The public finances

1. The public finances Robert Chote Carl Emmerson Christine Frayne

2. Outline • Fiscal policy framework • the fiscal rules • assessment over the economic cycle • potential reform to the fiscal policy framework • Green Budget forecasts • short and medium-term fiscal projections • risks • budget judgement

3. The Chancellor’s fiscal rules • ‘Golden rule’ • only borrow to invest • judged over the economic cycle • Sustainable investment rule • net debt below 40% of national income

4. Meeting the golden rule?

5. Recent forecasting errors Treasury estimates of current budget surplus

6. Will the golden rule be met? (1)

7. Will the golden rule be met? (1)

8. Will the golden rule be met? (1)

9. Will the golden rule be met? (1)

10. Will the golden rule be met? (2)

11. Next cycle? Current cycle? Stress testing the golden rule Cyclically adjusted current budget surplus, as a share of national income

12. Next cycle? Stress testing the golden rule Cyclically adjusted current budget surplus, as a share of national income

13. The Chancellor’s fiscal rules • ‘Golden rule’ • only borrow to invest • judged over the economic cycle • Sustainable investment rule • net debt below 40% of national income

14. Meeting the investment rule?

15. Will the investment rule be met?

16. Will the investment rule be met?

17. Will the investment rule be met?

18. Will the investment rule be met?

19. Will the investment rule be met?

20. Reforming the fiscal framework • Golden rule • intergenerational fairness • asymmetric target • retrospective v forward-looking measure • Net debt rule • off balance sheet activities • 40% debt ceiling too high? • 40% debt ceiling too low?

21. Status quo Potential institutional reform Fiscal policy delegation All fiscal policy Audited assumptions Budget approval Full tax powers No delegation Rule compliance Limited tax powers Sets fiscal rules

22. Outline • Fiscal policy framework • the fiscal rules • assessment over the economic cycle • potential reform to the fiscal policy framework • Green Budget forecasts • short and medium-term fiscal projections • risks • budget judgement

23. Green budget forecasts • Current economic cycle • golden rule to be met or missed by a small margin • sustainable investment rule to be met • Next economic cycle • golden rule more likely than not to be missed • 50/50 chance of debt exceeding 40% in 2008–09 • Budget judgement • to restore caution to the level sought in last Budget would require a tax increase of at least £11bn

24. Forecasts for 2004–05 £ billion

25. Forecasts for 2004–05 £ billion

26. Forecasts for 2004–05 £ billion

27. Forecasts for 2004–05 £ billion

28. Baseline assumptions • Economy performs as Treasury expects • Contingency reserve reset to usual levels • Current spending to remain constant as a share of national income beyond March 2008 • Corporation Tax receipts return to long-run average share of national income

29. Treasury forecast optimistic? Analysis by Graham Secker, Morgan Stanley Research

30. Receipts forecasts

31. Current spending forecasts

32. Meeting the golden rule? Cyclically adjusted current budget balance

33. Budget judgement

34. Budget judgement • surplus of 0.0% in 2006–07 = £11bn • surplus of 0.3% in 2007–08 = £13bn

35. Budget judgement 2. surplus of 0.7% in 2009–10 = £12bn

36. Budget judgement • 50/50 chance over 7 year cycle • starting in 2006–07 = £5½bn

37. Budget judgement • 50/50 chance over 7 year cycle • starting in 2006–07 = £5½bn 4. 50/50 chance over 7 year cycle starting in 2005–06 = £8bn

38. 0.0% 0.2% 0.5% 0.8% 1.1% 1.7% Conservatives’ proposals

39. Conclusion • Over the current cycle • golden rule should be met if cycle ends in 2004–05 • 33% chance of success if cycle ends in 2005–06 • Over the next cycle • length of next cycle crucial, but • at least £11bn tax increase for caution to be restored to levels recently sought by the Chancellor • smaller tax increases would be required if a 50/50 chance of success were acceptable