Memorandum submitted by Mr David Walton,
The centrepiece of the Budget was a £17
billion a year increase in public spending by the end of the Parliament
in 2005-06. This will be financed one-half by discretionary tax
increases, one quarter by assumed stronger underlying growth in
tax receipts and one quarter by higher borrowing.
The brunt of the tax increases are borne initially
by the corporate sector (80 per cent) rather than by households
(20 per cent). Public spending is planned, in total, to grow in
real terms by 4.0 per cent a year on average over the current
five-year Parliament. This compares with average annual growth
of 2.5 per cent a year in the last Parliament.
Fiscal policy will impart a boost to the economy
this year and next. After easing by 1¾ per cent of GDP in
2001-02, the fiscal stance will ease by a further 0.7 per cent
of GDP in 2002-03 and 0.4 per cent of GDP in 2003-04. The task
of slowing consumer spending growth to make room for the global
economic recovery remains with the Monetary Policy Committee.
19 April 2002
The centrepiece of the Budget (see Table 1)
was a £17 billion a year increase in public spending by the
end of the Parliament in 2005-06 relative to the projections in
last November's Pre-Budget Report (PBR). The counterparts to this
discretionary tax increases totalling
£8½ billion a year by 2005-06;
an increase in the Treasury's assumption
for trend GDP growth from 2¼ per cent a year to 2½ per
cent which boosts revenues by £4 billion in 2005-06;
an increase in public borrowing to
finance additional public investment worth £4 billion in
Table 1. Budget Decisions Affecting
Public Sector Net Borrowing
|Change since PBR||-1
|due to: ||
|Discretionary tax changes||+1
|Higher trend GDP growth||-1
The £17 billion increase in spending is made up of the
Spending on the National Health Service is planned
to grow by 7.4 per cent a year in real terms in the five years
to 2007-08. This is in line with the recommendations of the Wanless
Report and will take total planned spending on health up from
7.7 per cent of GDP in 2002-03 to 9.4 per cent of GDP in 2007-08.
Note that the Wanless Report implies that health spending will
need to rise by a further 0.9-1.6 per cent of GDP in the following
five yearsthis would require further tax increases of between
£9 billion and £16 billion in the next Parliament (in
Other departmental spending is planned to grow
by 2.5 per cent a year in real terms while annually managed expenditure
is planned to grow by 1.75 per cent a year in real terms, in line
with its historic trend.
Within these aggregates, net investment rises
to 2 per cent of GDP in 2005-06.
Public spending is planned, in total to grow in real terms
by 4 per cent on average over the current five-year Parliament.
This compares with average annual growth of 2.5 per cent a year
in the last Parliament and 1.6 per cent a year during the Conservatives'
period of office (see Graph 1). Even so, public spending will
be only 0.8 per cent of GDP higher in 2005-06 than in the Conservatives'
last year of office. But this is a misleading comparison; excluding
debt interest payments, public spending will have risen by 2.4
per cent of GDP over this period (see Graph 2). The tax burden
will have risen by 3.3 per cent of GDP but it will still be 0.3
per cent of GDP lower than the average tax burden during the Conservatives'
period of office.
Who pays the taxes?
The brunt of the tax increases are borne initially by the
corporate sector rather than by households. The split in 2003-04
and 2004-05 is roughly 80 per cent on companies and 20 per cent
on households (see Table 2).
Table 2. Who Pays the Taxes?
The main measures affecting companies are a 1 per cent increase
in employers' national insurance contributions (raising £3.9
billion in 2003-04)although this is likely to be shared
in time with employeesand a rise in North Sea taxation
(raising £450 million). Offsetting these is the new 25 per
cent tax credit for R&D spending.
On Goldman Sachs' forecasts, the current budget is in surplus
by around ¾ per cent of GDP at the end of the forecast horizon
and the ratio of net public sector debt stabilises at 30 per cent
of GDP. Hence the government's fiscal rules are still met comfortably
(see Graph 3). Our projections are broadly in line with the Treasury's.
It is quite reasonable for the Treasury to assume trend GDP
growth of 2½ per cent a year in its projections for the public
finances. This has always been our central assumption. I am less
certain about the Treasury's claim that this is a cautious assumption
but nevertheless, the Treasury's projections contain a margin
of comfort on both of its fiscal rules.
Fiscal policy will continue to impart a boost to the economy
this year and next. Given that the path for public sector net
borrowing is broadly unchanged between last November's PBR and
the Budget, there is also little change to estimates of the fiscal
stance. After easing by 1¾ per cent of GDP in 2001-02, the
fiscal stance will ease by a further 0.7 per cent of GDP in 2002-03
and 0.4 per cent of GDP in 2003-04 (see Graph 4). Household consumption
is projected by the Treasury to rise by 3 to 3½ per cent
in 2002 while government consumption rises by 3¼ per cent.
The task of rebalancing the economy remains with the Monetary
Policy Committee. The issue for the MPC in coming months is, will
consumer spending growth slow sufficiently to make room for the
global recovery? The Budget does nothing to help bring this about.
Indeed households enjoy a net tax cut of £1 billion in the
current financial year (see Table 2).