Transcript Heading for presentation - Chartered Institute of Housing

The fiscal state of the nation
Paul Johnson
Chartered Institute of Housing Conference
June 12 2012
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Since 2008...
• Following a long period of growth, GDP has fallen dramatically and
failed to recover
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GDP has nowhere near recovered pre-crisis
levels
115
2007Q1–2014Q1
Peak = 100
110
105
100
95
Quarters from peak
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24
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
90
A completely different story than previous
recessions
115
2007Q1–2014Q1
1989Q2–1996Q2
Peak = 100
110
1978Q4–1985Q4
105
100
95
Quarters from peak
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24
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
90
Since 2008...
• GDP has fallen dramatically and failed to recover
• Trend output is now expected to be 13% smaller in
2016 than had been forecast in Budget 2008
– The economy will be about £200 billion smaller than
expected
• This is expected to be a permanent loss
– Depends on uncertain estimates of the “output gap”
• And, along with effects of tax and benefit changes
will lead to a big fall in household incomes
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Household incomes falling to unprecedented degree
Median net household income
(indexed to 2009=100)
100
99
98
97
96
95
94
93
92
91
90
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
Sources: Department for Work and Pensions’ HBAI series; IFS calculations and projections using Family Resources Survey.
© Institute for Fiscal Studies
Since 2008...
• GDP has fallen dramatically and failed to recover
• Trend output is now expected to be 13% smaller in
2016 than had been forecast in Budget 2008
– The economy will be about £200 billion smaller than
expected
• This is expected to be a permanent loss
– Depends on uncertain estimates of the “output gap”
• And, along with effects of tax and benefit changes
will lead to a big fall in household incomes
• And a big public finance problem
© Institute for Fiscal Studies
This has created a hole in the public
finances
Total spending (Budget 2008)
Total spending (no action)
Permanent
damage =
7.5% of GDP
(£114bn)
Receipts (Budget 2008)
Receipts (no action)
50.0
45.0
40.0
© Institute for Fiscal Studies
Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.
2016–…
2015–…
2014–…
2013–…
2012–…
2011–…
2010–…
2009–…
2008–…
2007–…
2006–…
2005–…
2004–…
2003–…
2002–…
2001–…
2000–…
1999–…
1998–…
30.0
1997–…
35.0
1996–…
Percentage of national
income
55.0
1974–75
1977–78
1980–81
1983–84
1986–87
1989–90
1992–93
1995–96
1998–99
2001–02
2004–05
2007–08
2010–11
2013–14
2016–17
2019–20
2022–23
2025–26
2028–29
2031–32
2034–35
2037–38
2040–41
2043–44
2046–47
2049–50
Percentage of national
income
Which has to be dealt with
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: No policy action
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Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
The government plans to do that over 7 years
(original plan to do so over 5 years)
Percentage of national
income
9
8
7
6
5
Nov 2011: 7.5% national income (£114bn) hole in public
finances
Other current spend
Debt interest
Benefits
Investment
Tax increases
80%
4
3
2
1
20%
0
2010–11
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2011–12
2012–13
2013–14
2014–15
2015–16
Notes and sources: see Figure 3.5 of The IFS Green Budget: February 2012.
2016–17
Which just leads to fiscal mandate being
met..
Total spending (Budget 2008)
Receipts (no action)
Total spending (November 2011)
50.0
Receipts (Budget 2008)
Total spending (no action)
Receipts (November 2011)
45.0
40.0
© Institute for Fiscal Studies
Notes and sources: see Figure 3.6 of The IFS Green Budget: February 2012.
2016–…
2015–…
2014–…
2013–…
2012–…
2011–…
2010–…
2009–…
2008–…
2007–…
2006–…
2005–…
2004–…
2003–…
2002–…
2001–…
2000–…
1999–…
1998–…
30.0
1997–…
35.0
1996–…
Percentage of national
income
55.0
1974–75
1976–77
1978–79
1980–81
1982–83
1984–85
1986–87
1988–89
1990–91
1992–93
1994–95
1996–97
1998–99
2000–01
2002–03
2004–05
2006–07
2008–09
2010–11
2012–13
2014–15
2016–17
2018–19
2020–21
2022–23
2024–25
2026–27
2028–29
2030–31
2032–33
2034–35
2036–37
2038–39
2040–41
Percentage of national
income
Debt back on a more sustainable path
- but to remain above pre-crisis levels for a
generation
200
180
160
140
120
100
80
60
40
20
0
Debt: Budget 2008
Debt: No policy action
© Institute for Fiscal Studies
Notes and sources: see Figure 3.3 of The IFS Green Budget: February 2012.
Risks to the public finances
• Macroeconomic forecasts might not prove accurate
– Even if they did, revenues/spending might not turn out as
forecast
• Government may yet be unable or unwilling to implement the
planned spending cuts
– Only 12% of the planned cut to public service spending (6% of
the planned cut to current public service spending) implemented
by the end of 2011–12
• Nothing close to this scale of cuts has been attempted in
the last 60 years
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7-year
6-year squeeze on public service spending
16.2% cut
over 7 years
9.3% cut
over 7 years
10
5
0
-5
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Note:
Figure shows total public spending less spending on welfare benefits and debt interest.
2015–16
2010–11
2005–06
2000–01
1995–96
7 year moving average
1990–91
1985–86
Historic
1980–81
1975–76
ConLib
1970–71
1965–66
1955–56
-10
1960–61
Labour
1950–51
Annual percentage real increase
15
Real spending (1998-99 =
100)
Public service spending returns to 2004
levels
230
210
190
170
150
130
110
90
70
50
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Public service
spending
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
With big variations in DEL changes 2010-11 to
2014-15 by department
International Development
37.8%
Energy and Climate Change
6.5%
NHS (England)
1.0%
Defence
-8.2%
Education
-11.9%
Total
-11.5%
Transport
-14.5%
CLG: Local Government
-20.7%
Home Office
-22.0%
Justice
-27.2%
Environment, Food and Rural Affairs
-27.6%
Business, Innovation and Skills
-31.2%
Culture, Media and Sport
CLG: Communities
-100%
-46.1%
-71.3%
-80%
-60%
-40%
-20%
0%
Percentage real increase, 2010–11 to 2014–15
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20%
40%
Real spending (1998-99 =
100)
But remarkably similar priorities over time
230
210
190
170
150
130
110
90
70
50
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Health
Public service
spending
Education
Defence
Notes and sources: see Figure 3.12 of The IFS Green Budget: February 2012.
What comes next for public services
• Chancellor has pencilled in cuts in 2015-16 and 2016-17
• How much comes from public services depends on choice
between welfare spending and public service spending
• In the Budget the chancellor suggested a welfare cut of £8
billion (in current terms) would leave same balance between
welfare and public services as over this SR period
• Which would imply RDEL cuts of 2.3% a year
– Would need to be 3.8% a year without welfare cuts
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Trade-off between cuts to public service
spending and welfare cuts: 2015–16 and 2016–
17
Average annual real
change in RDEL (%)
1
0
-1
No RDEL cut,
£20bn welfare
cut
RDEL cut by 2.3% a
year, £8bn welfare cut
-2
-3
-4
-5
-25
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RDEL cut by 3.8% a
year, no welfare cut
-20
-15
-10
-5
0
Change in welfare spending (£bn, 2011–12 terms)
(or change in taxation or borrowing)
Note: HM Treasury and IFS calculations. Resource Departmental Expenditure
Limits (RDEL) is the non-investment component of the spending by central
Studies
government on the delivery and administration of public services.
5
What comes next for public services
• Chancellor has pencilled in cuts in 2015-16 and 2016-17
• How much comes from public services depends on choice
between welfare spending and public service spending
• In the Budget the chancellor suggested a welfare cut of £8
billion (in current terms) would leave same balance between
welfare and public services as over this SR period
• Which would imply RDEL cuts of 2.3% a year
– Would need to be 3.8% a year without welfare cuts
• With no welfare cuts and health still protected (no real
cuts) rest of public service spending would need to fall
even faster
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Summary
• The loss of output following the crisis has been deep and
prolonged
• With a consequent reduction in household incomes and
dramatic worsening of the public finances
• Government’s fiscal consolidation is most dramatic in 60
years
– But still leaves debt above pre-crisis levels for a generation
or more
• Though a remarkable consistency of priorities across time
• Cuts pencilled in for 2015-16 and 2016-17 look painful
• The new fiscal framework, especially the independent OBR,
looks more robust than what went before
• But there remain risks to deliverability
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– And the short term problems shouldn’t lead to us ignoring long