Memorandum submitted by Mr Martin Weale,
National Institute of Economic and Social Research
1. The Budget shows very little change as compared
to the situation described in the Pre-Budget Report. Like the
Pre-Budget Report, the Budget itself shows current expenditure
exceeding current income over the present economic cycle and thus
shows the Golden Rule being broken. There are, however, a number
of points of interest.
2. The figures for government borrowing on current
account for 2004/5 show that, with most of the data for the year
known, the Treasury has finally moved in line with the projections
made by independent forecasters such as the National Institute.
Table 1 compares the National Institute forecasts with those produced
by the Treasury over the last two years.
| HM Treasury |
| NIESR |
| March 2003 | £-1bn |
April 2003 | £-11bn |
| March 2004 | £-11bn |
April 2004 | £-15bn |
| March 2005 | £-16bn |
Jan 2005 | £-14bn |
3. Public current spending is forecast to rise by 5 ¾
% in the coming fiscal year. This rate of growth is in line with
the Treasury's projection of nominal GDP growth but is faster
than the growth in nominal GDP implied by most independent forecasts.
Current revenues are, nevertheless projected to rise by 8.3% with
further buoyancy needed in 2006/7 to close the budget deficit
with the Treasury anticipating considerable revenue buoyancy in
corporation tax and, to a lesser extent in income tax revenues.
4. The share of profits in national income is high at the
moment and reported company earnings have risen sharply over the
last six months. This means that if, in future the profit share
does no more than stabilise, there is likely to be some buoyancy
in revenue. Nevertheless it is difficult to avoid observing that,
at the current stage in the economic cycle pressures to produce
optimistic forecasts of borrowing are particularly strong.
5. A particular point of concern is that, while the Treasury
suggest that output is still below trend, most standard statistical
methods of identifying trend output, point to the output gap having
closed in the last year. If this is true, then growth at the rate
the Treasury is forecasting will provide a budgetary outturn which
is flattered by the state of the cycle.
6. Most fundamentally, as the table above shows, forecasts
cannot be expected to be perfect. This committee has in the past
asked HM Treasury to produce fan charts for its budgetary projections.
The need for these is as strong as ever. Even without them, it
is reasonable to ask what would happen to the Treasury projection
if the oil price were markedly lower than is assumed. Tax revenues
from the North Sea in 2005/6 are projected to be £3.4bn higher
than was thought a year ago and perhaps this gives some guidance
as to the revenue uncertainty associated with the oil price.
7. The long-term fiscal projections are a valuable attempt
to look further ahead than the usual budget horizon. The element
of uncertainty surrounding these must be much greater than that
affecting the other projections. Some guidance as to the effects
of, say, uncertainty about mortality, would be useful.
8. There are a number of other measures such as the lifting
of the stamp duty threshold on purchases of residential property.
There is a strong case for a fundamental review of housing taxation;
taxes such as stamp duty reduce mobility and discourage people
from adapting their housing to their needs. Thus it would be better
to see a shift in taxation away from purchase and towards use
of housing.
9. Of other measures announced perhaps the most interesting
is the re-introduction of very long-term government borrowing.
There is a strong case for active management of the public debt,
with the government buying in long-dated stock when interest rates
are high and issuing it when rates are low. With a period of very
low long-term rates perhaps just ending, it may be that this change
in borrowing policy comes slightly too late to be of greatest
value to the tax payer. The Debt and Reserves Management Report
does not indicate whether the government's liabilities have been
managed efficiently although the debt management objective is
clearly stated as "to minimise over the long term the costs
of meeting the Government's financing needs, taking into account
risk". Readers are told that this is achieved in part by
adjusting the maturity and nature of the Government's debt portfolio,
but there are no numbers to show whether the adjustments have
been successful.
10. The Government should be encouraged to show further flexibility
in its approach to borrowing. For example the introduction of
savings loans (where the lender pays the government a fixed contribution
each year and receives a lump sum at the end) would make retirement
planning simpler and fill a gap in the market. In turn this would
be likely to reduce the cost of long-term borrowing to tax payers.
17 March 2005
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