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Meeting the Golden Rule: Fiscal Challenges Ahead

Explore the changes since PBR 2004 and forecasts for economic growth. Discover the impact of higher equity prices, lower NICs, and corporation profits on fiscal balances. Analyze the Chancellor's fiscal rules, the concept of the golden rule, and the sustainable investment rule. Assess the current and future budget surpluses, ONS revisions, and forecasting uncertainties. Delve into tax policies, revenue growth projections, and the looming challenges in meeting fiscal targets. Stay informed about potential tax increases and the necessity for new measures to ensure fiscal sustainability.

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Meeting the Golden Rule: Fiscal Challenges Ahead

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  1. Meeting the golden rule? Christine Frayne

  2. Changes since PBR 2004 • Forecasts for economic growth unchanged • Small forecasting changes • Higher equity prices boost current & future receipts • But lower NICs and public sector corporation profits • Small net discretionary change • £265m tightening in 2005–06 • Small net giveaway thereafter

  3. £3.5bn –£0.3bn Small pre-election giveaway

  4. The Chancellor’s fiscal rules • Golden rule: only borrow to invest • Receipts cover current spending • Surplus or balance on current budget • Judged over the economic cycle • Sustainable investment rule: debt at a ‘stable and prudent’ level, <40% of national income

  5. Current cycle? Meeting the golden rule? (1) Current budget surplus, as a share of national income Source: HM Treasury

  6. Next cycle? Current cycle? Meeting the golden rule? (1) Current budget surplus, as a share of national income Source: HM Treasury

  7. Meeting the golden rule? (2) Cyclically adjusted current budget surplus, as a share of national income Source: HM Treasury

  8. Room to manoeuvre? • PBR 2nd December 2004 • Golden rule met with £8bn to spare • ONS revision 28th February 2005 • Margin increases by £3bn • Golden rule now met with £11bn to spare • Budget 16th March 2005 • Golden rule now met with £6bn to spare

  9. -£10.8 Meeting the golden rule? (3)

  10. Forecasting uncertainty Current budget surplus, as a share of national income Source: IFS calculations

  11. Forecasting uncertainty Current budget surplus, as a share of national income Source: IFS calculations

  12. Forecasting uncertainty Current budget surplus, as a share of national income Source: IFS calculations

  13. Forecasting uncertainty Current budget surplus, as a share of national income Source: IFS calculations

  14. Forecasting uncertainty Current budget surplus, as a share of national income Source: IFS calculations

  15. Forecasting uncertainty Current budget surplus, as a share of national income Source: IFS calculations

  16. Will the golden rule be met? Source: IFS Calculations

  17. Taxes to rise, spending to stabilise? Source: HM Treasury; IFS Green Budget

  18. Forecast growth in revenues Average annual real growth in revenues, 2004–05 to 2007–08 Source: HM Treasury

  19. The parties compared: 2007–08

  20. The parties compared: 2007–08

  21. Conclusions • Public finances little changed since the PBR • Despite £3bn improvement from ONS revision • Over current economic cycle • Whether golden rule is met likely to go to the wire • Over the next economic cycle • Tax burden set to grow • New tax raising measures might still be required

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