Autumn 2017 Budget: Options for easing the squeeze Carl Emmerson and Thomas Pope Presentation at the Institute of Chartered Accountants in England and Wales London, 30 th October 2017
The March Budget plan
2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 2022Q1 2008Q1 = 100 Terrible economic performance is important backdrop GDP per adult since 2008 Q1 (at time of March 2017 Budget) 140 135 130 2% per year trend 125 120 18% gap 115 110 15% gap 105 100 95 GDP per person aged 16+ 90 Notes and sources: see Figure 2.1 of Autumn 2017 Budget: Options for easing the squeeze
PSNB (2007 08) Change in spending Change in receipts PSNB (2009 10) Change in spending Change in receipts PSNB (2017 18) Change in spending Change in receipts PSNB (2021 22) Per cent of national inocme The rise and fall of the deficit Latest out-turns and March 2017 Budget forecasts for taxing, spending and borrowing 12.0 10.0 8.0 6.0 +6.1 1.1 9.9 5.6 Spend 0.5% GDP higher than 2007 08 Tax 0.4% GDP higher than 2007 08 4.0 2.0 2.8 +1.4 2.9 0.0 Notes and sources: see Figure 2.2 of Autumn 2017 Budget: Options for easing the squeeze
PSNB (2007 08) Change in spending Change in receipts PSNB (2009 10) Change in spending Change in receipts PSNB (2017 18) Change in spending Change in receipts PSNB (2021 22) Per cent of national inocme Further deficit reduction to come Latest out-turns and March 2017 Budget forecasts for taxing, spending and borrowing 12.0 10.0 8.0 6.0 +6.1 1.1 9.9 5.6 4.0 2.0 0.0 2.8 +1.4 2.9 1.7 +0.5 0.7 Notes and sources: see Figure 2.2 of Autumn 2017 Budget: Options for easing the squeeze
Policy changes doing most of the work Net tax rise of 6 billion in 2021 22 relative to 2017 18 Largest new tax measure is reduction in dividend allowance Benefit cuts worth 12 billion saving in 2021 22 Mostly from measures already in place Largest cut to come is benefits freeze Cuts to departmental spending as a share of national income save 24 billion by 2021 22 Investment spending to increase Large cuts to day-to-day spending
Spending cuts not shared equally across departments Real terms departmental budget cuts, 2010 11 to 2019 20 Transport DfID Culture Defence Health Education Home Office Scotland, Wales, N.I. DCLG: communities Justice HMT & HMRC & DWP DEFRA 2010 11 to 2019 20 2017 18 to 2019 20-60% -40% -20% 0% 20% 40% 60% Notes and sources: see Figure 2.10 of Autumn 2017 Budget: Options for easing the squeeze
1950 1955 56 1960 61 1965 66 1970 71 1975 76 1980 81 1985 86 1990 91 1995 96 2000 01 2005 06 2010 11 2015 16 2020 21 Per cent of natonal income Where would this leave tax and spend? Tax and spend since 1948, latest outturns and March Budget forecast 50 45 40 Current receipts Total Managed Expenditure Lowest spending since 2003 04 35 30 25 Highest receipts since 1986 87 National accounts taxes Highest tax receipts since 1969 70 Notes and sources: see Figure 2.2 of Autumn 2017 Budget: Options for easing the squeeze
2000 01 2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 2018 19 2019 20 2020 21 2021 22 Per cent of natonal income Where would this leave the deficit? Public sector net borrowing since 2000 01 12 10 8 6 4 2 0 Cyclically-adjusted public sector net borrowing Public sector net borrowing Target: 2% limit in 2020 21-2 -4 Overarching objective: eliminate deficit by mid-2020s Notes and sources: see Figure 2.6 of Autumn 2017 Budget: Options for easing the squeeze
2000 01 2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 2018 19 2019 20 2020 21 2021 22 Per cent of natonal income Where would this leave debt? Public sector net debt since 2000 01 100 90 80 70 60 50 40 30 20 10 0 Public sector net debt Public sector net debt, excluding Bank of England Target: debt falling between 2019 20 and 2020 21 Notes and sources: see Figure 2.7 of Autumn 2017 Budget: Options for easing the squeeze
Developments since March
Data so far this year paints a rosier picture Borrowing last year now thought to have been 45.7 billion, 6 billion lower than forecast in March Borrowing running behind the March forecast this year too Not all of this improvement is likely to persist for the whole year Self-assessment receipts expected to be much weaker than last year But a number of taxes are performing better than expected so far
Annual growth rate Data so far this year paints a rosier picture 20% Growth in tax receipts: OBR March forecast for year as a whole and year to date 15% OBR March Year to date 10% 5% + 2.1bn 0% + 1.2bn + 1.0bn + 1.2bn + 1.5bn -5% PAYE NICs Corporation tax VAT Stamp duty land tax Notes and sources: see Figure 3.6 of Autumn 2017 Budget: Options for easing the squeeze
Data so far this year paints a rosier picture A number of taxes are performing better than expected so far Could lead to improvement of around 6 billion Spending on benefits and contributions to the EU also lower than expected Could save around 2¾ billion Improvements come in spite of weaker-than-expected growth If strength persists, would lead to lower medium-term borrowing Worth around 12 billion by 2021 22
Policy changes since March will increase borrowing slightly Reversal of self-employed National Insurance contributions (NICs) measure costs 500 million per year May have a bigger effect in the long-run Confidence and supply deal: 450 million per year for two years On Health, Education and Infrastructure in Northern Ireland
Policy changes since March will increase borrowing slightly Changes to student loan system a considerable long-term cost, but little effect on short run measures Freezing fees at 9,250 small cut to University funding in short-run Repayment threshold to 25,000 means more debt written off Long-run cost of 2 billion a year, but not until 2046 Total effect of policy measures already announced increases borrowing in 2019 20 by 1.5 billion
Base rate (%) Higher interest rates likely to mean higher borrowing in the short term 1.4 Market expectations over the base rate: March and now 1.2 October 1.0 0.8 0.6 1.5 billion more borrowing in 2018 19 March 0.7 billion more borrowing in 2021 22 0.4 0.2 0.0 2017 2018 2019 2020 2021 2022 Notes and sources: see Figure 3.5 of Autumn 2017 Budget: Options for easing the squeeze
Real GDP (2016 Q1=100) Independent forecasters have downgraded growth forecasts slightly Real GDP: Bank of England and OBR forecasts since February 112 110 108 106 104 Bank of England, February OBR, March Bank of England, August Economy 0.3% smaller in 2019 than forecast in Feb 102 100 98 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1 2022Q1 Notes and sources: see Figure 3.1 of Autumn 2017 Budget: Options for easing the squeeze
PSNB ( billion) Taking these changes together, borrowing could be slightly down on the March forecast 80 Public sector net borrowing under different growth scenarios 60 40 20 0 OBR March 5 bn Moderate 2017 18 2018 19 2019 20 2020 21 2021 22 Notes and sources: see Figure 3.7 of Autumn 2017 Budget: Options for easing the squeeze
But a substantial productivity downgrade seems likely OBR have stated a productivity growth downgrade is likely Robert Chote: for now we are minded to revise down potential productivity growth significantly
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Output per hour (2009 Q1=100) Productivity forecasts have been consistently optimistic 120 Successive forecasts for productivity growth since June 2010 115 110 105 Out-turn June 2010 March 2017 100 95 Notes and sources: see Figure 3.3 of Autumn 2017 Budget: Options for easing the squeeze
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Annual growth (%) Recent productivity performance has been historically terrible Productivity growth since 1972: Out-turns and the March forecast 6% 5% Out-turn March forecast Average 4% 3% 2% Weak scenario 1% 0% -1% -2% Very poor scenario -3% Notes and sources: see Figure 3.4 of Autumn 2017 Budget: Options for easing the squeeze
A substantial productivity downgrade seems likely OBR have stated a productivity growth downgrade is likely Robert Chote: for now we are minded to revise down potential productivity growth significantly Only slightly offset by an expected increase in hours and employment forecasts Very poor productivity scenario 0.4% annual growth considered new normal Average real growth 2017-2021: 0.7% (1.8% in March) Weak productivity scenario Downgrade halfway towards average of last seven years Average real growth 2017-2021: 1.3% (1.8% in March)
PSNB ( billion) Weaker productivity would mean higher borrowing 80 Public sector net borrowing under different growth scenarios 60 Very poor 40 Weak 53 bn 20 OBR March 19 bn 0 Moderate 2017 18 2018 19 2019 20 2020 21 2021 22 Notes and sources: see Figure 3.7 of Autumn 2017 Budget: Options for easing the squeeze
Structural borrowing (% national income) All of which would be structural Structural borrowing under different growth scenarios 4% 3% 2% 13 bn headroom Very poor 2% target Weak 1% OBR March 0% Moderate 2017 18 2018 19 2019 20 2020 21 2021 22 Notes and sources: see Figure 3.8 of Autumn 2017 Budget: Options for easing the squeeze
PSND (% national income) And the National Debt would rise as a result 100% Public sector net debt under different growth scenarios 95% 90% Very poor 85% 80% 75% Weak OBR March Moderate 2017 18 2018 19 2019 20 2020 21 2021 22 Notes and sources: see Figure 3.9 of Autumn 2017 Budget: Options for easing the squeeze
So what s a Chancellor to do?
Election year Elections tend to be followed by tax rises Long run net tax rise from measures announced in the year following general elections 1992 25bn 1997 2001 15bn 16bn 2005 6bn 2010 2015 11bn 13bn 0 5 10 15 20 25 30 billion (2017 18 terms) Notes and sources: see Figure 3.10 of Autumn 2017 Budget: Options for easing the squeeze.
Asymmetric response to public finance news Average change in underlying borrowing and policy response since 2010 Underlying improvement (5 occasions) Short run policy Long run policy Underlying change -10-5 0 5 10 15 20 Impact on borrowing ( billion) Notes and sources: see Figure 3.11 of Autumn 2017 Budget: Options for easing the squeeze.
Asymmetric response to public finance news Average change in underlying borrowing and policy response since 2010 Underlying deterioration (10 occasions) Underlying improvement (5 occasions) Short run policy Long run policy Underlying change -10-5 0 5 10 15 20 Impact on borrowing ( billion) Notes and sources: see Figure 3.11 of Autumn 2017 Budget: Options for easing the squeeze.
Options for tax rises One option is to announce tax rises if so could do worse than increasing rate(s) of one of the main taxes NICs rates rose in early 1990s, early 2000s and early 2010s Could decide not to cut rate of corporation tax from 19% to 17% boost revenues by around 5 billion require House of Commons vote and break manifesto commitment Politics makes any significant tax takeaways difficult apart from the seemingly obligatory tax avoidance measures?
Tax cuts more likely? 6 billion net tax rise already still to come and tax burden forecast to rise to level not maintained since 1950s Conservative manifesto commitment to increase income tax personal allowance to 12.5k and higher-rate threshold to 50k would now only cost 1.1 billion a year on top of 12 billion spent increasing personal allowance since 2010 Another freeze in fuel duties would cost ¾ billion a year on top of the 5.4 billion cost of freezing them since 2010 would cost ¼ billion if frozen for petrol but not diesel
Possible benefit giveaways? (1/2) 12 billion of cuts in benefits for working age families are still in the pipeline, on top of 29 billion implemented since 2010 11 Universal credit being rolled out nationwide rollout 8% complete in September, rising to 13% in March less generous than legacy system, cash terms protection for existing recipients Concern with time taken before claimants receive first full payment paid monthly in arrears 7 waiting days before unemployed can claim: return to 3 waiting days would cost of 0.3 billion a year
Possible benefit giveaways? (2/2) Most working age benefits to be frozen for next two years 4 year freeze (2015 16 to 2019 20) initially expected to save 3.4 billion rising inflation means now on course to save 4.6 billion could move to 1% increase for two years, or cancel final year of freeze, and keep broadly to the original saving could scrap final two years at cost of around 4 billion
2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 2018 19 2019 20 2020 21 2021 22 billion (2017 18 prices) per capita (2017 18 prices) Day-to-day public service spending squeezed 360 350 340 330 320 310 300 290 280 270 Resource Departmental Expenditure Limits Per capita spending to fall by a further 5% ( 15bn) on top of the 13% ( 46bn) since 2010 11 Total ( bn, LH axis) Per capita (, RH axis) 5,600 5,450 5,300 5,150 5,000 4,850 4,700 4,550 4,400 4,250 Notes and sources: see Figure 2.10 of Autumn 2017 Budget: Options for easing the squeeze.
1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 2018 19 2019 20 Percentage Retaining public sector pay cap not risk free 20 Average difference between public and private sector hourly pay 15 10 5 0 Average difference Projection: increase scales by 1% each year Projection: increase scales in line with Consumer Prices Index Projection: increase pay in line with private sector earnings Notes and sources: see Figure 4.1 of Autumn 2017 Budget: Options for easing the squeeze.
1956 57 1960 61 1965 66 1970 71 1975 76 1980 81 1985 86 1990 91 1995 96 2000 01 2005 06 2010 11 2015 16 2020 21 Percentage NHS: extremely tight spending settlement 12 10 Annual real increase in per capita UK NHS spending 8 6 4 2 0-2 -4 Notes and sources: see Figure 4.2 of Autumn 2017 Budget: Options for easing the squeeze.
Percentage change, 2009 10 to 2016 17 NHS: managing to do more 20 15 English hospital activity per capita 15.7 15.1 10 5 3.2 7.7 6.7 0 English DH spending per capita A&E attendances Non-elective (emergency) admissions Notes and sources: see Figure 4.3 of Autumn 2017 Budget: Options for easing the squeeze. Elective admissions (overnight admissions and daycases) First outpatient attendances
2004 05 2005 06 2006 07 2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 Per cent NHS: clear signs of strain (1/2) A&E patients in England increasingly likely to wait more than 4 hours 100 95 National target = 98% National target = 95% 90 85 80 75 70 % admitted, transferred or discharged within four hours Notes and sources: see Figure 4.4 of Autumn 2017 Budget: Options for easing the squeeze.
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Per cent NHS: clear signs of strain (2/2) % waiting more than 18 weeks from referral to treatment in England 15 10 8% target 5 0 Notes and sources: see Figure 4.5 of Autumn 2017 Budget: Options for easing the squeeze.
Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Per cent NHS: clear signs of strain (2/2) % waiting more than 18 weeks from referral to treatment in England 50 40 30 20 10 8% target 0 Notes and sources: see Figure 4.5 of Autumn 2017 Budget: Options for easing the squeeze.
Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Per cent NHS: clear signs of strain (2/2) % waiting more than 18 weeks from referral to treatment in England 50 40 30 20 10 8% target 0 Notes and sources: see Figure 4.5 of Autumn 2017 Budget: Options for easing the squeeze.
2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 Per cent Prisons: spending and staff cut 120 110 100 Prison population 90 80 70 Prison spending Prison staffing 60 Notes and sources: see Figure 4.6 of Autumn 2017 Budget: Options for easing the squeeze.
2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 Per cent Prisons: spending and staff cut 250 200 150 100 50 Prison staffing Prison population Prison spending 0 Notes and sources: see Figure 4.6 of Autumn 2017 Budget: Options for easing the squeeze.
2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 Per cent Prisons: assaults on staff, assaults on prisoners and prisoner self-harm up 250 200 150 Assaults on staff Assaults on prisoners Prisoner selfharm 100 50 Prison staffing Prison population Prison spending 0 Notes and sources: see Figure 4.6 of Autumn 2017 Budget: Options for easing the squeeze.
So what s a Chancellor to do? (1/2) Mr Hammond has been dealt a tricky hand If forecast productivity growth were unchanged public finance outlook would be slightly stronger than in March Likely productivity downgrade would, if significant, dominate downgrading halfway towards recent experience could increase forecast borrowing in 2021 22 from 17 billion to 36 billion fiscal targets for this parliament could still be met, albeit with much reduced headroom
So what s a Chancellor to do? (2/2) Unlikely to announce a significant fiscal tightening Budget giveaways seem likely, but an end to austerity unlikely choosing between competing spending demands difficult Chances of eliminating the deficit anytime soon keep receding possible public finances will perform much better than expected but perhaps time to admit that a firm commitment to running a budget surplus from the mid-2020s onwards is no longer sensible
Autumn 2017 Budget: Options for easing the squeeze Carl Emmerson and Thomas Pope Presentation at the Institute of Chartered Accountants in England and Wales London, 30 th October 2017