FSR 2011 Presentation Final

7/31/2019 FSR 2011 Presentation Final

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Fiscal sustainability report 2011Robert Chote

Chairman

13 July 2011


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Preamble

OBR set up in 2010 to provide independent andauthoritative analysis of the UK public finances

FSR is our first assessment of the long-term health andsustainability of the public finances, complementing ourmedium-term forecasts

BRC responsible for the conclusions, drawing on timeand expertise of full-time OBR staff, governmentdepartments and advisory panel

Chancellor received draft analysis on 30 June and finalreport on 12 July

No pressure to change conclusions from ministers orapparatchiks


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Our approach in the report

Look at the impact of past government activity Measures of assets and liabilities on the public sectorbalance sheet

Make use of new Whole of Government Accounts (WGA)data

Look at the potential impact of future governmentactivity 50-year projections of spending, revenues and financial

transactions

Make projections of budget deficits and public sector net

debt Judge sustainability and quantify possible need for fiscaltightening


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Our approach in the report

Look at the impact of past government activity Measures of assets and liabilities on the public sectorbalance sheet

Make use of new Whole of Government Accounts (WGA)data

Look at the potential impact of future governmentactivity 50-year projections of spending, revenues and financial

transactions

Make projections of budget deficits and public sector net

debt Judge sustainability and quantify possible need for fiscaltightening

Four points: 50-year projections inevitably have big uncertainties around

them Unchan ed olic not alwa s strai htforward to define


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Public sector net debt and net worth

-20

-10

0

10

20

30

40

50

60

70

80

90

1986-87 1990-91 1994-95 1998-99 2002-03 2006-07 2010-11 2014-15

Percent

ofG

Public sector net debt Public sector net worth

EFO forecast


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Public service pension liabilities inWGA

Public service pension liabilities rose 331 billionin 2009-10

But almost 260 billion of the increase reflected afall in the discount rate from 3.2% to 1.8%, nothigher expected payments

The discount rate will rise again to 2.9% in 2010-11

802

1133

0

200

400

600

800

10001200

March 2009 March 2010

billions


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Private finance initiative capitalliabilities

29.9

40

5.10

10

20

30

40

50

On balancesheet in PSND

On balancesheet in WGA

Total on andoff balance

sheet

billioninMarch2010


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Provisions and contingent liabilities

WGA liabilities include 107bn (7% of GDP) ofprovisions

Costs where probability of incurring less than 100% butmore than 50%

Main items: nuclear decommissioning and clinicalnegligence

WGA also notes 207bn (14.4% of GDP) ofcontingent

liabilities

Costs where probability of incurring is less than 50% butmore than 0%

Main items: 175bn of financial sector guarantees andundertakings


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Stocks and flows

WGA are a welcome boost to transparency with widercoverage

They will become increasingly useful as time seriesbuilds up

But balance sheets alone of limited value in judgingsustainability

They omit future flows arising from future government

activity:

Future spending on public services and transfers

Future tax revenues

When in doubt, go with the flows


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Assumptions: demography

Ageing population pastrises in life expectancy andfalls in fertility plus babyboom bulge

ONS population projections

Our central projectionassumes: 65+ proportion rises from

17% in 2011 to 26% in

2061 Net inward migration

averages roughly halfrecent levels

We also show sensitivity toolder and younger age

Figuresrefer toannualgrowthrates

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

2 0 1 1 2 0 6 1

PercentofUKpopulation

0 - 1 5 1 6 - 5 4 5 5 - 6 4 6 5 - 8 4 8 5 +

2 . 7

0 . 9

0 . 2

0 . 1

0 . 2


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Assumptions: economy

Whole economy productivity growth averages 2% ayear, in line with long-run historical experience

Also show sensitivity to 1.5% and 2.5% productivitygrowth

CPI inflation at 2%, consistent with Bank of Englandtarget

GDP deflator rises 2.7% a year


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Assumptions: unchanged policy

Income tax / NICs allowances rise by earnings post2015-16 Price up-rating would push 3.9m extra people into higher

rate tax and would increase receipts by 2.6% of GDP by2030-31

Most working age benefits rise by earnings post 2015-16 Price up-rating would reduce benefit generosity relative to

average living standards and would cut costs by 1.6% ofGDP by 2030-31


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Income tax / NICs allowances rise by earnings post2015-16 Price up-rating would push 3.9m extra people into higher




Receipts and income losses from proposed asset salesnot included in central projection as details currentlytoo vague to estimate with reasonable accuracy. Butrisks discussed in online annex.


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Income tax / NICs allowances rise by earnings post 2015-16 Price up-rating would push 3.9m extra people into higher




Receipts and income losses from proposed asset salesnot included in central projection as details currently toovague to estimate with reasonable accuracy. But risksdiscussed in online annex.

Assume public services spending rises with per capitaGDP, but show scenario in which unchanged policy

means raising health spending by 3% a year in realterms to offset weaker productivity growth


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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 5.0State 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 9.4Spending 44.2 36.3 36.6 38.8 40.0 40.4 41.7

Per cent of GDP

FSR ProjectionEstimate


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Gross public service pensionpayments

0.0

0.5

1.0

1.5

2.0

2.5

2010-11 2020-21 2030-31 2040-41 2050-51 2060-61

Perce

ntofGDP

Existing pensioners and deferreds Existing actives past service

Existing actives future service Future new entrants

EFO

forecastFSR projection


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Results: non-interest revenues

2010-112015-162020-212030-312040-412050-512060-61

Income 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 6.4Corporation 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


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Non-demographic influences onrevenues

Outside our central projection, we look at severalrevenue streams:

income tax: revenues would increase if income growth isskewed toward the top of the income distribution

transport taxes: better fuel efficiency could reduce revenue

North sea revenues: projected to decline as production falls

climate change levy / EU ETS: revenues look likely to rise

tobacco duty: revenues fall if consumption continues falling

Net effect: revenues could fall by up to 2% of GDP by2030-31


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Long term revenue and spendingprojections

30

35

40

45

50

2010-11 2020-21 2030-31 2040-41 2050-51 2060-61

Perce

ntofGDP

Non-interest spending Non-interest revenue

EFO

forecastFSR projection


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Primary budget balance

-6

-4

-2

0

2

4

6

2015-2016

2020-2021

2025-2026

2030-2031

2035-2036

2040-2041

2045-2046

2050-2051

2055-2056

2060-2061

percentofG


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Impact of student loans on PSND

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010-11 2020-21 2030-31 2040-41 2050-51 2060-61

Increase fees and

maintenance loans by

earnings

Increase fees and

maintenance loans by

inflation

Percen

tofGD

EFOforecast FSR projection


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Public sector net debt

-50

0

50

100

150

200

250

2010-11 2020-21 2030-31 2040-41 2050-51 2060-61

PercentofGDP

Constant primary balance

EFO

forecast

FSR projection


23/31


-50

0

50

100

150

200

250

2010-11 2020-21 2030-31 2040-41 2050-51 2060-61

PercentofGDP

Central Constant primary balance

EFO

forecast

FSR projection


24/31


-50

0

50

100

150

200

250

2010-11 2020-21 2030-31 2040-41 2050-51 2060-61

PercentofGDP

CentralConstant primary balance

Real health spending per person growth of 3 per cent per annum

EFO

forecast

FSR projection


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Economic feedbacks

Budget deficits provide helpful boost to the economywhen private spending unusually depressed

But higher debt and deficits over the long term mayreduce national saving, increase interest rates and

crowd out investment

This could reduce GDP and worsen fiscal position

Historical correlations suggest central projection deficitpath would reduce GDP, but only modestly

But not necessarily good guide to the future


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Sensitivity analysis

Considerable uncertainty around any 50 yearprojections

Outlook for debt would be worse if: Population structure older

Productivity growth slower

Long run interest rates higher relative to long rungrowth rates

Higher net migration would improve outlook asimmigrants more likely to be of working age

But effect will erode as immigrants reach oldage


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Achieving sustainability

Satisfy inter-temporal budget constraint Permanent tightening of 3% of GDP from 2016-17

Fiscal gap: achieve PSND of 40% of GDP in

2060-61 Permanent tightening of 1.5% of GDP from 2016-17

Permanent tightening of 3.9% of GDP from 2016-17 ifper capital health spending rises 3% a year in realterms

If structural budget position 1% of GDP better orworse in 2015-16 than we forecast in March,necessary fiscal tightening less or greater by thesame amount

Could tighten 0.5% of GDP per decade rather than

1.5% one-off


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Timing the response: one-off

-3

-2

-1

0

1

2

3

4

2016-2017 2024-2025 2032-2033 2040-2041 2048-2049 2056-2057

0

10

20

30

40

50

60

70

Required adjustment (LHS) PSND (RHS)

perc

entofGDP

percentofGDP


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Timing the response: decade bydecade

-3

-2

-1

0

1

2

3

4

2016-2017 2024-2025 2032-2033 2040-2041 2048-2049 2056-2057

0

10

20

30

40

50

60

70


per

centofGD

percentof

GDP


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Timing the response: holding debtflat

-3

-2

-1

0

1

2

3

4

2016-2017 2024-2025 2032-2033 2040-2041 2048-2049 2056-2057

0

10

20

30

40

50

60

70


percentofGD

percentofGDP


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Conclusions

WGA bring a welcome increase in transparency

Balance sheets limited as a guide to sustainability

Ageing population increases fiscal costs, here andabroad

More tightening likely to be needed post-

consolidation

Long term projections uncertain, but should notbe ignored

Documents

FSR 2011 Presentation Final