© Institute for Fiscal Studies PBR 2009: filling in some details Robert Chote

What we will be looking out for Forecasts for economic growth Forecasts for the public finances The repair job –How big is the hole? –Speed and composition –Implications for spending Some political positioning Institutional reform: the Fiscal Responsibility Bill © Institute for Fiscal Studies

Economic growth – but don’t forget the level HM Treasury (Budget 2009) Bank of England (Inflation Report November 2009 Average of new independent forecasts 2009–3¾%–4.8%–4.6% %+1.5%+1.2% ¼%+3.1%+2% Level of GDP in 2011 relative to %–0.4%–1.5% © Institute for Fiscal Studies

Public finance forecasts: borrowing 2009–102010–112011–122012–132013–14 Cash£175bn£173bn£140bn£118bn£97bn % GDP12.4%11.9%9.1%7.2%5.5% On current trends borrowing this year in line with forecast Getting within c.£15bn would be good in a normal year Weaker-than-expected real GDP will push up %GDP ratio, but this may be offset by higher-than- expected whole economy inflation Government will want to show deficit halving in 4 years © Institute for Fiscal Studies Budget 2009 forecasts for public sector net borrowing

Public finance forecasts: debt 2009–102010–112011–122012–132013–14 Excluding bailout costs 55.4%65.0%70.9%74.5%76.2% Including bailout costs 59.0%68.4%74.0%77.5%79.0% Does HMT still expect debt to peak in 2013–14 – and at what level? How far will expected cost of financial interventions be reduced? © Institute for Fiscal Studies Budget 2009 forecasts for public sector net debt (%GDP)

The repair job: the Treasury’s diagnosis The financial crisis means that the economy and the value of our houses and financial assets will be significantly and permanently smaller in cash terms than it had previously expected This will permanently reduce tax receipts and increase public spending as shares of national income This will increase the amount we have to borrow to bridge the gap between the two – even after the economy has recovered The Budget implied the crisis had added £90bn a year or 6.4% of GDP to structural deficit. Will the CX revise this estimate? © Institute for Fiscal Studies

The repair job: the story so far Sources: HM Treasury; IFS calculations. Tories want to tighten more aggressively from next year How will Darling/Brown respond? Tax measures to ease spending squeeze?

The outlook for public spending Over the next spending review (2011–12, 2012–13 and 2013–14) Budget 2009 plans (published and leaked) imply: –Total public spending broadly flat in real terms –Investment spending cut 17.3% a year –Non-investment spending up 0.7% a year –Departmental Expenditure Limits cut 2.9% a year –¾ of rise in DELs as % GDP during good years reversed by 2013–14 Will we get a DEL estimate – or will we have to guess? Will we get any departmental settlements announced? Any clues on spending/tax mix beyond 2013–14? © Institute for Fiscal Studies

Some political positioning Labour will want to paint Tories as withdrawing fiscal support from the economy when recovery not yet rooted......even though that is what they are planning to do anyway Tories will say that the Government is imperilling recovery by tackling deficit too slowly – will probably cite Dubai as risk Labour know that the Tories are reluctant to oppose tax increases on the rich, so might they push the boundary a bit more? © Institute for Fiscal Studies

Institutional reform Improving credibility of fiscal pledges seen as important to reassure potential buyers of government debt Government has promised ‘Fiscal Responsibility Act’, putting pledge to reduce deficit in law But why should this be more convincing than old rules and Code for Fiscal Stability? Need to bolster faith in forecast Conservatives propose outside body. Labour has rejected this and says Parliament will scrutinise. More powers or resources? © Institute for Fiscal Studies

PBR 2009: filling in some details Robert Chote