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
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 Coalition - Budget 2010
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 Coalition - Budget 2010 Coalition - post Budget 2010
Policy measures post Budget 08
Source: Institute for Fiscal Studies
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%
Policy measures post Budget 08
Source: Institute for Fiscal Studies
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
Source: Institute for Fiscal Studies
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
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
Total managed expenditure Current receipts
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
Total managed expenditure Current receipts
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
Total managed expenditure Current receipts
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
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 measures –0.7 +2.3Memo: financial sector –0.5 +0.1
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 –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
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)
+9.8% +13.0%
Social security and tax credits
+11.6% +19.6%
Central government debt interest
+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
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% 0 +6.5
Public services/admin
(current + capital DEL)
+9.8% +13.0% -0.1 +3.2
Social security and tax credits
+11.6% +19.6% +0.1 +2.4
Central government debt interest
+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
Total managed expenditure Current receipts
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
The squeeze on public spending
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
The squeeze on public spending
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?