Meeting the fiscal rules?

Meeting the fiscal rules?

Gemma Tetlow

Institute for Fiscal Studies

Strengthening the public finances

Source: HM Treasury; IFS

% GDP PBR 2007 Budget 2008

Spending cuts

CSR 07 years

SR 09 years

Tax increase

Overall current budget tightening

+1.7% +1.6%

Change in current budget balance, 2007–08 to 2012–13




Spending cuts –0.7%

CSR 07 years

SR 09 years

Tax increase +1.0%


+1.7% +1.6%





Spending cuts –0.7% –0.9%

CSR 07 years

SR 09 years

Tax increase +1.0% +0.7%


+1.7% +1.6%






CSR 07 years –0.4% –0.3%

SR 09 years



+1.7% +1.6%






CSR 07 years –0.4% –0.3%

SR 09 years –0.3% –0.6%



+1.7% +1.6%




2007–08 terms PBR 2007 Budget 2008

Spending cuts –£10bn –£12bn

CSR 07 years –£6bn –£4bn

SR 09 years –£4bn –£8bn

Tax increase +£14bn +£9bn


+£24bn +£22bn


The big picture

35

36

37

38

39

40

41

42

43

96

–9

7

97

–9

8

98

–9

9

99

–0

0

00

–0

1

01

–0

2

02

–0

3

03

–0

4

04

–0

5

05

–0

6

06

–0

7

07

–0

8

08

–0

9

09

–1

0

10

–1

1

11

–1

2

12

–1

3

Financial year

Pe

rce

nta

ge

of

na

tion

al i

nco

me

ReceiptsCurrent expenditureTotal expenditure

Source: HM Treasury

Labour I Labour II

The fiscal rules• Golden Rule

• Borrow only to invest• Current budget balance or surplus• Judged over the economic cycle

• Sustainable Investment Rule• Debt at a stable and prudent level• This cycle: ≤40% of national income every

year

Source: HM Treasury

Current budget balance

-0.1

1.2

2.3 2.4

1.2

-1.0-1.5 -1.6

-1.1-0.3 -0.6 -0.7

-0.2

0.3 0.61.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

97–9

8

98–9

9

99–0

0

00–0

1

01–0

2

02–0

3

03–0

4

04–0

5

05–0

6

06–0

7

07–0

8

08–0

9

09–1

0

10–1

1

11–1

2

12–1

3

Per

cent

age

of n

atio

nal i

ncom

e

Outturns

Budget 08 forecast

Source: HM Treasury

Meeting the golden rule?

-40

-20

0

20

40

60

80

100

120

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th 16th

Financial year of the cycle

Cum

ulat

ive

surp

lus

£bn,

2007

–08

term

s

Cycle starting in 1997-98

Cumulative current budget balance



-40

-20

0

20

40

60

80

100

120



Cum

ulat

ive

surp

lus

£bn,

2007

–08

term

s






-40

-20

0

20

40

60

80

100

120



Cum

ulat

ive

surp

lus

£bn,

2007

–08

term

s




Current budget balances

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

99

–0

0

00

–0

1

01

–0

2

02

–0

3

03

–0

4

04

–0

5

05

–0

6

06

–0

7

07

–0

8

08

–0

9

09

–1

0

10

–1

1

11

–1

2

12

–1

3

Pe

rce

nta

ge

of

na

tion

al i

nco

me

Budget 01 Budget 02Budget 03 Budget 04Budget 05 Budget 06Budget 07 Budget 08

Source: HM Treasury

The fiscal rules• Golden Rule

• Borrow only to invest• Current budget balance or surplus• Judged over the economic cycle

• Sustainable Investment Rule• Debt at a stable and prudent level• This cycle: ≤40% of national income every

year• Now defined excluding Northern Rock

Will the investment rule be met?

0

10

20

30

40

50

60

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Financial year

Per

cent

age

of n

atio

nal i

ncom

e

Budget 2008

Ceiling



0

10

20

30

40

50

60

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Financial year

Per

cent

age

of n

atio

nal i

ncom

e

Budget 2008

Ceiling

Includingestimatedimpact ofNorthern Rock



0

10

20

30

40

50

60

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Financial year

Per

cent

age

of n

atio

nal i

ncom

e

Budget 2008

Ceiling


Meeting the net debt rule?

0.21.2

9.79.0

6.2

3.62.9

1.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Budget01

Budget02

Budget03

Budget04

Budget05

Budget06

Budget07

Budget08

% o

f na

tion

al i

nco

me


Minimum forecast headroom from 40% ceiling

Meeting the net debt rule?

2.816.9

136.3126.5

87.1

50.640.7

22.5

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Budget01

Budget02

Budget03

Budget04

Budget05

Budget06

Budget07

Budget08

£bn,

200

7-08

term

s


Minimum forecast headroom from 40% ceiling

Risks to the public finances

• Economic downturn deeper/more prolonged• Underlying receipts weaker than Treasury

believes• Though Budget 2008 projection now closer

to Green Budget 2008• Political pressure for greater giveaways

Greater giveaways ahead?

• One-off enhanced payment for over-60s• Maybe over-60s equally deserving next winter?• Cost £575 million per year

• Fuel duty: delay 2p nominal increase until October• Maybe oil price will remain high?• Cost £550 million per six months

• Gift aid: 2p cut in charity relief delayed for 3 years• Maybe charities equally deserving in year four?• Cost £120 million per year

• To make these policies permanent: £2bn a year

Conclusions

• £7½bn deterioration in public finances• Financed by new measures, tighter

Spending Review 2009 and higher borrowing

• No room to manoeuvre against either fiscal rule• Debt rule could easily be breached in 2010–

11• Increased pressure for further giveaways?

Documents

Meeting the fiscal rules?