Fiscal Consolidation Sam Beckett, Director, Fiscal Policy, HM Treasury 27 May 2011
Overview of presentation 1. Origin of the UK fiscal deficit 2. Fiscal policy response and framework reform 3. Latest forecasts and data 2
Imbalances in the UK economy Private sector debt in the UK Source: Office for National Statistics. Increasing reliance on government, consumer and financial sector debt drove imbalances: By 2007 UK had the largest structural deficit of any G7 economy. The UK s current account went from near balance in 1997, to more than a 3% deficit by 2006. Financial services share of GDP rose from 6½% in 1997 to 8½% in 2007, while manufacturing s share nearly halved. 3
Persistent pre-crisis fiscal deficit 4
Impact of crisis exposed large structural deficit 5
Significant debt management implications Significant upward revisions to Central Government Net Cash Requirement (CGNCR) and enhanced external focus on the sustainability of the UK s fiscal position e.g. Standard and Poor s assigning a negative outlook to the UK s sovereign credit rating in May 2009. CGNCR (forecast, outturn or estimate) 2008-09 2009-10 2010-11 % of GDP bn % of GDP bn % of GDP bn Budget 2007 2.0 29.0 2.2 34.0 1.8 28.0 June Budget 2010 11.3 162.4 14.1 198.9 9.9 146.1 Alongside auctions, greater use of supplementary issuance methods (syndications/mini-tenders) to add flexibility to the gilt issuance programme and facilitate higher issuance of long conventional and index-linked gilts. All but one syndication (11 out of 12) have been held since June 2009, with 20 per cent of 2011-12 of gilt issuance to be delivered through syndications and mini-tenders. High average maturity of UK debt (13.4 years) has reduced refinancing risk and contributed to maintenance of historically low average portfolio yield (2.87 per cent). 6
Vulnerabilities 600 UK Total financial sector assets less branches (% GDP) 500 400 300 200 100 0 France Ireland Germany Austria Spain Portugal Norway Belgium Greece Slovenia Finland U.S Bulgaria Romania Lithuania Slovakia Italy Czech Rep 0 1 2 3 4 5 6 7 8 9 10 Structural deficit in 2010 (% GDP) 7
Overview of presentation 1. Origin of the UK fiscal deficit 2. Fiscal policy response and framework reform 3. Latest forecasts and data 8
Government strategy Early, decisive action to reduce the deficit: o Setting plans to restore the public finances to a sustainable path. Consolidation plans result in debt peaking in 2013-14. Significant fiscal framework reform to rebuild credibility. o Creating the Office for Budget Responsibility, to provide independent, transparent and credible forecasts. o Introducing a clear, forward-looking fiscal mandate, to guide decisions over medium term. Reform of financial sector regulation to help prevent build-up of systemic risks o Overhaul of tripartite system of financial regulation, will legislate to create a Financial Policy Committee within the BoE and a Prudential Regulation Authority. o Independent Commission on Banking published interim report on 11 th April. Structural reform to support economic growth o Government published a micro-economic Plan for Growth alongside Budget 2011 to complement macroeconomic stability 9
Fiscal consolidation plan The Government plans a total consolidation of 126 billion by 2015-16 (6.6 per cent of GDP). Taking the consolidation as a whole, 76 per cent will be delivered by lower spending by 2015-16. This is consistent with OECD and IMF research, which suggests that fiscal consolidation efforts that largely rely on spending restraint help sustain growth. 10
Pace of consolidation in line with other countries given scale of deficit Source: IMF Fiscal Monitor April 2011 11
Policy Implementation 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 33 Implementation of consolidation plans now underway Receipts and expenditure Per cent of GDP 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14 2015-16 Public Sector Current Receipts (Budget 2011) Total Managed Expenditure (Budget 2011) Taxation: majority of tax consolidation has been implemented, including the increase in standard rate of VAT by 2.5 percentage points, to 20 per cent. Forecasts Spending Plans as far as possible protect most productive public investment expenditure Spending Review set fixed departmental budgets for 2011-12 to 2014-15 Public Expenditure Cabinet Committee to oversee departments implementation Reform of AME, including legislation introduced on Welfare Reform and Pensions and Savings Bills 12
The impact of the consolidation was considered in a multiplier framework Policy stance judged to be crucial to mitigate tail-risks from UK s vulnerable position OBR forecast explicitly acknowledges consolidation is likely to have a direct impact on growth via multiplier approach An expansionary fiscal contraction is not assumed in the forecast. Multipliers imply a net reduction in the level of GDP. Multipliers are generally context specific with wide range of estimates. OBR estimates close to average. 13
Overview of presentation 1. Origin of the UK fiscal deficit 2. Fiscal policy response and framework reform 3. Latest forecasts and data 14
Economic forecast GDP growth 2010 2011 2012 2013 2014 2015 GDP growth 1.3 1.7 2.5 2.9 2.9 2.8 Output gap -3.4-3.9-3.6-3.0-2.2-1.4 ILO unemployment rate 7.9 8.2 8.1 7.6 7.0 6.4 15
Implications for public finances 16
Bond yields 17