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Meeting The Golden Rule
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Meeting the golden rule?
Christine Frayne
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
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Budget2001 -
Giveaway
Budget2001 -
Takeaway
Budget2005 -
Giveaway
Budget2005 -
Takeaway
£ bi
llion
Other
Pensioners
Home owners(?)
Anti-avoidance
Stamp duty
Oil companies
Children
Income tax
Motorists
Small pre-election giveaway
£3.5bn
–£0.3bn
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
Meeting the golden rule? (1)
2.2 2.2
1.0
-1.3-1.8
-1.4
-0.5
-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5
99–0
0
00–0
1
01–0
2
02–0
3
03–0
4
04–0
5
05–0
6
06–0
7
07–0
8
08–0
9
09–1
0
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
Current budget surplus, as a share of national income
Current cycle?
Source: HM Treasury
Meeting the golden rule? (1)
2.2 2.2
1.0
-1.3-1.8
-1.4
-0.5
0.00.3
0.6 0.8
-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5
99–0
0
00–0
1
01–0
2
02–0
3
03–0
4
04–0
5
05–0
6
06–0
7
07–0
8
08–0
9
09–1
0
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
Current budget surplus, as a share of national income
Next cycle?Current cycle?
Source: HM Treasury
Meeting the golden rule? (2)
-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5
99–0
0
00–0
1
01–0
2
02–0
3
03–0
4
04–0
5
05–0
6
06–0
7
07–0
8
08–0
9
09–1
0
Per
cent
age
of n
atio
nal i
ncom
e
Budget 02Budget 03Budget 04Budget 05
Source: HM Treasury
Cyclically adjusted current budget surplus, as a share of national income
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
-10.5
-12.5
-15.9 -16.1
-5.5-6.9
-13.4
-5.7
-18.0
-16.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
Budget 04 PBR 04IFS GreenBudget 05 Budget 05
£ bi
llion
2004-052005-06
Meeting the golden rule? (3)
-£10.8
Forecasting uncertainty
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1999
-200
0
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
Central
Source: IFS calculations
Current budget surplus, as a share of national income
Forecasting uncertainty
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1999
-200
0
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
20%
Central
20%
Source: IFS calculations
Current budget surplus, as a share of national income
Forecasting uncertainty
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1999
-200
0
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
40%
20%
Central
20%
40%
Source: IFS calculations
Current budget surplus, as a share of national income
Forecasting uncertainty
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1999
-200
0
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
60%
40%
20%
Central
20%
40%
60%
Source: IFS calculations
Current budget surplus, as a share of national income
Forecasting uncertainty
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1999
-200
0
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
80%60%40%20%Central20%40%60%80%
Source: IFS calculations
Current budget surplus, as a share of national income
Forecasting uncertainty
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1999
-200
0
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
Financial year
Per
cent
age
of n
atio
nal i
ncom
e
80%60%40%20%Central20%40%60%80%
Source: IFS calculations
Current budget surplus, as a share of national income
Will the golden rule be met?
82.2%74.2%
59.1%62.9%
44.5%
0%
20%
40%
60%
80%
100%
Budget 02 Budget 03 Budget 04 Budget 05 IFS GreenBudget 05
Per
cent
age
Source: IFS Calculations
Taxes to rise, spending to stabilise?
35.0
36.0
37.0
38.0
39.0
40.0
41.0
96
–9
7
97
–9
8
98
–9
9
99
–0
0
00
–0
1
01
–0
2
02
–0
3
03
–0
4
04
–0
5
05
–0
6
06
–0
7
07
–0
8
Pe
rce
nta
ge
of n
atio
na
l in
com
e
Current expenditureCurrent receiptsGreen Budget revenue projection
Source: HM Treasury; IFS Green Budget
Forecast growth in revenues
4.4
0.5
2.0
3.5
3.5
4.7
13.2
0 5 10 15
Excise Duties
VAT
'Other taxes and royalties'
NICs
Income tax
Corporation Tax
Of which
Current receipts
Average annual real growth
Average annual real growth in revenues, 2004–05 to 2007–08
Source: HM Treasury
The parties compared: 2007–08
Tory Lib Dem
Net change in tax
–£4bn +£4bn
Net change in spending
–£12bn +£4bn
Net change in borrowing
–£8bn No change
The parties compared: 2007–08
Tory Lib Dem
Labour
baseline
plans
Net change in tax
–£4bn +£4bn +£25bn
Net change in spending
–£12bn +£4bn +£13bn
Net change in borrowing
–£8bn No change –£11bn
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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