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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