The Institute for Fiscal Studies launched its IFS Green Budget 2008 at a half-day conference yesterday. A preview of the official UK Budget due mid-March, it's comprehensive and thought provoking document for anyone with an interest in the state of the UK economy or public finances. Both the full 312 page (3.9Mb) report itself and the PowerPoint presentations from yesterday's seminar are available to download online. You can also download individual chapters. The nine presentations covered:
* The economic outlook, David Miles, Morgan Stanley
* Labour's record on the public finances, Robert Chote, Carl Emmerson and Gemma Tetlow, IFS
* The public finances going forward, Robert Chote, Carl Emmerson and Gemma Tetlow, IFS
* Funding issues and debt management, David Miles and Laurence Mutkin, Morgan Stanley
* Public sector pay and pensions, Antoine Bozio and Paul Johnson, IFS
* Capital gains tax, Stuart Adam, IFS
* Taxation of foreign profits, Malcolm Gammie, Rachel Griffith and Helen Miller, IFS
* Aviation taxes, Andrew Leicester and Cormac O'Dea, IFS
* Impact of tax and benefit changes taking effect in April 2008, David Philips, IFS
The reports' authors are gloomier than Treasury officials about the outlook for tax receipts and borrowing over the next two years, given the downside risks facing the UK economy. The IFS baseline forecast scenario is not for a recession, though. They expect sub-trend growth in both 2008-09 and 2009-10, resulting in a larger budget deficit, higher public sector debt, and slower path to surplus than official forecasts. The IFS press release (PDF) puts it like this:
..we fear that tax revenues will not grow as strongly as the Treasury hopes, as the impact of the credit crunch and a weak outlook for profit growth depress Corporation Tax receipts and as weaker share and property prices reduce Stamp Duty revenues.
Under existing policies, we expect the Government to have to borrow more than £40 billion this year, next year and in 2009-10. We expect public sector net debt to hit the Government’s ceiling of 40% of national income in 2009-10 and to rise to 41.2% by 2012-13. The Government would also break its “golden rule” (to borrow only to pay for investment) over the new economic cycle, unless that cycle lasts at least a decade.
IFS Director Robert Chote argued at the conference that the government faced a "difficult call", but some action now would be "prudent". The report also reminds us that the UK’s debt remains below the OECD average,and government debt and borrowing are still both lower than when the Conservatives left office in 1997. Press coverage was predictably more critical, with most reporters focussing on the need to raise taxes. Today's FT report by Chris Giles is typical: Increase taxation by £8bn, Darling told
So precarious are the public finances that Alistair Darling should raise taxation by £8bn in the Budget even though the economy faces the risk of a brutal slowdown, says the Institute for Fiscal Studies.
A brutal slowdown? Hardly. True, Morgan Stanley's economic projections include a more pessimistic scenario in which the UK economy suffers a ‘technical recession’. But they see only a one-in-three probability of this; I would rate the chances even lower.
Martin Wolf is less downbeat in his 8 February FT piece, Why a crisis is also an opportunity. He argues that "it is not that the government’s overall fiscal performance has been lamentable. It has merely been mediocre." The government must rebalance, and could benefit from depreciation: "a weaker real exchange rate is a valuable part of the economic adjustment". He concludes:
The UK economy could not continue indefinitely on its course of rising internal debt and external deficits. Equally, the government could not continue indefinitely raising the share of public spending in GDP and missing fiscal targets. These trends are now at an end. How well the necessary corrections are managed will determine how well a rebalanced economy performs in the years ahead.
Hard to disagree with that.