Budget 2009: more repairs needed? Carl Emmerson BBC seminar, Thursday 16th April 2009 www.ifs.org.uk © Institute for Fiscal Studies

The 2008 Pre-Budget Report: the problem Exchequer loses 3.5% of national income (£50bn) a year permanently permanent 4% fall in productive potential of the economy equity and house prices to stay below levels assumed in Budget

The 2008 Pre-Budget Report: the policy response © Institute for Fiscal Studies 3

The 2008 Pre-Budget Report: the policy response © Institute for Fiscal Studies 4

Public spending squeeze ahead © Institute for Fiscal Studies 5

Borrowing overshooting PBR forecast On current trends public sector will borrow £95 billion in 2008–09 (ONS to release provisional outturn on Budget day morning) Almost £17 billion more than forecast in PBR Net investment overshooting by £4.3billion and revenues undershooting by £12.5 billon IFS Green Budget had forecast weaker revenues, but still an unexplained £5.8 revenue shortfall © Institute for Fiscal Studies 6

Recession deeper than expected at PBR time… Economic growth 2009 2010 2011 Treasury’s PBR assumptions –1¼ to –¾% +1½ to +2% +2¾ to +3¼% Bank of England’s February mean forecasts –3.7% +1.0% +2.5% © Institute for Fiscal Studies 7

…which will add to borrowing Economic growth 2009 2010 2011 Treasury’s PBR assumptions –1¼ to –¾% +1½ to +2% +2¾ to +3¼% Bank of England’s February mean forecasts –3.7% +1.0% +2.5% Public sector net borrowing 2008–09 2009–10 2010–11 2011–12 Additional (% of GDP) Additional (£ billion) +0.3% £4.4bn +1.6% £23.4bn +2.2% £32.2bn +2.5% £36.6bn © Institute for Fiscal Studies 8

Public sector borrowing to hit post-war peak © Institute for Fiscal Studies 9

Public sector borrowing to hit post-war peak © Institute for Fiscal Studies 10

Public sector net debt to exceed mid-90s peak © Institute for Fiscal Studies 11

Public sector net debt to exceed mid-90s peak © Institute for Fiscal Studies 12

Longer term outlook: debt stays on upward path © Institute for Fiscal Studies 13

Interest payments: borrowing costs crucial © Institute for Fiscal Studies 14

Budget 2009: another fiscal stimulus? PBR stimulus package smaller and shorter than US or German Stimulus only small fraction of debt rise forecast in PBR Two views of the affordability of additional stimulus: debt rising so far that it would make little difference debt rising so far that adding anything more would be dangerous Mervyn King has increased market/political downside targeted employment measures now more likely? Relationship between credibility and market reaction complex do investors look more at Labour or Conservative credibility? investors may be unusually wary of hung parliament Credibility of consolidation more important than stimulus decision © Institute for Fiscal Studies 15

Budget 2009: another fiscal tightening? May need to repeat scale of PBR tightening to balance current budget by 2015–16 all by tax would require increases of £1,250 per family all by spending would require real public spending freeze over the five years from April 2011 (rather than +1.1%) Budget may be more pessimistic than us in the short term and less pessimistic in the long term Treasury likely to delay return to balance, with smaller tightening and forecast downgrades than our projections suggest How is any tightening split between tax increases and spending cuts? © Institute for Fiscal Studies 16

Budget 2009: more repairs needed? Carl Emmerson BBC seminar, Thursday 16th April 2009 www.ifs.org.uk © Institute for Fiscal Studies 17