britains public finances robert chote chairman royal economic society public lecture london and...
TRANSCRIPT
Britain’s public financesRobert Chote
Chairman
Royal Economic Society Public LectureLondon and Birmingham
14 and 15 December 2011
Outline
• Why do governments tax, spend, lend and borrow?
• The public finances today: a snapshot
• The crisis and the repair job
• Some historical and international perspective
• The policy debate: Plan A versus Plan B
Why do governments tax, spend and lend?
• Providing ‘public goods’
– Defence, criminal justice
• Replacing ‘missing markets’
– Unemployment and incapacity insurance, higher education
• Influencing behaviour: paternalism and spillovers
– Schools, pensions, libraries, tobacco duties, green taxes
• Redistributing resources
– Taxes, cash benefits and benefits in kind
Why do governments borrow?• Revenue and spending forecast errors
– It is hard to ensure revenues equal spending even if you try
• Inter-generational fairness
– Wars, capital spending, training doctors and teachers
• Stabilizing tax rates
– Using the deficit as a shock absorber helps avoid costly tax rate changes
• Macroeconomic management
– Automatic and discretionary changes help stabilise total spending
• Political expedience
– Voters like having money spent on them more than paying taxes
The public finances today: a snapshot
Public spending in 2011-12
• We estimate that the public sector will spend £703 billion this year
– Equivalent to £26,000 per family or 46.2% of national income
Social protection29%
Health and care services
22%
Education13%
Defence6%
Debt interest7%
Other23%
Public sector receipts in 2011-12
• We estimate that the public sector will raise £576 billion this year from taxes and other receipts
– Equivalent to £21,300 per family or 37.8% of national income
Income tax and NICs44%
VAT16%
Corporation tax7%
Council tax and business rates
9%
Fuel and excise duties8%
Capital taxes3%
Other13%
Public sector borrowing in 2011-12
Public sector spending £703bn 46.2% of GDPPublic sector receipts £576bn 37.8% of GDP
Public sector borrowing £127bn 8.4% of GDP
• Deficit down from post-war peak of 11.2% in 2009-10
• Government still borrowing £1 for every £5 it spends
Public sector net debt in March 2011Gross Debtof which: gilts £919bn 62% of GDP
: treasury bills £63bn 4% of GDP : national savings £99bn 7% of GDP
less liquid assetsof which: forex reserves £53bn 4% of GDP
Public sector net debt £905bn 60% of GDP
• Debt highest share of GDP since 1968
But is this the whole story?
• PSND often criticised as a measure of the public sector’s financial health, as it fails to take account of future debts that will arise because of past government action
• Some prefer to look at the public sector’s balance sheet in the same way you would look at a private sector one
• Now possible thanks to ‘Whole of Government Accounts’
• Built up from accounts of 1500 constituent public bodies
• WGA includes physical and illiquid financial assets, plus present value of some future cash flows
WGA public sector assets 2009-10
Land, buildings and dwelling £354bnPhysical infrastructure £233bnTaxes due £105bnLoans and deposits £68bn Shareholdings in banks £65bnTreasury loans to financial institutions £58bnMilitary equipment £36bnStudent loans £28bnOverseas government bonds £24bnOther £237bn
Total £1208bn 86% of GDP
WGA public sector liabilities 2009-10
Public service pension liabilities £1132bnGilts, treasury bills and National Savings £966bnProvisions (mostly nuclear decommissioning) £102bn Amounts payable under PFI contracts £27bnOther £192bn
Total £2419bn 173% of GDP
• Does not include contingent liabilities where the chance of having to pay is <50% – mostly guarantees for the financial sector
So is the public sector insolvent?
WGA liabilities £2419bn 173% of GDPWGA assets £1208bn 86% of GDP
WGA net liabilities £1212bn 86% of GDP
• No. Its greatest asset is not included in the WGA – the right to levy future taxes
• Judging fiscal sustainability therefore requires analysis of long-term prospects for spending and revenues, taking into account demographics, health care etc
Assumptions: demography
• Ageing population – past rises in life expectancy and falls in fertility plus baby boom ‘bulge’
• ONS population projections
• Our central projection assumes:– 65+ proportion rises from 17% in
2011 to 26% in 2061– Net inward migration averages
roughly half recent levels
• We also show sensitivity to older and younger age structures and higher net migration
Figures refer to annual growth rates
0
10
20
30
40
50
60
70
80
90
100
2011 2061
Per c
ent o
f UK
popu
latio
n
0-15 16-54 55-64 65-84 85+
2.7%
0.9%
0.2%
0.1%
0.2%
Results: non-interest spending
2010-11 2015-16 2020-21 2030-31 2040-41 2050-51 2060-61
Health 8.2 7.4 7.7 8.5 9.1 9.5 9.8
Long-term care 1.3 1.2 1.3 1.5 1.8 1.9 2.0
Education 6.3 5.0 5.1 5.2 5.0 5.0 5.0
State pensions 5.7 5.5 5.2 6.1 6.8 6.9 7.9
Pensioner benefits 1.2 1.0 1.0 1.2 1.2 1.2 1.2
Public service pensions 2.0 2.0 1.9 1.8 1.6 1.5 1.4
Total age-related spending 24.6 22.0 22.1 24.3 25.6 26.0 27.3
Other social benefits 6.2 4.9 5.1 5.1 5.0 5.0 5.0
Other spending 13.3 9.4 9.4 9.4 9.4 9.4 9.4
Spending 44.2 36.3 36.6 38.8 40.0 40.4 41.7
Per cent of GDP
FSR ProjectionEstimate
Results: non-interest revenues
2010-112015-162020-212030-312040-412050-512060-61Income tax 10.3 10.7 10.8 10.8 10.9 10.8 10.9
NICs 6.5 6.6 6.6 6.5 6.5 6.4 6.4
Corporation tax 2.9 2.9 2.9 2.8 2.8 2.8 2.8
VAT 5.8 6.1 6.2 6.3 6.4 6.3 6.4
Capital taxes 1.0 1.2 1.3 1.4 1.5 1.6 1.7
Other taxes 10.4 10.1 10.2 10.3 10.4 10.4 10.4
Revenue 37.0 37.6 37.9 38.2 38.4 38.2 38.5
Per cent of GDP
Estimate FSR projection
Long term revenue and spending projections
30
34
38
42
46
50
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
Per ce
nt o
f GD
P
Non-interest spending Non-interest revenue
FSR 2011 projectionsMarch EFO
forecast
Public sector net debt
-50
0
50
100
150
200
250
2010-11 2020-21 2030-31 2040-41 2050-51 2060-61
Per
cent of G
DP
Central Constant primary balance
EFO forecast
FSR projection
The crisis and the repair job
Public sector net borrowing-4
-2
0
2
4
6
8
10
12
1996-97 2000-01 2004-05 2008-09 2012-13 2016-17
Per ce
nt o
f GD
P
Total public spending and receipts
30
34
38
42
46
50
1996-97 2000-01 2004-05 2008-09 2012-13 2016-17
Per
cent
of G
DP
Spending Receipts
Nominal GDP: total cash size of economy
90
110
130
150
170
190
210
230
2003 2005 2007 2009 2011 2013 2015 2017
Inde
x 10
0 =
200
3Q1
15%
Total public spending and revenues
30
34
38
42
46
50
1996-97 2000-01 2004-05 2008-09 2012-13 2016-17
Per ce
nt o
f GD
P
Spending ReceiptsSpending excl. measures Receipts excl. measuresSource: OBR, IFS
Policy measures from autumn 2008
0
2
4
6
8
10
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Per
cent
of G
DP
Tax Benefits Debt interest Other spendingSource: IFS
80%
20%
Bigger squeeze on public services spending
-8
-4
0
4
8
12
195
0-51
195
3-54
195
6-57
195
9-60
196
2-63
196
5-66
196
8-69
197
1-72
197
4-75
197
7-78
198
0-81
198
3-84
198
6-87
198
9-90
199
2-93
199
5-96
199
8-99
200
1-02
200
4-05
200
7-08
201
0-11
201
3-14
201
6-17
Ann
ual p
erce
ntag
e re
al in
crea
se
Source: IFS
Some historical and international perspective
Net borrowing as a share of GDP-6
-3
0
3
6
9
12 194
8-49
195
1-52
195
4-55
195
7-58
196
0-61
196
3-64
196
6-67
196
9-70
197
2-73
197
5-76
197
8-79
198
1-82
198
4-85
198
7-88
199
0-91
199
3-94
199
6-97
199
9-00
200
2-03
200
5-06
200
8-09
201
1-12
201
4-15
Per ce
nt o
f GD
P
National debt since 1700
0
50
100
150
200
250
300
1700 1730 1760 1790 1820 1850 1880 1910 1940 1970 2000
Per ce
nt o
f nat
iona
l inc
ome
War
of s
pani
sh s
ucce
ssio
n
Aus
trian
suc
cess
ion
Seve
n Ye
ars
War
Am
eric
an W
ar o
f In
depe
nden
ce
Revo
lutio
nary
and
N
apol
eoni
c W
ars
Boer
War
Wor
ld W
ar I W
orld
War
II
Introduction of income tax
Expansion of national insurance
Forecast
Selected OECD budget deficitsGovernment net lending/net borrowing in 2011
-15 -10 -5 0 5 10 15
Ireland
United States
United Kingdom
Greece
Japan
OECD-Total
Spain
Portugal
France
Italy
Germany
Sweden
Switzerland
Norway
Per cent of GDPSource: OECD
Selected OECD debt ratiosGovernment gross financial liabilities in 2011
0 50 100 150 200 250
Switzerland
Sweden
Norway
Spain
Germany
United Kingdom
United States
France
OECD-Total
Portugal
Ireland
Italy
Greece
Japan
Per cent of GDPSource: OECD
The policy debate: Plan A versus Plan B
The backdrop: weak economic growth
-5
-4
-3
-2
-1
0
1
2
3
4
5
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Perc
enta
ge c
hang
e on
pre
viou
s ye
ar
The backdrop: economy has spare capacity
-5
-4
-3
-2
-1
0
1
2
3
Q12007
Q3 Q12008
Q3 Q12009
Q3 Q12010
Q3 Q12011
Q3
Per ce
nt
"Aggregate composite" estimates"Principal components analysis" estimates (previous approach)"Principal components analysis" estimates (updated approach)
Output gap c. 2.5% in Q3
The backdrop: govt can borrow cheaply
5 year bond yields
0
1
2
3
4
5
6
7
8
Mar-11 Apr-11 May-11 Jul-11 Aug-11 Sep-11 Nov-11
Per
cent
0
10
20
30
40
50
60
Per
cent
UK Germany Italy Greece (RHS)
Plan A versus Plan B
• Is there a temporary tax cut or spending increase large enough to give a material boost to the economy, but small enough not to push up the Government’s borrowing costs in a self-defeating way?
• The Government says borrowing costs are low because it has a credible fiscal consolidation plan. A fiscal loosening would undermine confidence, push up debt interest costs and soon require even greater fiscal tightening
• The Opposition says borrowing costs are low more because we are outside the eurozone and because people are pessimistic about long term growth. Slowing the consolidation would boost growth and help cut the deficit
• Who’s right? It’s not for us to say!
The role of the OBR
• “to examine and report on the sustainability of the public finances” (Budget Responsibility and National Audit Act 2010)
• Overcome mistrust of ministerial analysis. Four main tasks:
– Produce two five-year forecasts for economy and public finances– Judge progress towards the government’s fiscal targets– Scrutinise Treasury costing of tax and spending measures– Assess long-term sustainability and public sector balance sheet
• Demonstrating our political independence is key
– Various legal safeguards– But transparency is key