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Welcome to the Influence Conference 2013
Nicky AlberryChairman
Economic and Fiscal Outlook
March 2013
Matteo CarrozzaSenior Economist
3
What to expect in the next 50 minutes:
Economic and fiscal analysis– Growth prospects
– UK fiscal outlook vs. other economies
– Current spending plans
What could be done.– How to analyse proposals (effect on short term, long term, distributional)
– Proposals advanced so far
Q & A, and your proposals
4
Sluggish is an understatement…..worse than the 1930s
Source: ONS/BoE
92
93
9495
96
97
98
99
100101
102
103t
t+2
t+4
t+6
t+8
t+10
t+12
t+14
t+16
t+18
UK Economic Output (Index, t = business cycle peak)
2008
1930s
Quarters
5
Global outlook bleak, but UK performance disappointing
6
Employment is only ‘positive’…
93
94
95
96
97
98
99
100
101
t
t+4
t+8
t+12
t+16
t+20
t+24
t+28
t+32
t+36
t+40
t+44
t+48
t+52
t+56
t+60
UK Employment (Business Cycle Peak = 100)
2008
1980
1990
7
…but wage growth weak, and productivity low
8
UK deficit remains very high…
9
…although debt position is considerably better
10
…and borrowing costs remain low
11
Current plans expect 4 more years of fiscal consolidation
Scale of tightening broadly unchanged over the next two years, pace of tightening starts easing only by 2015/16.
Most of the tightening comes from spending cuts, rather than tax rises
Cumulative tightening, as % of GDP
0123456789
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
Perc
enta
ge o
f nati
onal
inco
me Other current spend
Debt interestBenefitsInvestmentTax increases
12
With most of the cuts still to come
% of cuts not implemented by March 2013
58%
17%
67%
33%
59%
77%
0%10%20%30%40%50%60%70%80%90%
All fiscaltightening
Tax increases Totalspending
cuts
Investmentcuts
Benefit cuts Othercurrent
spendingcuts
% n
ot im
plem
ente
d by
…
13
Time for changing fiscal policy?
Arguments for changes– Growth has been much worse than expected, indicating that perhaps fiscal
tightening ought to be postponed
– Size of the fiscal multiplier may be larger than expected
– Borrowing costs remain low, as long as return on investment is higher than 3%, postponing adjustment may be beneficial in short and long run
Arguments against changes– Danger that changes to fiscal policy result in eventual rise in borrowing
costs, which could be sudden
– Uncertainty with regards to amount of spare capacity, which may be smaller than we think (note: not an argument the OBR/HMT make)
14
How to evaluate fiscal policy changes? What is the short run impact? This depends on the fiscal multiplier of
policy change, and generally the higher the propensity to spend the higher the multiplier. i.e. an infrastructure project has generally a higher multiplier than say a tax cut. Some of the windfall of tax cut will be saved, rather than spent. Also, how much is spent domestically?
What is the long run impact? This depends on whether this measure provides positive long term incentives. A policy which for instance encourages more people to work, or invest, would have a beneficial long run effect. With regards to investment, is it a useful investment project, or is it a wasteful project.
What is the distributional effect? Politics, not economics, though distribution is important as it can impact effectiveness of the proposal.
15
What changes are scheduled to take place? Departmental spending & benefits
– Further departmental cuts
Taxes– Small increases in personal allowance
– Income tax rate above 150,000 from 50% to 45%
– Freezing of special personal allowance for people older 65, i.e ‘granny tax’
BENEFIT CHANGE
JSA, Employment allowance and other work benefits
Rise limited to 1%
Child benefits Frozen till 2014. Then 1%
Maternity leave Rise limited to 1%
Housing benefits New rules, bedroom tax, + 1% increase
16
Should there be higher government investment? Short run effect
– Large multiplier. Very labour intensive, most spent domestically
– ‘Shovel ready’?
Long run effect– Effectiveness would depend on usefulness of investment. Most likely to
have positive long-run effect are investments in transport, energy, and housing. Note: these are the type of projects which generally attract most opposition (HS2, Heathrow expansion, wind farms, etc)
Distributional– Many people benefit from better infrastructure, but there are localised losers
17
Should there be tax cuts? Short run effect
– Multiplier depends on propensity to consume it, rather than save it. ‘US-style tax rebates’ would have highest multiplier, changes in tax allowance or VAT cuts less so.
Long run effect– Hard to assess. It partly depends on assessment of spare capacity, and
how deficient demand is
Distributional– Depends on how they are applied
18
What Budget proposals have been advanced? CBI
– They propose a fiscally neutral Budget, in which £2.2bn of further cuts in current spend is used to finance extra £1.25bn of investment and £950m in tax cuts.
– Infrastructure investment focused on housing and improved transport. Tax cuts focused on cap on business rates, and freeze of air passenger duty.
– Measures are quite small (£2.2bn), and neutral, so unlikely to have a major impact. Using OBR’s own estimates of multipliers for different policies - which range from 0.3 to 1 – and assuming that proposals deliver most ‘bang for your buck’ the increase in GDP would be negligible.
Others– Various politicians have proposed making further cuts to current spend,
either in welfare or in some specific department, to fund increased investment.
19
To conclude Don’t expect much change, with fiscal tightening to continue for until 2016/17,
probably longer Fiscally neutral changes unlikely to deliver much stimulus, especially in the
short term If growth is priority, then extra borrowing to finance infrastructure would deliver
most bang for your buck. See IFS simulations
20
Your proposals and Q&A?
Thank you
We hope you’ve enjoyed your day.
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Thanks to Vox and Business West for their help in organising today.
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