June 2010 Budget - Treasury Contents


1  Introduction


1. In previous Parliaments, it was the practice of the Treasury Committee to take evidence on the Budget and to report before the Second Reading of the Finance Bill. This year, that has not been possible. Our predecessor Committee took evidence on the first Budget of the year in March 2010, but was unable to report on it, because of the imminent election. The current Chancellor presented the second Budget of the year on 22 June 2010, and the Second Reading of the Finance Bill took place on 6 July. This Committee was established on 12 July. We immediately decided to take evidence on the Budget, and on 13 July we took evidence from the following witness panels:

Office for Budget Responsibility

Sir Alan Budd, Chairman, Budget Responsibility Committee

Geoffrey Dicks, Member, Budget Responsibility Committee

Graham Parker, Member, Budget Responsibility Committee

Experts

Ray Barrell, Director of Macroeconomic Research and Forecasting, National Institute of Economic and Social Research (NIESR)

Roger Bootle, Managing Director, Capital Economics

Robert Chote, Director, Institute for Fiscal Studies (IFS)

Alan Clarke, Economist, BNP Paribas

John Whiting, Tax Policy Director, Chartered Institute of Taxation

HM Treasury Officials

Dave Ramsden, Chief Economic Adviser

Andrew Hudson, Managing Director, Public Services and Growth

Edward Troup, Managing Director, Budget, Tax and Welfare

On 15 July we took evidence from the Chancellor of the Exchequer, the Rt Hon George Osborne MP, Sir Nicholas Macpherson, Permanent Secretary of HM Treasury, and Mark Bowman, Director, Budget and Tax. We are very grateful to all our witnesses; because of their co-operation we have been able to produce this Report in time for Third Reading of the Finance Bill.

2. There is a degree of political consensus over the need to reduce the deficit in the medium term, although there is debate about the speed and depth of reduction needed. The Fiscal Responsibility Act 2010 introduced by the previous administration, required that the Treasury must ensure:  

public sector net debt as at the end of the financial year ending in 2016 expressed as a percentage of gross domestic product (centred on 31 March 2016), is less than public sector net debt as at the end of the previous financial year expressed as a percentage of gross domestic product (centred on 31 March 2015).[1]

The Chancellor has set himself a similar target for net debt:

For this Parliament, the fiscal mandate will be supplemented by a target for debt as a share of GDP to be falling at a fixed date of 2015-16, ensuring that the public finances are restored to a sustainable path [...]

3. However, there are differences in approach to public sector net borrowing, even though both administrations proposed some fiscal tightening. The previous Chancellor estimated that net borrowing would reach £166.5bn in 2009-10; in the March Budget he proposed fiscal adjustments which meant borrowing was expected to fall to £74bn by 2014-15, a reduction of 56%. Although borrowing in 2009-10 was lower than expected, the OBR estimated that the fiscal adjustments announced in the June Budget by the current Chancellor meant that net borrowing would fall from £155bn in 2009-10 to £37bn by 2014-15, a reduction of 76%.[2]

4. The previous administration's Fiscal Responsibility Act requires the Treasury to ensure that public sector net borrowing as a percentage of GDP falls each year from 2011 to 2016, and that for the financial year ending in 2014, public sector net borrowing expressed as a percentage of gross domestic product is no more than half of what it was for the financial year ending in 2010.

5. In his Budget statement the Chancellor set out a formal fiscal mandate:

that the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget.[3]

At this Budget, the end of the forecast period is 2015-16. However, under current plans the structural current deficit is expected to be in balance a year early, in 2014-15. Although there are differences in the definitions used, in that the Fiscal Responsibility Act refers to all public sector net borrowing, while the fiscal mandate is expressed in terms of the structural deficit, it is clear that the Chancellor is proposing a significantly faster fiscal adjustment than that set out in the previous Government's March 2010 Budget.

6. There is international controversy over what would be a prudent speed for fiscal consolidation. In June 2010, the President of the United States of America wrote to his G20 colleagues urging caution, saying:

We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.[4]

The Chartered Institute for Personnel and Development (CIPD) has warned:

[...] historical precedent would suggest that the application of stronger fiscal discipline to an economy in too weak a state to bear it will both slow the rate of economic growth and stem the pace of job creation.[5]

7. In contrast, the Chancellor considers that without a more rapid adjustment, the UK will face:

Higher interest rates, more business failures, sharper rises in unemployment, and potentially even a catastrophic loss of confidence and the end of the recovery.[6]

Ray Barrell of NIESR told us:

Tighter fiscal policy is needed to pay down the debt stock, and the government's general plan to do that is welcome. As the UK is the only large OECD country that has never defaulted on its debt, it is very unlikely that the UK will face a Greek style confidence crisis. It is therefore unlikely that we will see a noticeable premium on interest payments on UK debt. However, debt reduction is needed both to ensure we are fair to our children by not consuming their inheritance, and also to prepare our defences for the next financial crisis when debts will have to rise again.[7]

8. This is the central and most difficult decision any Chancellor has to take. We have not attempted to challenge the Chancellor's judgement on the Budget as a whole. There are risks on either side of the Budget judgement. The Chancellor has chosen a somewhat more radical path than his predecessor. Furthermore, he has been explicit that his aim is not only to reduce debt, but to rebalance the economy away from the public and toward the private sector. In this Report, we examine some of the risks and uncertainties in this approach. We expect that the consequences of the Chancellor's decision will be the subject of many of our future inquiries.


1   Fiscal Responsibility Act 2010, C.3, section 1 Back

2   June 2010 Budget, p 99, table C.10 Back

3   HC Deb, 22 June 2010, col 167 Back

4   http://www.whitehouse.gov/the-press-office/letter-president-g-20-leaders, accessed 19 July 2010 Back

5   CIPD, CIPD responds to 'optimistic' Office for Budget Responsibility employment forecasts, 30 June 2010 Back

6   HC Deb, 22 June 2010, col 166 Back

7   Ev 47 Back


 
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Prepared 23 July 2010