fiscal rule and model with some practice.ppt

Fiscal rule

1. Gemma Tetlow, Institute for Fiscal Studies
PBR 2008 and the fiscal rules

2. © Institute for Fiscal Studies, 2008
The previous fiscal rules over the last cycle
•Sustainable Investment Rule
–Maintain debt below 40% of national income in each and every year
•Golden Rule
–Borrow only to invest over the economic cycle
–In other words, cumulative current budget must be in balance or surplus
•Both were met over the cycle now thought to have begun in 1997 and closed
in second half of 2006
–Sustainable Investment Rule:
•Debt below 40% of national income in each year, except 1997–98
•Debt 4% of national income below the ceiling at end of the cycle (about £59
billion in 2008–09 terms)
–Golden rule:
•Cumulative surplus on current budget equal to 1.4% of national income

3. © Institute for Fiscal Studies, 2008
Meeting the Golden Rule
20
-400
-350
-300
-250
-200
-150
-100
-50
0
50
Tories: 1978 to
1986
Tories: 1986 to
1997
Labour: 1997
to 2006
Labour: 2006
to 2014
£

b
illio
n
,

2
0
0
8
-
0
9

t
e
r
m
s
Source: HM Treasury, Authors’ calculations
Cumulative surplus on the current budget over the cycle (£bn, 2008-09)

4. © Institute for Fiscal Studies, 2008
Meeting the Golden Rule
-241 -341
20
-400
-350
-300
-250
-200
-150
-100
-50
0
50
Tories: 1978 to
1986
Tories: 1986 to
1997
Labour: 1997
to 2006
Labour: 2006
to 2014
£

b
illio
n
,

2
0
0
8
-
0
9

t
e
r
m
s
Source: HM Treasury, Authors’ calculations
Cumulative surplus on the current budget over the cycle (£bn, 2008-09)

5. © Institute for Fiscal Studies, 2008
Meeting the Golden Rule
-241 -341
20
-296
-400
-350
-300
-250
-200
-150
-100
-50
0
50
Tories: 1978 to
1986
Tories: 1986 to
1997
Labour: 1997
to 2006
Labour: 2006
to 2014
£

b
illio
n
,

2
0
0
8
-
0
9

t
e
r
m
s
Source: HM Treasury, Authors’ calculations
Cumulative surplus on the current budget over the cycle (£bn, 2008-09)

6. © Institute for Fiscal Studies, 2008
The new fiscal framework: compliance
•Previous rules suspended
–Justified on grounds that economic shocks could not have been
anticipated and fiscal policy needs “the flexibility to respond appropriately
to those shocks”
•Darling’s temporary operating rule: “…improve the cyclically-adjusted
current budget each year, once the economy emerges from the
downturn so it reaches balance and debt is falling as a proportion of
GDP once the global shocks have worked their way through the
economy in full”.

7. © Institute for Fiscal Studies, 2008
Improving the cyclically-adjusted current budget
-5
-4
-3
-2
-1
0
1
2
3
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
2
0
0
1
-
0
2
2
0
0
2
-
0
3
2
0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
2
0
1
2
-
1
3
2
0
1
3
-
1
4P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Source: HM Treasury, Authors’ calculations
Cyclically-adjusted surplus on the current budget (% national income)

8. © Institute for Fiscal Studies, 2008
Improving the cyclically-adjusted current budget
-5
-4
-3
-2
-1
0
1
2
3
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
2
0
0
1
-
0
2
2
0
0
2
-
0
3
2
0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
2
0
1
2
-
1
3
2
0
1
3
-
1
4P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Source: HM Treasury, Authors’ calculations
Cyclically-adjusted surplus on the current budget (% national income)
on trend
above
trend

9. © Institute for Fiscal Studies, 2008
The new fiscal framework: critique
•Darling’s temporary operating rule: “…improve the cyclically-adjusted
current budget each year, once the economy emerges from the
downturn so it reaches balance and debt is falling as a proportion of
GDP once the global shocks have worked their way through the
economy in full”.
•Tory proposal, September 2008: “At the end of a forecast horizon:
falling debt as a percentage of GDP and a balanced current budget,
adjusted for the cycle”
•Falling debt at the end of the forecasting period is not a sufficiently
constraining fiscal target

10. © Institute for Fiscal Studies, 2008
Net debt – a 40-year high
0
10
20
30
40
50
60
1
9
7
4
-
7
5
1
9
7
6
-
7
7
1
9
7
8
-
7
9
1
9
8
0
-
8
1
1
9
8
2
-
8
3
1
9
8
4
-
8
5
1
9
8
6
-
8
7
1
9
8
8
-
8
9
1
9
9
0
-
9
1
1
9
9
2
-
9
3
1
9
9
4
-
9
5
1
9
9
6
-
9
7
1
9
9
8
-
9
9
2
0
0
0
-
0
1
2
0
0
2
-
0
3
2
0
0
4
-
0
5
2
0
0
6
-
0
7
2
0
0
8
-
0
9
2
0
1
0
-
1
1
2
0
1
2
-
1
3
Financial year
P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Source: HM Treasury

11. © Institute for Fiscal Studies, 2008
Net debt – a 40-year high
0
10
20
30
40
50
60
1
9
7
4
-
7
5
1
9
7
6
-
7
7
1
9
7
8
-
7
9
1
9
8
0
-
8
1
1
9
8
2
-
8
3
1
9
8
4
-
8
5
1
9
8
6
-
8
7
1
9
8
8
-
8
9
1
9
9
0
-
9
1
1
9
9
2
-
9
3
1
9
9
4
-
9
5
1
9
9
6
-
9
7
1
9
9
8
-
9
9
2
0
0
0
-
0
1
2
0
0
2
-
0
3
2
0
0
4
-
0
5
2
0
0
6
-
0
7
2
0
0
8
-
0
9
2
0
1
0
-
1
1
2
0
1
2
-
1
3
Financial year
P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Source: HM Treasury

12. © Institute for Fiscal Studies, 2008
Net debt – a 40-year high
0
10
20
30
40
50
60
1
9
7
4
-
7
5
1
9
7
6
-
7
7
1
9
7
8
-
7
9
1
9
8
0
-
8
1
1
9
8
2
-
8
3
1
9
8
4
-
8
5
1
9
8
6
-
8
7
1
9
8
8
-
8
9
1
9
9
0
-
9
1
1
9
9
2
-
9
3
1
9
9
4
-
9
5
1
9
9
6
-
9
7
1
9
9
8
-
9
9
2
0
0
0
-
0
1
2
0
0
2
-
0
3
2
0
0
4
-
0
5
2
0
0
6
-
0
7
2
0
0
8
-
0
9
2
0
1
0
-
1
1
2
0
1
2
-
1
3
Financial year
P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Source: HM Treasury

13. © Institute for Fiscal Studies, 2008
Borrowing – a 63-year high
-4
-2
0
2
4
6
8
10
1
9
4
6
-
4
7
1
9
4
9
-
5
0
1
9
5
2
-
5
3
1
9
5
5
-
5
6
1
9
5
8
-
5
9
1
9
6
1
-
6
2
1
9
6
4
-
6
5
1
9
6
7
-
6
8
1
9
7
0
-
7
1
1
9
7
3
-
7
4
1
9
7
6
-
7
7
1
9
7
9
-
8
0
1
9
8
2
-
8
3
1
9
8
5
-
8
6
1
9
8
8
-
8
9
1
9
9
1
-
9
2
1
9
9
4
-
9
5
1
9
9
7
-
9
8
2
0
0
0
-
0
1
2
0
0
3
-
0
4
2
0
0
6
-
0
7
2
0
0
9
-
1
0
2
0
1
2
-
1
3
Financial year
P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Source: HM Treasury

14. © Institute for Fiscal Studies, 2008
Structural current budget balance:
Labour vs Conservatives
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
0123456789101112131415161718
Years since 1978-79 and 1996-97 respectively
P
e
r
c
e
n
t
a
g
e

o
f

n
a
t
io
n
a
l
in
c
o
m
e
Brown / Darling
Howe / Lawson / Major / Lamont / Clarke

15. © Institute for Fiscal Studies, 2008
Conclusions
•Sharp deterioration in forecast for GDP and borrowing
–Including 4% permanent loss of trend GDP
•Both fiscal rules set to be missed and no adequate replacement
•Debt and borrowing both set to rise to historically high levels
•Medium-term tightening
–Largely through cutbacks to spending plans
–Planned real cuts in capital spending