0<br />
-5.0<br />
OBR, December 2012<br />
IFS: baseline<br />
IFS: Oxford Economics central case<br />
IFS: Oxford Economics 'corporate reawakening'<br />
IFS: Oxford Economics 'eurozone break-up'<br />
-6.0<br />
2012–13 2013–14 2014–15 2015–16 2016–17 2017–18<br />
1.2% of<br />
GDP<br />
(£19bn)<br />
<strong>Fiscal</strong> mandate: “cyclically adjusted<br />
current budget balance by the end of the<br />
rolling, five year forecast period”<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Figure 5.15 of <strong>The</strong> IFS Green Budget: February 2013.
% of national income<br />
Summary of alternative public finance forecasts:<br />
Public sector net debt<br />
120<br />
110<br />
100<br />
OBR, December 2012<br />
IFS: baseline<br />
IFS: Oxford Economics central case<br />
IFS: Oxford Economics 'corporate reawakening'<br />
IFS: Oxford Economics 'eurozone break-up'<br />
Supplementary target: public sector net<br />
debt as a share of national income should<br />
be falling at a fixed date of 2015−16<br />
90<br />
80<br />
70<br />
60<br />
2012–13 2013–14 2014–15 2015–16 2016–17 2017–18<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong><br />
Notes and sources: see Figure 5.16 of <strong>The</strong> IFS Green Budget: February 2013.
Key points<br />
• IFS baseline forecast is that borrowing will be £4.9 billion higher in<br />
2012–13 than 2011–12 on a like-for-like basis<br />
• <strong>Fiscal</strong> policy in this parliament is set to be more expansionary than<br />
suggested by forecasts from November 2010<br />
– Chancellor has allowed automatic stabilisers to operate, offsetting just<br />
£1 billion of the £65 billion rise in forecast borrowing for 2014–15<br />
• But borrowing increase has been offset in the next parliament by<br />
further planned squeeze on public spending<br />
• Exact size of problem and medium-term action required is<br />
uncertain – both upside and downside risks exist<br />
• Debt has increased significantly over last 4 years; further adverse<br />
shocks could easily drive it above 100% of national income<br />
© <strong>Institute</strong> for <strong>Fiscal</strong> <strong>Studies</strong>