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PBR 2009: filling in some details
Robert Chote
www.ifs.org.uk
© Institute for Fiscal Studies
What we will be looking out for
• Forecasts for economic growth
• Forecasts for the public finances
• The repair job
– How big is the hole?
– Speed and composition
– Implications for spending
• Some political positioning
• Institutional reform: the Fiscal Responsibility Bill
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Economic growth – but don’t forget the level
HM Treasury
(Budget 2009)
Bank of England
(Inflation Report
November 2009
Average of new
independent
forecasts
2009
–3¾%
–4.8%
–4.6%
2010
+1%
+1.5%
+1.2%
2011
+3¼%
+3.1%
+2%
Level of GDP in
2011 relative to
2008
+0.4%
–0.4%
–1.5%
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Public finance forecasts: borrowing
Budget 2009 forecasts for public sector net borrowing
2009–10
2010–11
2011–12
2012–13
2013–14
Cash
£175bn
£173bn
£140bn
£118bn
£97bn
% GDP
12.4%
11.9%
9.1%
7.2%
5.5%
• On current trends borrowing this year in line with forecast
• Getting within c.£15bn would be good in a normal year
• Weaker-than-expected real GDP will push up %GDP ratio, but this
may be offset by higher-than-expected whole economy inflation
• Government will want to show deficit halving in 4 years
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Public finance forecasts: debt
Budget 2009 forecasts for public sector net debt (%GDP)
2009–10
2010–11
2011–12
2012–13
2013–14
Excluding
bailout costs
55.4%
65.0%
70.9%
74.5%
76.2%
Including
bailout costs
59.0%
68.4%
74.0%
77.5%
79.0%
• Does HMT still expect debt to peak in 2013–14 – and at what
level?
• How far will expected cost of financial interventions be reduced?
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The repair job: the Treasury’s diagnosis
• The financial crisis means that the economy and the value of
our houses and financial assets will be significantly and
permanently smaller in cash terms than it had previously
expected
• This will permanently reduce tax receipts and increase public
spending as shares of national income
• This will increase the amount we have to borrow to bridge the
gap between the two – even after the economy has
recovered
• The Budget implied the crisis had added £90bn a year or 6.4%
of GDP to structural deficit. Will the CX revise this estimate?
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The repair job: the story so far
• Tories want to tighten more aggressively from next year
• How will Darling/Brown respond?
• Tax measures to ease spending squeeze?
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Sources: HM Treasury; IFS calculations.
The outlook for public spending
• Over the next spending review (2011–12, 2012–13 and 2013–
14) Budget 2009 plans (published and leaked) imply:
– Total public spending broadly flat in real terms
– Investment spending cut 17.3% a year
– Non-investment spending up 0.7% a year
– Departmental Expenditure Limits cut 2.9% a year
– ¾ of rise in DELs as % GDP during good years reversed by 2013–
14
• Will we get a DEL estimate – or will we have to guess?
• Will we get any departmental settlements announced?
• Any clues on spending/tax mix beyond 2013–14?
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Some political positioning
• Labour will want to paint Tories as withdrawing fiscal support
from the economy when recovery not yet rooted...
• ...even though that is what they are planning to do anyway
• Tories will say that the Government is imperilling recovery by
tackling deficit too slowly – will probably cite Dubai as risk
• Labour know that the Tories are reluctant to oppose tax
increases on the rich, so might they push the boundary a bit
more?
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Institutional reform
• Improving credibility of fiscal pledges seen as important to
reassure potential buyers of government debt
• Government has promised ‘Fiscal Responsibility Act’, putting
pledge to reduce deficit in law
• But why should this be more convincing than old rules and Code
for Fiscal Stability? Need to bolster faith in forecast
• Conservatives propose outside body. Labour has rejected this
and says Parliament will scrutinise. More powers or resources?
© Institute for Fiscal Studies
PBR 2009: filling in some details
Robert Chote
www.ifs.org.uk
© Institute for Fiscal Studies