Transcript Heading for presentation

Disease and cure in the UK: The fiscal impact
of the crisis and the policy response
Slides prepared by Carl Emmerson for SOLACE
November 2010
http://www.ifs.org.uk/projects/346
© Institute for Fiscal Studies
Conclusions
•
Permanent hit to public finances from financial crisis estimated at £86
billion a year (in today’s terms)
•
Response is a £98 billion fiscal tightening by 2015–16, comprising a £24
billion tax rise and a £74 billion spending cut (in today’s terms)
– OBR estimates 60% chance of hitting fiscal mandate on current policies
•
Overall post crisis tax and benefit reforms regressive across most of the
income distribution, although very focussed on richest 2%
– cuts to welfare payments for working-age individuals
•
Four years from next April will be the tightest sustained squeeze to
public service spending since April 1976 to March 1980
– total DELs cut by 11% in real terms
– overseas aid budget increased sharply
– in England: NHS and schools relatively protected; largest cuts to:
Communities and Local Government, DEFRA and BIS
•
Would be sensible to review plans in 2012
© Institute for Fiscal Studies
Disease
•
Outlook for the public finances dramatically weakened since Budget
2008
•
Much of deterioration expected to be impervious to economic recovery
– ‘structural’ rather than ‘cyclical’ increase in borrowing
•
Forecasting borrowing difficult
– estimates of the size of the structural hole have changed over time
– latest (June 2010) forecasts are slightly worse than the forecast made before
the general election (March 2010)
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12
Extra cyclical
Extra structural
Budget 2008
10
8
6
Permanent
damage =
5.8% of GDP
(£86bn)
4
2
© Institute for Fiscal Studies
Note: Author’s calculations comparing HM Treasury June 2010 Budget
with HM Treasury March 2010 Budget.
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
0
2008–09
Percentage of national income
Disease: size of the problem
Disease: change over time
Percentage of national income
8
£47bn
£94bn
£86bn
£78bn
£86bn
PBR 2008
Budget 2009
PBR 2009
Budget March
2010
Budget June
2010
7
6
5
4
3
2
1
0
© Institute for Fiscal Studies
Sources: HM Treasury; IFS calculations.
Cure
•
Labour (March 2010 Budget)
– no fiscal tightening in 2010–11 (although economy would have to deal with
the removal of the fiscal stimulus that was in place in 2009–10)
– six year fiscal consolidation starting in April 2011
– composition of cure in 2014–15: 70% spending cuts, 30% tax rises
– no detail of additional measures for 2015–16 and 2016–17
•
New Government
– fiscal tightening to start this year
– aim to fill the hole in 2014–15, further tightening in 2015–16 to build some
caution into the plans
– overall package in 2014–15: 73% spending cuts and 27% tax rises
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Fiscal tightening: Labour’s plans
8
Percentage of national income
7
6
5
4
Unknown
Tax increases
Other spending cuts
Investment cuts
Benefit cuts
30%
3
2
70%
1
0
-1
© Institute for Fiscal Studies
Sources: HM Treasury; IFS calculations.
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
-2
Fiscal tightening: additional measures
8
Percentage of national income
7
6
5
4
3
2
Additional tax increases
Additional spending cuts
Tax increases
Other spending cuts
Investment cuts
Benefit cuts
22%
78%
1
0
-1
© Institute for Fiscal Studies
Sources: HM Treasury; IFS calculations.
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
-2
Fiscal tightening: coalition plan
8
Percentage of national income
7
6
5
4
Tax increases
Other spending cuts
Investment cuts
Benefit cuts
27%
3
73%
2
1
0
-1
© Institute for Fiscal Studies
Sources: HM Treasury; IFS calculations.
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
-2
Differences in cure (2014–15)
•
Overall tightening: new Government to tighten by more
•
Composition of tightening
– mix between tax and spending very similar to March 2010 Budget plan
– sharper fall in borrowing leads to greater reduction in debt interest spending
– similar £bn cut to investment spending (both very deep)
– significant welfare cuts announced since election (not known whether Labour
would have done this)
– bigger £bn tax rises, and deeper £bn cut to non-investment spending, than
implied by the March 2010 Budget plan
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Composition of the tightening in 2014–15
£ billion (nominal)
March 2010
Budget
October 2010
Spending Review
Tax
21.5
29.8
Spending
50.9
80.5
Investment spending
17.2
17.0
Current spending
33.7
63.5
7
10
Benefits
–0.3
17.7
Public services
27.0
35.7
Total tightening (£bn)
72.4
110.3
% Spending
70
73
% Tax
30
27
Of which:
Debt interest
© Institute for Fiscal Studies
Latest forecasts
•
Measures forecast to offset increase in underlying borrowing seen
Budget 2008
– deficit to return to pre-crisis levels in 2015–16
•
Measures also to return debt to a sustainable path
– but constant borrowing beyond 2015–16 would see not debt return to precrisis levels until late 2020s
– if no further tax rises / spending cuts to offset costs of ageing population then
debt still sustainable, but may not return to below 40% of national income
•
Significant uncertainty remains
– if latest forecasts are as accurate as previous ones then 60% chance of
meeting the Government’s fiscal mandate on current policies
– 40% chance that further tax rises or deeper spending cuts required
© Institute for Fiscal Studies
Cure: borrowing back to pre-crisis levels
Budget 2008
Budget June 2010 – no policy change
Budget June 2010
10
8
6
4
2
© Institute for Fiscal Studies
Sources: Author’s calculations using all Budgets and Pre-Budget Reports
since March 2008 (all available at http://www.hm-treasury.gov.uk/).
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
0
2007–08
Percentage of national income
12
Cure: debt sustainable but not back to pre-crisis
levels for a generation
200
Budget June 2010 – no policy action
160
Budget June 2010
120
Budget June 2010 – including impact of
demographic pressures
80
40
© Institute for Fiscal Studies
Source: Author’s calculations based on the March 2008 and June 2010
Budget.
2039–40
2034–35
2029–30
2024–25
2019–20
2014–15
2009–10
2004–05
1999–2000
1994–95
1989–90
1984–85
1979–80
0
1974–75
Percentage of national income
Budget 2008
Meeting the fiscal mandate?
60% chance of a surplus on the structural current budget under current policies
Percentage of national income
6
60% chance
of surplus
in 2015–16
4
2
0
-2
-4
-6
-8
09–10
© Institute for Fiscal Studies
10–11
11–12
12–13
13–14
14–15
Source: Office for Budget Responsibility
(http://budgetresponsibility.independent.gov.uk/d/fan_charts_intervals.xls).
15–16
Tax & spend
•
Crisis depressed tax revenues and increased public spending as a
share of national income
– tax revenues: lower financial sector profits, lower house and equity prices
– public spending: public service spending set in cash terms for three years in
2007 and economy turned out much smaller than expected
•
As a share of national income increase in spending greater than the fall
in revenues
– provides possible rationale for more of the policy response being on
spending than on tax
– aim to return spending to slightly below, and revenues to slightly above, precrisis levels
© Institute for Fiscal Studies
Cure: impact on tax and spending
50
Spending – no policy change
Revenues – no policy change
Spending − June 2010 Budget
Revenues − June 2010 Budget
45
40
35
© Institute for Fiscal Studies
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–2000
1998–99
30
1997–98
Percentage of national income
55
Impact of tax rises and welfare cuts
•
Measures reduce net incomes across the income distribution
•
Impact regressive across most of the income distribution
– with notable exception of the richest the losses are larger among low income
groups than among higher income groups
•
Throughout the income distribution pensioners lose, on average, less
than families with children
© Institute for Fiscal Studies
Cure: all in this together?
Impact of tax & benefit reforms to be in place by 2014–15, by income
£0
0%
-1%
-£1,000
-2%
-£1,500
-3%
-£2,000
-4%
-£2,500
-5%
Change in net income
-£500
October 2010 Spending Review
June 2010 Budget
Announced by previous government
Total as a % of income (right axis)
-£3,000
-£3,500
-6%
-7%
-£4,000
-8%
Poorest
© Institute for Fiscal Studies
2
3
4
5
6
7
Income decile group
8
9
Richest
Cure: all in this together?
Impact of tax & benefit reforms to be in place by 2014–15, by family type
0%
Change in net income
-1%
-2%
-3%
-4%
-5%
-6%
Families with children
Pensioners
Others
-7%
-8%
Poorest
© Institute for Fiscal Studies
2
3
4
5
6
7
Income decile group
8
9
Richest
Impact of cuts to spending on public services
•
Total spending on public services to be cut in real terms for six years
– since WW2 cuts have only been achieved for two consecutive years
– deepest sustained cuts since April 1975 to March 1980
•
Central government spending on public services (DELs)
– to be cut as a share of national income back to the late 1990s levels
– in real terms spending in 2014–15 to be 11.2% lower than in 2010–11 or
13% below the level Labour planned for 2010–11
© Institute for Fiscal Studies
Cure: public service spending set for a squeeze
Annual percentage real increase
15
10
5
0
© Institute for Fiscal Studies
Note: Figure shows total public spending less spending on welfare
benefits and debt interest.
2015–16
2010–11
2005–06
2000–01
1995–96
6 year moving average
1990–91
1985–86
1970–71
Historic
1980–81
ConLib
1975–76
Labour
1965–66
1955–56
1950–51
-10
1960–61
-5
DELs: The grand old Duke of York?
30
March 2010 Budget
25
20
15
© Institute for Fiscal Studies
Note: Figure shows Departmental Expenditure Limits (DELs) as a share of
national income under current policies.
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–2000
10
1998–99
Percentage of national income
October 2010 Spending Review
DELs: deep cuts coming
105
Index: Labour 2010–11 = 100
March 2010 Budget
October 2010 Spending Review
100
95
–11%
90
–10%
– 13%
85
80
2010–11
© Institute for Fiscal Studies
2011–12
2012–13
2013–14
2014–15
Sharing the pain
•
Two winners?
– spending on international aid and energy & climate change
•
Relative protection for NHS and schools?
– tightest settlement for NHS spending since early 1950s
– schools spending per pupil to fall in all but most deprived schools
•
Several losers?
– Home office, Justice, Local Government and Department for Business,
Innovation and Skills all face cuts of around one-quarter
– latter primarily comes from deep cuts to taxpayer support for higher
education teaching
•
One big loser?
– DCLG communities budget to be cut by two-thirds, with capital budgets cut
by three-quarters: public investment in new social housing the big loser
© Institute for Fiscal Studies
‘Winners’
International development
34.2
Energy and climate change
16.2
Work and pensions
1.4
NHS (England)
Defence
0.3
-7.3
Education
-10.8
Average DEL cut
-11.2
-20
-10
0
10
20
30
40
Real budget increase 2011–12 to 2014–15
© Institute for Fiscal Studies
Note: Figures show real change in total (resource + capital) DEL
‘Losers’
Average DEL cut
-11.2
Transport
Culture, media and sport
-14.6
-21.1
Home office
-25.2
Justice
-25.3
CLG Local government
Business, innovation and skills
Environment, food and rural affairs
-26.8
-28.5
-30.9
CLG Communities -67.6
-80
-60
-40
-20
0
Real budget increase 2011–12 to 2014–15
© Institute for Fiscal Studies
Note: Figures show real change in total (resource + capital) DEL
English schools spending
• DfE to receive total real-terms cut in DEL of 10.8%
• Schools spending including pupil premium to grow by 0.1% per
year in real-terms (or 0.4% in total)
– but total pupil numbers to increase by average of 0.7% per year
– total schools spending per pupil to be cut in real-terms by 0.6% per
year (total of 2¼%)
• Assuming flat-rate pupil premium of £2,400 (stated total cost £2.5
billion) and underlying funding per pupil frozen in cash-terms
– 60% of primary school pupils in schools where real funding falls
– 87% of secondary school pupils in schools where real funding falls
– 43% of pupils in (less deprived) schools would see cuts of 5% or more
– 1 in 8 pupils in (very deprived) schools would see increase of 5% or
more
© Institute for Fiscal Studies
Note: Assumes all schools experience the same growth in pupil numbers.
Record breakers?
• Real increase over next 4 years
– total spending: tightest since World War II
– spending on public services: tightest since April 1975 to March 1980
– NHS: tightest since April 1951 to March 1956
– (ODA: greatest since Jan 2002 to Dec 2006)
© Institute for Fiscal Studies
Conclusions
•
Permanent hit to public finances from financial crisis estimated at £86
billion a year (in today’s terms)
•
Response is a £98 billion fiscal tightening by 2015–16, comprising a £24
billion tax rise and a £74 billion spending cut (in today’s terms)
– OBR estimates 60% chance of hitting fiscal mandate on current policies
•
Overall post crisis tax and benefit reforms regressive across most of the
income distribution, although very focussed on richest 2%
– cuts to welfare payments for working-age individuals
•
Four years from next April will be the tightest sustained squeeze to
public service spending since April 1976 to March 1980
– total DELs cut by 11% in real terms
– overseas aid budget increased sharply
– in England: NHS and schools relatively protected; largest cuts to:
Communities and Local Government, DEFRA and BIS
•
Would be sensible to review plans in 2012
© Institute for Fiscal Studies
Disease and cure in the UK: The fiscal impact
of the crisis and the policy response
Slides prepared by Carl Emmerson for SOLACE
November 2010
http://www.ifs.org.uk/projects/346
© Institute for Fiscal Studies