Pre-Budget Report 2008: A return to bust?

1. Pre-Budget Report 2008: A return to bust? Carl Emmerson Institute for Fiscal Studies BBC Seminar, Monday 17th November 2008 (updated for new monthly public finance data on Thursday 20th November 2008) www.ifs.org.uk/budgets/pbr2008/index.php

2. Summary conclusions • March 2008 Budget forecast • borrowing to fall from combination of increased tax burden and cuts in spending as a share of national income • on course to continue to meet both fiscal rules • Sharp deterioration in outlook for economy and public finances • borrowing and debt to rise • on course to break one or both fiscal rule(s): rules suspended and new ones expected • Possible fiscal stimulus package • effective package would have to be targeted, timely and temporary • Future fiscal tightening? • expected combination of new tax raising measures / deeper cuts in public spending as a share of national income

3. The big picture: going forwards March 2008 Budget projections for receipts and spending Labour I Labour II Note: Budget 2008 GDP projections adjusted for FISIM. Source: HM Treasury; ONS; Author’s calculations.

4. Public spending March 2008 Budget projections for Total Managed Expenditure Note: Budget 2008 GDP projections adjusted for FISIM. Source: HM Treasury; ONS; Author’s calculations.

5. X No return to boom and bust? Output gap since 1979 Note: Alternative output gap assumes 2½% trend growth and constant interest rates at 3%. Sources: HM Treasury; Bank of England; Author’s calculations.

6. Worsening government finances (1) Cyclically-adjusted public sector net borrowing Note: Inferred from European Commission forecasts for general government borrowing. Source: HM Treasury; European Commission; Author’s calculations.

7. Worsening government finances (2) Public sector net debt, excluding Northern Rock, Bradford & Bingley, and other bank recapitalisations Note: Inferred from European Commission forecasts for general government debt. Source: HM Treasury; European Commission; Author’s calculations.

8. Fiscal stimulus could help? • Usually rely on interest rates to manage demand • but might be less effective during a credit crunch • ‘Automatic stabilisers’ also help • increased benefit spending and depressed tax receipts in a downturn • but unlikely to be optimal • New measures so far: • increased income tax personal allowance (£2.7bn in 2008–09); fuel duties frozen from September (£550m per six months); 1 year stamp duty cut (£600m) • Further active fiscal loosening could help, if: • targeted (boost spending on domestic goods) • timely (during the recession) • temporary (increased long-term borrowing risks higher interest rates) • Long-term fiscal tightening • expected combination of spending cuts as a share of national income and further tax raising measures

9. Opposition proposals Conservatives • Temporary NI cut for some firms hiring individuals who have been receiving out-of-work benefits for 3 months or more • might not get enough extra into work to be self-financing • but any net giveaway could help economy Liberal Democrats: • Abolish council tax, increase tax on polluters, those making large capital gains, and higher income pension savers (on average lower national income tax offset by new local income tax) • redistribution from savers to spenders could help economy • unclear that package is revenue neutral: any net giveaway would boost economy but would need subsequent action

10. Further options • Increase public investment • ensures giveaway spent domestically • difficult to spend well quickly • Giveaways to those on lower incomes • more likely to spend extra income & compensates 10p losers further • difficult to make temporary: requires subsequent tax increase elsewhere? • Boost firms investment allowances • might be a sensible long-term reform • again requires subsequent tax increase elsewhere • Temporary VAT reduction followed by permanent VAT increase • strong encouragement to spend now and improve public finances • not politically viable?

11. Summary conclusions • March 2008 Budget forecast • borrowing to fall from combination of increased tax burden and cuts in spending as a share of national income • on course to continue to meet both fiscal rules • Sharp deterioration in outlook for economy and public finances • borrowing and debt to rise • on course to miss one or both fiscal rules: rules suspended and new ones expected • Possible fiscal stimulus package • effective package would have to be targeted, timely and temporary • Future fiscal tightening? • expected combination of new tax raising measures / deeper cuts in public spending as a share of national income

12. Pre-Budget Report 2008: A return to bust? Carl Emmerson Institute for Fiscal Studies BBC Seminar, Monday 17th November 2008 (updated for new monthly public finance data on Thursday 20th November 2008) www.ifs.org.uk/budgets/pbr2008/index.php

13. Some numbers • Economic growth (%) • Budget 2008 forecasts: 2008 = 1¾ to 2¼; 2009 = 2¼ to 3; 2010 = 2½ to 3 • November 2008 BoE: 2008 = –1½; 2009 = ½ • Public sector net borrowing • Budget 2008 forecast: 2008–09 = £42.5bn • trend from first seven months + new measures: 2008–09 = £68bn • Public sector net debt (% of national income, excluding Northern Rock, Bradford and Bingley and other bank recapitalisations) • Budget 2008 forecast: 2008–09 = 38.5%; peaking at 39.8% in 2010–11 • could break 40% this year