This document summarizes an economic presentation on the UK's fiscal outlook. It finds that UK economic growth has been much worse than expected since the 2008 recession, with output and employment recovery lagging behind previous recessions. While the UK's debt position is better than other countries, its budget deficit remains very high and further fiscal consolidation is planned through 2018. The presentation evaluates proposals to change fiscal policy, finding that increased infrastructure investment would provide the largest short-term stimulus due to high multipliers, though long-term effects depend on project selection. Proposed changes so far are small and unlikely to significantly boost growth. The conclusion is that more borrowing may be needed to finance stimulus if growth is a priority.

1. Welcome to the Influence
Conference 2013
Nicky Alberry
Chairman

2. Economic and Fiscal
Outlook
March 2013
Matteo Carrozza
Senior Economist

3. What to expect in the next 50 minutes:
 Economic and fiscal analysis
– Growth prospects
– UK fiscal outlook vs. other economies
– Current spending plans
 What could be done.
– How to analyse proposals (effect on short term, long term, distributional)
– Proposals advanced so far
 Q & A, and your proposals
3

4. Sluggish is an understatement…..worse than the 1930s
103 UK Economic Output
(Index, t = business cycle peak) 1930s
102
101
100
Source: ONS/BoE
99
98
2008
97
96
95
94
93
92
t
t+2
t+4
t+6
t+8
t+10
t+12
t+14
t+16
t+18
Quarters
4

5. Global outlook bleak, but UK performance disappointing
5

6. Employment is only ‘positive’…
UK Employment
(Business Cycle Peak = 100)
101
2008
100
99
98
97
1980
96
95
1990
94
93
t
t+4
t+8
t+12
t+16
t+20
t+24
t+28
t+36
t+40
t+44
t+48
t+52
t+56
t+60
t+32
6

7. …but wage growth weak, and productivity low
7

8. UK deficit remains very high…
8

9. …although debt position is considerably better
9

10. …and borrowing costs remain low
10

11. Current plans expect 4 more years of fiscal consolidation
 Scale of tightening broadly unchanged over the next two years, pace of
tightening starts easing only by 2015/16.
 Most of the tightening comes from spending cuts, rather than tax rises
Cumulative tightening, as % of GDP
9 Other current spend
Percentage of national income
8 Debt interest
7 Benefits
6
5 Investment
4 Tax increases
3
2
1
0
2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17
11

12. With most of the cuts still to come
% of cuts not implemented by March 2013
90% 77%
80% 67%
% not implemented by …
70% 58% 59%
60%
50%
40% 33%
30% 17%
20%
10%
0%
All fiscal Tax increases Total Investment Benefit cuts Other
tightening spending cuts current
cuts spending
cuts
12

13. Time for changing fiscal policy?
 Arguments for changes
– Growth has been much worse than expected, indicating that perhaps fiscal
tightening ought to be postponed
– Size of the fiscal multiplier may be larger than expected
– Borrowing costs remain low, as long as return on investment is higher than
3%, postponing adjustment may be beneficial in short and long run
 Arguments against changes
– Danger that changes to fiscal policy result in eventual rise in borrowing
costs, which could be sudden
– Uncertainty with regards to amount of spare capacity, which may be smaller
than we think (note: not an argument the OBR/HMT make)
13

14. How to evaluate fiscal policy changes?
 What is the short run impact? This depends on the fiscal multiplier of
policy change, and generally the higher the propensity to spend the
higher the multiplier. i.e. an infrastructure project has generally a higher
multiplier than say a tax cut. Some of the windfall of tax cut will be
saved, rather than spent. Also, how much is spent domestically?
 What is the long run impact? This depends on whether this measure
provides positive long term incentives. A policy which for instance
encourages more people to work, or invest, would have a beneficial
long run effect. With regards to investment, is it a useful investment
project, or is it a wasteful project.
 What is the distributional effect? Politics, not economics, though
distribution is important as it can impact effectiveness of the proposal.
14

15. What changes are scheduled to take place?
 Departmental spending & benefits
– Further departmental cuts
BENEFIT CHANGE
JSA, Employment allowance and Rise limited to 1%
other work benefits
Child benefits Frozen till 2014. Then 1%
Maternity leave Rise limited to 1%
Housing benefits New rules, bedroom tax, + 1%
increase
 Taxes
– Small increases in personal allowance
– Income tax rate above 150,000 from 50% to 45%
– Freezing of special personal allowance for people older 65, i.e ‘granny tax’
15

16. Should there be higher government investment?
 Short run effect
– Large multiplier. Very labour intensive, most spent domestically
– ‘Shovel ready’?
 Long run effect
– Effectiveness would depend on usefulness of investment. Most likely to
have positive long-run effect are investments in transport, energy, and
housing. Note: these are the type of projects which generally attract most
opposition (HS2, Heathrow expansion, wind farms, etc)
 Distributional
– Many people benefit from better infrastructure, but there are localised losers
16

17. Should there be tax cuts?
 Short run effect
– Multiplier depends on propensity to consume it, rather than save it. ‘US-
style tax rebates’ would have highest multiplier, changes in tax allowance or
VAT cuts less so.
 Long run effect
– Hard to assess. It partly depends on assessment of spare capacity, and
how deficient demand is
 Distributional
– Depends on how they are applied
17

18. What Budget proposals have been advanced?
 CBI
– They propose a fiscally neutral Budget, in which £2.2bn of further cuts in
current spend is used to finance extra £1.25bn of investment and £950m in
tax cuts.
– Infrastructure investment focused on housing and improved transport. Tax
cuts focused on cap on business rates, and freeze of air passenger duty.
– Measures are quite small (£2.2bn), and neutral, so unlikely to have a major
impact. Using OBR’s own estimates of multipliers for different policies -
which range from 0.3 to 1 – and assuming that proposals deliver most ‘bang
for your buck’ the increase in GDP would be negligible.
 Others
– Various politicians have proposed making further cuts to current spend,
either in welfare or in some specific department, to fund increased
investment.
18

19. To conclude
 Don’t expect much change, with fiscal tightening to continue for until 2016/17,
probably longer
 Fiscally neutral changes unlikely to deliver much stimulus, especially in the
short term
 If growth is priority, then extra borrowing to finance infrastructure would deliver
most bang for your buck. See IFS simulations
19

20. Your proposals and Q&A?
20

21. Thank you
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