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The public finances

The public finances. Christine Frayne Institute for Fiscal Studies www.ifs.org.uk. Public finances overview. The framework within which public finance decisions are made in the UK Go over numbers Illustrate theoretical issues. Public finances overview 2.

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The public finances

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  1. The public finances Christine Frayne Institute for Fiscal Studies www.ifs.org.uk

  2. Public finances overview • The framework within which public finance decisions are made in the UK • Go over numbers • Illustrate theoretical issues

  3. Public finances overview 2 • Politically the public finances are closely watched • Overall: • Borrowing • Debt • Constituent parts: • Receipts (tax revenues) • Spending • Why do we care about these?

  4. Revenues (taxes) Personal Macroeconomic Borrowing Indicator of sustainability Political economy Inflation Spending Services/redistribution Crowding out/efficiency Debt Sustainability Debt repayments Hedging of risks/ safe borrowing Why do we care about the levels of public finances figures?

  5. Constraints on borrowing and debt • UK: Code for fiscal stability and fiscal rules • Common in other OECD countries • Stability and growth pact • Credibility

  6. Determining fiscal policy – The fiscal rules (1) • The Golden Rule: the government will borrow only to invest. • Intergenerational equity • Borrowing smaller or equal to capital spending • Surplus on current budget • By definition: Current budget = revenues – current spending • Assessed over the economic cycle • Backward looking versus forward looking

  7. Determining fiscal policy – The fiscal rules (2) • Sustainable investment rule: Ratio of net public sector debt to GDP set at “stable & prudent level” - 40%. • Sustainability • Again assessed over the cycle for the moment • Optimal? • Crude capital/current split • Level for debt • No direct relationship between MC and MB

  8. Meeting the golden rule? Current budget surplus as a share of GDP, 1966-67 to 2005-06 Forecasts Note: HM Treasury forecasts, excluding the windfall tax and associated spending

  9. Current budget balance Source: HM Treasury

  10. Current budget balance Source: HM Treasury

  11. A changing cycle? Budget 05: 7 year cycle Source: HM Treasury ; Morgan Stanley

  12. A changing cycle? PBR 05 and Budget 06: 12 year cycle Budget 05: 7 year cycle Source: HM Treasury ; Morgan Stanley

  13. A changing cycle? PBR 05 and Budget 06: 12 year cycle Budget 05: 7 year cycle PBR 06: 10 year cycle Source: HM Treasury ; Morgan Stanley

  14. Meeting the sustainable investment rule Net debt (% GDP) PSNB (% GDP)

  15. Revenues and spending Note: HM Treasury forecasts, excluding the windfall tax and associated spending

  16. The Cycle GDP growth Discretionary measures Change in the tax base Higher denominator Taxes more cyclical Fiscal drag: progressivity of tax system Direct intervention Shocks to tax base: e.g. industry / North Sea Oil Changes in the tax burden

  17. Why have tax revenues gone up? Note: Increase between 1996–97 and 2007–08

  18. Why have tax revenues gone up? Note: Increase between 1996–97 and 2007–08

  19. Why have tax revenues gone up? Note: Increase between 1996–97 and 2007–08

  20. Why have tax revenues gone up? Note: Increase between 1996–97 and 2007–08

  21. The public finances Christine Frayne Institute for Fiscal Studies www.ifs.org.uk

  22. Annually managed expenditure social security payments debt interest devolved parliaments autonomous local gov. Departmental Expenditure Limits 3 year spending rounds: CSR July 98, SR 2000, SR 2002, SR 2004 and CSR 07 expected for 2008-09, 08-10 and 10-11 Already have ideas Total Managed Expenditure Capital/Current budgets planned separately

  23. Total Managed Expenditure Source: HM Treasury

  24. A challenging spending review?

  25. A challenging spending review?

  26. A challenging spending review?

  27. What might the trade-off be? • Health spending • Wanless Review recommended minimum 4.4% annual growth in spending • Education spending • State school spending per pupil to match that in the private sector in 2005–06 • Child poverty • £4½ billion needed to meet 2010–11 target

  28. What increases might we have? 9 smaller departments Department for Constitutional Affairs Source: HM Treasury ; IFS

  29. What increases might we have? 9 smaller departments Department for Constitutional Affairs Source: HM Treasury ; IFS

  30. The public finances Christine Frayne Institute for Fiscal Studies www.ifs.org.uk

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