Budget 1999: Public Finances - Brown's modest giveaway no threat to sound financial management
Wednesday 10 March 1999
It is little wonder that the average error in forecasting next year's deficit is pounds 10bn. Any assessment of the Treasury's new forecasts for the public finances has to bear in mind these huge uncertainties.
To complicate matters, presentation of the public finances has changed dramatically in the past 12 months. Some important definitions have changed and a new set of national accounts data published last summer has made comparisons with previous budgets complex.
Even so, it is clear that Mr Brown is starting from a far better position than he expected in November's Pre-Budget Report. It has paved the way for a mildly expansionary Budget rather than the strictly neutral one many City analysts had expected.
Tax revenues have come in ahead of the Treasury's cautious forecasts. Lower interest rates have also cut the Government's debt repayments.
In his speech yesterday, the Chancellor boasted: "Britain's fiscal position is not only sound today but on the soundest possible footing for the future." The net pounds 6bn giveaway over three years, in tax cuts and increased spending announced yesterday, will be paid for by a combination of higher borrowing and savings on interest payments. In addition, of course, some groups of people are tax winners and some tax losers.
The overall tax burden is forecast to decline slightly as a share of GDP, dropping to 36.6 per cent next financial year, having risen from 35.4 per cent in the year before Labour took office to 37.2 per cent last year.
Tax increases announced in previous budgets, including the abolition of profit-related pay, of advance corporation tax, with the fuel and tobacco escalators, explain the step up in the tax burden compared with the early Nineties.
They were needed to repair the damage to the public finances caused by recession and ill-judged tax cuts. They will pay for the 3 per cent a year real-terms increase in spending on public services over the next three years.
The Budget Red Book now publishes predictions for three measures. The City focuses on the Public Sector Net Cash Requirement (PSNCR), equivalent of the old PSBR (Public Sector Borrowing Requirement). Yesterday's statement put this in surplus by pounds 5.2bn in the current financial year, compared to the pounds 2.8bn (excluding windfall tax) predicted in November. The figure for next year is pounds 4.5bn in deficit, rather than the earlier forecast of pounds 1bn. This difference, with its immediate implications for the Government's funding needs, sent a shockwave around the gilts market yesterday.
However, two other measures are now given greater prominence because they are needed to assess whether the Chancellor is meeting the two rules for sound finance set out in the Code for Fiscal Stability. The Office for National Statistics is working on producing these monthly, rather than quarterly as at present.
The first rule, the "golden rule", says that the Government can borrow only to finance investment spending, so that the day-to-day current spending must balance with revenues over the course of a business cycle. The surplus on current budget is the relevant measure here.
The second rule is that the ratio of net public sector debt to gross domestic product must be "stable and prudent", defined as 40 per cent of GDP. Public- sector net borrowing is the key measure for this rule. (It differs from the PSNCR by the value of sales of financial assets and other financial adjustments.)
The current balance is put at a surplus of pounds 4.1bn this year (compared with the pounds 5.5bn predicted in November) and pounds 2bn in 1999-2000 (up from pounds 1bn). The Red Book predicts a gently rising surplus up to pounds 11bn in 2003-04.
The net borrowing figure shows a repayment of pounds 1bn this year, and a small deficit of pounds 3bn next year. Continuing small amounts of borrowing keep the net debt ratio stable at just below 40 per cent of GDP.
If the forecasts are correct, Mr Brown will comfortably meet his two rules, and satisfy the Maastricht criteria for membership of the single European currency. Even if the economy turns out much weaker, many experts think the public finances will remain in decent shape.
"I give them real credit for controlling public spending so tightly. That is what has put them in such a happy position," said Roger Bootle, managing director of Capital Economics.
Others were less impressed. "This is definitely a fiscal relaxation," said Steven Bell at Deutsche Bank.
The Treasury has taken a cautious approach. The Red Book bases the main forecasts on GDP growth of 1 per cent in 1999, the bottom of the range. For the first time, too, social- security spending forecasts are based on an assumption derived from outside forecasts that unemployment will rise slightly.
If growth is closer to the 0.6 per cent average of other forecasts, it could throw out the current budget figure by another pounds 2bn or so this year. But as this would be due to the economic downturn, it would fall within the "over a business cycle" definition of the rule and could be recouped later.
Even if the Treasury's forecasts do fall victim to slow growth or to the other uncertainties that can so easily hit tax and spending, the public finances are undoubtedly on a much sounder footing than at any time in recent memory. The City gives the Chancellor full credit for this.
"The big investors have a lot of trust in Gordon Brown. If he were to leave the Treasury for any reason, that trust would change," said David Owen, an economist at Dresdner Kleinwort Benson.
For a Labour Chancellor to have won over anybody in the financial markets at the same time as winning plaudits for tax cuts and redistribution is an achievement that would have seemed impossible just a few years ago.
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