Budget 2014 - Treasury Contents

3  The public finances

Performance against the fiscal targets

66. The Government's fiscal targets are set out in the Charter for Budget Responsibility. At the Budget, the Government amended the existing Charter to account for changes related to the introduction of the welfare cap. The Government's fiscal targets, as originally set out in 2010, were not changed.[122]

67. The Government has set itself two medium-term fiscal targets: the fiscal mandate and the supplementary target. The fiscal mandate is to target a "cyclically adjusted current balance by the end of the rolling, five year fiscal period", whilst the supplementary target is for "public sector net debt as a percentage of GDP to be falling at a fixed date of 2015-16".[123]Table 2: Changes to the cyclically-adjusted current budget since December 2013
Per cent of GDP
  2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
December forecast -3.6-2.9 -2.0-1.4 -0.20.7 1.6
March forecast -3.5-2.8 -2.2-1.5 -0.20.7 1.5
Change 0.2 0.1 -0.2 -0.2 0.0 0.0 0.0

Source: Office for Budget Responsibility, Economic and fiscal outlook, March 2014, p 167Table 3: Changes to public sector net debt projections since December 2013
Per cent of GDP
  2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
December forecast 69.974.4 78.380.8 81.280.0 77.6
March forecast 70.173.6 77.579.8 79.878.1 75.7
Change 0.2 -0.8 -0.8 -1.0 -1.4 -1.9 -1.9

Source: Office for Budget Responsibility, Economic and fiscal outlook, March 2014, p 166

68. The OBR's March 2014 Economic and Fiscal Outlook forecasts the cyclically adjusted current budget to be in surplus by 1.5 per cent of GDP in 2018-19, with a surplus of 0.7 per cent in 2017-18. The OBR therefore forecasts that the Government will meet its fiscal mandate a year early.[124] However, public sector net debt is forecast to rise by 1.5 percentage points in 2015-16, and not fall until 2016-17. As a result, the Government is forecast to miss its supplementary target by one year.[125]

69. In the latest Budget, the Government opted for a fiscally neutral stance.[126] This is in line with statements made at the 2012 Autumn Statement, where the Chancellor of the Exchequer noted that the Government was not pursuing the supplementary target:

    One of the central judgments of this Autumn Statement was not to chase the debt target, in other words, to accept that we had missed the debt target, and had we chased the debt target, that would have required significant cuts or tax rises over the next couple of years.[127]

As a result, the OBR has forecast that the Government will not meet the supplementary target. In June 2012, the IFS told us that the Government would effectively "be putting more than an additional £100 billion into the economy in the years 2012-13 to 2014-15 than it had planned".[128]

70. For the fourth Economic and Fiscal Outlook in a row, theOBR forecasts that the Government will meet the rolling fiscal mandate, but not the supplementary target. In line with previous occasions, the Government has not proposed any corrective action in order to meet the supplementary target. Instead the Government has allowed the automatic stabilisers to continue their work, rather than taking corrective action—tightening fiscal policy—in order to meet the supplementary target.

Changes announced in the Budget

71. The overall effect of policy changes announced in the Budget was broadly fiscally neutral, with a small net positive impact on the public finances of £150 million over the five year forecast period. The Government said in the Budget:

    Reflecting the government's commitment to responsible fiscal policy, and despite the improved borrowing forecast by the OBR, Budget 2014 sets out a fiscally neutral response with the improvement in the fiscal forecast helping to return the public finances to a sustainable position.[129]
Table 4: Summary of Budget policy decisions
£ million
  2014-15 2015-16 2016-17 2017-18 2018-19
Total tax policy decisions -10-640 -1,800 -1,420-1,685
Total spending policy decisions -540+80 +2,025 +2,055+2,085
TOTAL POLICY DECISIONS -550 -560 +225 +635 +400

Source: HM Treasury, Budget 2014, 19 March 2014, p 57, Table 2.1

72. Of the 54 policy changes announced, seven are projected to cost or raise more than £1 billion in total over the forecast period:[130]

·  The increase in the personal allowance to £10,500 in 2015-16 with equal gains to higher rate taxpayers

·  Reduction in the tax rate for pension withdrawals to the marginal income tax rate

·  Abolition of the 10 per cent rate for saving, and an increase in the 0 per cent band to £5,000

·  Equalising stocks and shares and cash ISA limit, with an increase in the annual limit to £15,000

·  Increase of the annual investment allowance to £500,000

·  Limiting carbon price floor disparity between the UK and EU

·  Accelerated payment of disclosed tax avoidance schemes and the General Anti-Abuse Rule.

73. The OBR noted that some of the measures announced at the Budget had "markedly different implications beyond the five year scorecard period than within it".[131] In particular, the Treasury provided longer term revenue consequences for four of the measures:

·  the pension withdrawals measure, which brings forward income tax receipts but has a small steady-state cost in the long term;

·  voluntary NICs, which increases NICs receipts in the short term but also increases long-term state pension costs;

·  the temporary annual investment allowance increase, which raises the amount of tax relief that can be claimed until December 2015, but then reduces it thereafter, largely recouping the scorecard costs; and

·  accelerated payments related to tax avoidance schemes, which brings forward receipts from future years.

74. The long run effects of the four measures above are presented in chart 4. Commenting on the effects, the OBR said:

    The net effect of these measures is to increase receipts over the scorecard horizon by £1.2 billion a year on average, but the revenue raised then drops sharply in 2019-20 and averages only £0.2 billion a year over the 15 years beyond the scorecard horizon. Given the uncertainty associated with costing these policy measures over a 5-year horizon, the longer-term implications will be also be subject to considerable uncertainty.[132]

75. Commenting on these measures, the IFS noted that "permanent tax giveaways" set out in the Budget were being paid for by "temporary increases in tax revenues".[133] Paul Johnson, Director the Institute for Fiscal Studies, said:

    These things balance out in the scorecard but the increased revenue runs out pretty soon after the end of the scorecard, and indeed goes negative, while the reduced taxes or increased spending are permanent. Obviously they can be changed but it is more difficult to change these things once they are there.[134]
Chart 4: Revenue raised by selected Budget policy measures

Source: Office for Budget Responsibility, Economic and Fiscal outlook, 19 March 2014, p 98, chart 4.1

76. However, compared to the overall size of the Government finances, these measures are relatively small. Mr Johnson noted that "these are a few billions out of the still £100 billion-odd of borrowing we are doing."[135] He also noted that the estimates of revenue and expenditure arising from the measures were highly uncertain:

    The scorecard suggests an extra £1 billion or £1.5 billion of revenues in the short run. The OBR document makes it very clear there is a huge amount of uncertainty about that and that depends on fairly unknown assumptions about how pensioners will behave: how much they will draw down early or the extent to which they will, nevertheless, buy annuities or not. If you take those forecasts, in the long run—and I think this is after about 2030-something—you get a reduction in revenues as the income is used up a bit quicker. I think the answer is the fiscal implications are probably small; probably positive in the short run and negative in the long run.[136]

77. Mr Johnson said that overall the Chancellor was "not being quite as prudent as [he] might suggest", and that he did not believe it was "an entirely neutral Budget."[137] Mr Johnson also warned that this was not the first time he had seen short term revenue increases in the Budget:

    One reason for stressing that a little more than we might otherwise is that rather similar things have been done over the last budget and autumn statement where we have seen, for example, one of the biggest, contracting out for employer national insurance contributions, will cost the public sector around £3 billion a year. That was scored as additional revenue and the assumption is that they will just be additional spending cuts. It is something that has happened two or three times. You begin to add those up and it begins to make a noticeable difference.[138]

78. The Budget was fiscally neutral on a five year view—the forecast period. Four of the measures announced have consequences within the forecast period that differ significantly from their longer term effects. These measures are fiscally positive within the five year forecast period. However, this tapers and they are projected to be fiscally negative after 20 years. While the effect of these four spending decisions may be small, and subject to uncertainty, the Committee would be concerned if the Government made fiscal decisions with its eye only on the five year forecast period. It is important that the OBR cost the long term implications of Budget measures.

Cyclically adjusted current budget

79. The Government's fiscal mandate is "a forward-looking target to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period".[139] According to the OBR, this means that "total public sector receipts need to at least equal total public sector spending (minus spending on net investment) in five years' time, after adjusting for the impact of any remaining spare capacity in the economy."[140]

80. The OBR's methodology for adjusting for the impact of spare capacity on the public finances is set out in its working paper Cyclically adjusting the public finances.[141] The OBR's approach relies heavily on its estimation of the size of the output gap. As already noted, the output gap is unobservable and very difficult to estimate. As the OBR has said:

    Past experience and common sense suggest that there are significant upside and downside risks to our central forecasts for the public finances. These reflect uncertainty both about the outlook for the economy and about the level of receipts and spending in any given state of the economy.[142]

In the Economic and Fiscal Outlook, the OBR noted that it had judged the size of the output gap to have been larger than its own cyclical indicators—a method of estimating the size of the output gap—had suggested. According to Mr Chote, the cyclical indicators suggested that the size of the output gap was around two percentage points smaller.[143]

81. The Committee asked both Mr Chote and Graham Parker, a member of the Budget Responsibility Committee, how a smaller estimate of the output gap would affect the CACB. Both agreed that it would have worsened the cyclically adjusted fiscal position by around £20 billion.[144] When asked whether whether this would have led to the need for additional fiscal tightening to meet the fiscal mandate, Mr Chote said that he did not know, but that "it would be quite close."[145] He also said:

    I suspect, if you took [the cyclical indicators] completely at face value, we would be at the very small end of the spectrum and it would use up most of the room for manoeuvre against the mandate.[146]

Mr Chote also commented on longer term uncertainty in the CACB:

    I am sure, if [the government] were here, they would say that they believe that delivering a sustainable medium-term fiscal path does help deliver your broader economic objectives. I think the key point to bear in mind is that, as you say, you do not know with confidence what the output gap is going to be at that sort of horizon, which is one reason why, in every forecast that we have produced, we do a sensitivity analysis to show how wrong you have to be about that in order for the rule to be in danger of being breached.

    The other uncertainty, of course, even if you know what the activity is, is whether you get the forecast of the unadjusted deficit right over that horizon. Clearly that is not straightforward either, so you have two sources of difficulty there.[147]

82. The Government is planning to update its fiscal mandate later this year. The Committee asked IFS witnesses whether the cyclically adjusted current budget should remain part of the fiscal mandate. Mr Johnson said:

    It is a difficult one. I think it is appropriate to think about your fiscal position in the context of where you think you are relative to the cycle or relative to the output gap. Clearly, if you are simply outbalanced, if you think you have a massive negative output gap, you are well above trend, then that is not a long-term sustainable position. […] but there are balances between uncertainty on the one hand and the need to have an output gap measure on the other.[148]

Gemma Tetlow, Programme Director at the IFS, made a further point, noting that the current significant distinctions between unadjusted and cyclically adjusted measures were particularly acute due to the depth of the recent recession:

    The only thing I would add to that is, as Paul said, there are good reasons for not worrying about the bits of borrowing that are purely cyclical and temporary. In more normal times, this distinction becomes less important. If you are in a small recession or you are in a small boom, then well within the five-year forecasting horizon you would expect the economy to be back at its trend level again and, therefore, the cyclically-adjusted measure is exactly the same as the headline measure. The reason that the cyclically-adjusted measure was an important part of the fiscal mandate four years ago now is that we were forecasting a very long period of below potential economic activity. Therefore, there was a difference for all five years of the forecast horizon between a cyclically-adjusted measure and a headline measure. As we get back to a more normal operating position, I think the distinction between the two becomes a lot less important and it is a lot easier simply to think about the headline measure.[149]

Mr Chote of the OBR said:

    You can clearly have a target that is not a cyclical one and, at one level, that is simple. The Chancellor has suggested he would like to be in a situation where you are looking for a simple, straightforward surplus on the overall budget. That is clearly easier to understand and to interpret than a cyclically-adjusted surplus or balance on the current budget.[150]

83. After an economic shock, cyclically adjusted measurements are particularly uncertain. The current fiscal mandate is dependent on an unobservable output gap. It has been made even more unreliable as a consequence of the financial crisis.

84. For most of the last 30 years, governments have been trying to devise a robust fiscal anchor. There have been successive Medium Term Financial Strategies; the Code for Fiscal Stability (modified during the crisis by the temporary operating rule); and the Charter for Budget Responsibility. The Government is now considering a new Charter for Budget Responsibility. Fiscal anchors have merit. But at a time when the credibility of pledges in all aspects of public policy has attracted greater scepticismthan before, it will be more difficult to build confidence in the fiscal anchor deep enough to withstand an extreme event.

Ring fencing

85. The Government has been following a policy of 'ring fencing' certain departmental budgets. In the 2013 Autumn Statement, the Government confirmed that expenditure on Health, schools and Official Development Assistance (ODA) would "be protected in line with the policy set out at Spending Round 2013".[151] No change to this policy was announced in the Budget.

86. The Committee has already expressed concern about the long term impact of ring fencing on the shape of Government, particularly if departmental spending were to be cut further than it has been already. The IFS in its Green Budget 2014 noted the implications of ring-fencing on allocations of departmental spending: "By 2015-16, while total departmental spending will be 11.1% lower than in 2010-11, departmental spending on areas other than the NHS, schools and aid will have been cut by 21.0%".[152]The Committee's Autumn Statement 2013 report said:

    Ring fencing, by definition, requires that the balance of public expenditure restraint and cuts be borne in the rest of public expenditure. Each successive year of public expenditure restraint results in an increase in ring-fenced spending as a proportion of the total. The smaller non-ring fenced areas in turn have to bear a higher proportion of any savings in subsequent years. The IFS has shown that non-ring-fenced expenditure may fall from 61.6 per cent in 2010-11 to around 50 per cent in 2018-19 of total Departmental Expenditure Limits. Ring fencing also reduces the discipline on spending in these areas: the rigour of negotiations between the department and the Treasury on allocations will be weakened, since it is known in advance by both sides that this spending is protected.[153]

87. In its fiscal plans for the period 2015-16 to 2018-19, the Government has set a fiscal envelope that requires further fiscal consolidation. Witnesses told the Committee that the further fiscal tightening planned during the next Parliament would be significant in scale. Mr Saunders said:

    In broad terms if you go back to the 2010 budget, about 90 per cent of the total fiscal tightening in terms of the structural primary balance would have been completed by the end of the fiscal year that is about to begin, the 2014-15 year, before the next election. Ever since then that proportion has fallen steadily and under the current plans it is about 50:50. The total fiscal tightening is just above 10 per cent of GDP and roughly 5 per cent of GDP of that happens in this Parliament, most of it in the first two years, and roughly 5 per cent of GDP is pencilled in for the next Parliament. […] We have lifted a headwind, if you like.[154]

Ms Tetlow expanded on this point, noting:

    If you think instead about what active policies have been introduced and are placed, the current Coalition Government has stuck to its plan for the tax increases and the spending cuts it was going to do in this Parliament but, in a sense, the size of the problem that they have been faced with has been revised over time. They have tacked on to the end of it additional cuts to come in the next Parliament.[155]

88. The Government has announced the spending envelope for 2015-16 to 2018-19, but the areas where spending will be reduced, or income raised, have not yet been set out in detail by the Government. Mr Johnson said:

    Beyond 2015-16 we have not heard from this Government what exact spending cuts they would introduce. We do not know what the Opposition would do. That is kind of the position we were at in 2009-10 before the election, but clearly […] there are three years of very big spending cuts pencilled in and we know next to nothing about what they will look like.[156]

89. Ring fencing distorts spending decisions. It also weakens rigorous scrutiny of spending in ring fenced departments. Furthermore, with each year that ring fencing remains in place, the size of ring fenced departments increases as a proportion of total departmental spending. The IFS has stated that by 2015-16, expenditure reductions of 21 per cent will have been implementedin areas other than the NHS, schools and overseas aid. Each successive round, seeking reductions from an already smaller non-ringfenced base, will be more difficult than its predecessor.

Welfare cap

90. The 2014 Budget set out the Government's additional controls over annually managed expenditure (AME) on welfare—the welfare cap. The welfare cap is a cap on forecast welfare spending. It is not a cap on actual welfare spending.The Government states that the welfare cap "will not apply to the first year of the forecast horizon, or to years previous to the first year of the forecast horizon.", and that "The welfare cap and margin will roll forward every year. The level of the welfare cap for the additional year will be published at the same time as the level of the margin".[157]

91. The level of the cap has been set for the years 2015-16 to 2018-19 at the level of the OBR's forecast, and consequently the Government's existing spending plans, as published in the March 2014 Economic and Fiscal Outlook.[158]Table 5: The level of the welfare cap and the forecast margin
£ billion
  2015-16 2016-17 2017-18 2018-19
Welfare cap 119.5 122.0124.6 126.7
Forecast margin (2%) 2.42.4 2.52.5

Source: HM Treasury, Budget 2014, 19 March 2014, p 26, Table 1.5

92. Rules governing the cap are set out in an updated Charter for Budget Responsibility published alongside the Budget. These rules include: how the cap is to be set; how and when the size of the cap can be changed; the requirement for a forecast margin above the cap; how the cap is to be assessed; how the contents of the cap can be changed; under what circumstances the cap is considered to be breached; and actions to be taken by the Government in the event of a breach.[159]

93. The OBR will assess the Government's adherence to the welfare cap in every autumn Economic and Fiscal Outlook. Alongside this will be a new report from the OBR on welfare trends, published annually.[160] The OBR's autumn EFO analysis will be updated in every Budget EFO, but no formal assessment will take place.[161]

Effect on policymaking

94. The stated aim of the welfare cap is to "improve spending control".[162] The cap is breached if either "spending within its scope is forecast to increase above the level of the cap in any year in which it applies, as a result of discretionary policy action" or if "spending is forecast to increase above the margin in any year where the cap applies, for any reason."[163]

95. A breach of the cap triggers "a debate on a voteable motion led by the Department for Work and Pensions, normally within 28 sitting days." The Department for Work and Pensions will then have three options: to propose Government policy measures which will reduce welfare spending to within the level of the cap; to seek approval for the level of the welfare cap and/or margin to be increased, along with an explanation of why this is considered to be justified; or to explain why a breach of the welfare cap is considered justified.[164]

96. There has in recent years been an increasing tendency for government targets to be given a statutory underpinning. Examples of such "declaratory legislation" include the fuel poverty target set by the Warm Homes and Energy Conservation Act 2000, targets to reduce greenhouse gas emission, set by the Climate Change Act 2008, and targets for the reduction of child poverty, set by the Child Poverty Act 2010. Commenting on the likely effectiveness of the welfare cap, Mr Johnson noted that previous government targets of this kind, including the child poverty target and the supplementary debt target, had not been met. He said that targets enshrined in legislation "do not appear to have had an enormous amount of bite",[165] and noted that their deterrent effect generally amounted to "political stigma". He added: "Sometimes that works and sometimes it does not."[166] Moreover, Mr Johnson warned that the cap would come under much more pressure during a recession, when it would be more likely to be abandoned:

    […] if we did fall into some significant additional recession—and we know that, while the Job Seeker's Allowance and particular bits of housing benefit are clearly driven by the cycle, other bits of the benefit system are not invariable to the cycle and might rise in the circumstances that you are describing. The question is—and I do not know the answer to this question—suppose that were to happen, would this cap bite or is this a cap only for normal times? I presume that the Chancellor will say this is a cap for whatever times, but it would clearly bite much harder if we were to move into a substantial recession than under normal circumstances.[167]

97. Witnesses did, however, agree that increased scrutiny of welfare spending alongside additional analysis from the OBR on welfare trends could affect and might improve policymaking. Commenting on the impact the cap might have on policymaking in future, Mr Saunders said:

    I would guess quite large if it is bought into by all parties because it would mean that you would have a trade-off. If you propose new welfare measures then you would have to squeeze elsewhere.[168]

Mr Mortimer-Lee suggested that the cap would"lead to much more political consideration or consideration in society more broadly about how much we spend on these items of welfare."[169] He added:

    For some of the longer-term choices, in a way by focusing on a number I think you are going to bring into sharp relief a choice between welfare spending and spending on current goods and services by Government as we come to future consolidation because people are going to say, "Some of the departmental spending is going to be cut by 30%-odd. Shouldn't we cut the welfare budget?"[170]

Ms Tetlow also commented favourably on the impact of increased scrutiny and the OBR's new report. She suggested that the cap could have a positive effect if budgets had grown unintentionally or unexpectedly:

    To the extent that this causes you, on an ongoing basis, to assess where welfare spending is going, and the OBR is, in fact, going to publish a report each autumn assessing changes to the welfare forecast and what is going on. To the extent that it causes you to have an ongoing review of benefit spending and to think about, "What is the level of this and how is it distributed and why has it changed since we last looked at it", I think that is a positive thing. Hopefully, it might cause you to make better policies because you look at this every year rather than suddenly realising that your budget has exploded in a way you did not intend and then trying to address the issue.[171]

Design of the cap

98. The Government has set out which elements of welfare sit inside and outside the cap in its latest Budget, describing the cap as containing "all welfare spending in AME, with the exception of the state pension and the automatic stabilisers."[172] According to the OBR, of the £210.1 billion of total welfare spending for 2013-14, £116.4 billion of spending, or approximately 55.4 per cent, sits within the cap.[173]

99. While the Government has stated that the automatic stabilisers are excluded from the cap, some potentially cyclical elements of welfare spending, such as in work credits, remain inside.[174] Commenting on the desirability of limiting such in-work credits, Mr Mortimer-Lee said:

    If these individuals have low productivity and therefore would be able to access only a very low wage or no job at all, is it better to subsidise those people to be in a job or should we allow them to be unemployed? My own view is that it would be better for low productivity individuals that we subsidise them and encourage them into employment when otherwise they might not be employed. I think that has lots of desirable social consequences and there is also a strong argument for encouraging that to build up experience and human capital over a period.[175]


    If you take a much more puritan point of view, they might be unemployed for a very long time and therefore end up with no skills whatsoever. I think that would be a poor outcome for them and for society.[176]

100. The Committee also asked for witnesses' opinions on the exclusion of the state pension and automatic stabilisers from the cap. Mr Mortimer-Lee agreed with the exclusion of pensions, and noted that they were elements of spending that were difficult to control:

    If you are going to have a cap you should try to cap those things that you can control and don't cap those things that you can't control. In terms of Jobseeker's Allowance, you can't control precisely how many unemployed people there are going to be, so you should not try to control that. To some extent, people's decisions about retirement are also out of it. It may be sensible to start small and then think about where you are going to go over the longer term.[177]

Mr Johnson agreed, saying:

    It is not clear what the benefit of putting the state pension in would be. The state pension is completely uncontrollable unless you think you are going to renege on previous promises or you are going to adjust, year by year, the rate at which you increase the state pension. If you put the state pension in you are, I think, suggesting that you would consider adjusting the state pension and that is just a policy decision for Government. [178]

101. The welfare cap acts as a limit on total welfare spending, but does not impose restrictions on how spending is allocated within the cap. Mr Johnson said that this meant that the cap was "potentially very flexible if different things are going on with different bits of the system, but very inflexible if everything is moving in the same direction."[179]Commenting on the cap's design, Mr Johnson said:

    You can imagine a world in which one benefit, say personal independence payments, starts rising much quicker than expected but that is offset, for some reason, by some reduction in housing benefit or tax credit. If that happened, the cap would not bite and that would not force any policy change, but you might think that you want to be thinking about each individual benefit and what the appropriate structure and spending on those is.[180]

102. Overall, Mr Johnson suggested that the cap was a somewhat blunt instrument, noting that "this is a very top-level cap. It would be very nice to see more detail underneath that about some of the ways in which you might respond." He said:

    Whether you would want to change the rules just because higher levels of low income had resulted in more people coming on to housing benefit; you might want to respond to that differently to where something was going up because rents were rising much more quickly than you expected.[181]

Forecast margin

103. As noted earlier, the welfare cap is subject to a forecast margin. In practice, this means that the Government will only be deemed to have breached the cap if one of two conditions is met:

·  if spending within its scope is forecast to increase above the level of the cap in any year in which it applies, as a result of discretionary policy action; or

·  if spending is forecast to increase above the margin in any year where the cap applies, for any reason.[182]

This is intended to prevent inaccuracies in the forecasts of welfare spending triggering the sanctions of the cap, and therefore ensure that "policy action is not triggered by small fluctuations in the forecast."[183]

104. The Government has set the margin at 2 per cent of projected welfare spending on the categories of spending that fall within the scope of the cap, for each year of the five year forecast horizon, excluding the first one.Commenting on the size of this margin, Ms Tetlow noted that a 2 per cent margin would have been breached in the recent past:

    We did try to look a little bit at how binding this 2 per cent forecasting margin is and the one time that it would have been breached in the last few years is, between the 2011 budget and the 2012 budget, there was a reasonably significant downgrade in the economic forecast from the OBR. That led to the forecast for welfare and scope spending in 2015 being more than 2 per cent higher in budget 2012 than it was in budget 2011. That was a reasonably significant revision to the economic forecast, but not a large recession. That sort of scale of change could cause a breach in this.[184]

Mr Johnson also commented on the size of the forecast margin, noting that the size of the welfare budget becomes progressively less certain nearing the end of the forecast window:

    One is that it is interesting looking at the cap and the amount of forecasting room around it, which does not grow as you go out. It is about 2 per cent or 2 per cent-and-a-bit each year into the future. You would expect the uncertainty to grow over time. Potentially at least, the tightness of this cap will be bigger over time or it may turn out to be very loose, because there is quite a lot of uncertainty about where we will be in 2018, for example. I suspect setting it five years ahead with a fixed 2 per cent to 2 per cent-and-a-bit forecasting margin around it will not last.[185]

105. 17 per cent of headline total managed expenditure in 2012-13 would have been covered by the welfare cap. The cap raises a number of concerns and we intend to seek further written evidence on its design and operation. Some welfare spending is not included within the cap. This may distort decision making, for example by tempting a government to change welfare entitlements in order to avoid breaching it. The penalty for a breach of the cap is any political embarrassment that may come with Parliamentary debate, a requirement in the event of its breach. The cap is therefore declaratory. Previous examples of such declarations include the child poverty target and the fuel poverty target.

122   HM Treasury, Budget 2010, June 2010, HC 61, p 12, paras 1.15-1.16 Back

123   HM Treasury, Charter for Budget Responsibility, March 2014 update, 19 March 2014 Back

124   Office for Budget Responsibility, Economic and Fiscal Outlook - March 2014, 19 March 2014, p 167, table 5.2 Back

125   Office for Budget Responsibility, Economic and Fiscal Outlook - March 2014, 19 March 2014, p 167, para 5.9 Back

126   HM Treasury, Budget 2014, 19 March 2014, p 20, para 1.52 Back

127   Oral evidence by the Chancellor of the Exchequer to the Treasury Committee, Autumn Statement 2013, 13 December 2013, Q 290 Back

128   Letter from Paul Johnson, Director, IFS, 13 June 2012 Back

129   HM Treasury, Budget 2014, 19 March 2014, p 20, para 1.52 Back

130   HM Treasury, Budget 2014, 19 March 2014, p 56-57, table 2.1 Back

131   Office for Budget Responsibility, Economic and Fiscal Outlook - March 2014, 19 March 2014, p 97, para 4.27 Back

132   Office for Budget Responsibility, Economic and Fiscal Outlook - March 2014, 19 March 2014 Back

133   Institute for Fiscal Studies, "Economy bouncing back more strongly but policy choices have increased long-run risks to the public finances," 2014 post budget briefing slides, 20 March 2014 Back

134   Q52 Back

135   Q52 Back

136   Q61 Back

137   Q53 Back

138   Q53 Back

139   HM Treasury, Charter for Budget Responsibility, March 2014 update,19 March 2014 Back

140   Office for Budget Responsibility, Economic and Fiscal Outlook - March 2014, 19 March 2014, p 165, para 5.3 Back

141   Office for Budget Responsibility, "Cyclically adjusting the public finances", June 2012 Back

142   Office for Budget Responsibility, Economic and Fiscal Outlook - March 2014, 19 March 2014, p 169, para 5.14 Back

143   Q185 Back

144   Q186 Back

145   Q187 Back

146   Q185 Back

147   Q189 Back

148   Q54 Back

149   Q54 Back

150   Q191 Back

151   HM Treasury, Autumn Statement 2013, Cm 8747, December 2013, p81, para 2.7 Back

152   IFS, Green Budget 2014, 5 February 2014, p40 Back

153   Treasury Committee, "Autumn Statement 2013," HC 826, p 28, para 45 Back

154   Q25 Back

155   Q59 Back

156   Q59 Back

157   HM Treasury, Charter for Budget Responsibility, March 2014 update,18 March 2014, paras 3.21-3.24 Back

158   HM Treasury, Budget 2014, 19 March 2014, p 26, para 1.76 Back

159   HM Treasury, Charter for Budget Responsibility, March 2014 update, 19 March 2014 Back

160   Office for Budget Responsibility, Economic and Fiscal Outlook, 19 March 2014, para 4.141 Back

161   Office for Budget Responsibility, Economic and Fiscal Outlook, 19 March 2014, para 4.139 Back

162   HM Treasury, Budget 2014, 19 March 2014, p 26, para 1.76 Back

163   HM Treasury, Charter for Budget Responsibility, March 2014 update,19 March 2014, p 10, para 3.30 Back

164   HM Treasury, Charter for Budget Responsibility, March 2014 update, 19 March 2014, p 10, para 3.31 Back

165   Q77 Back

166   Q77 Back

167   Q77 Back

168   Q37 Back

169   Q40 Back

170   Q40 Back

171   Q80 Back

172   HM Treasury, Budget 2014, 19 March 2014, p 27, para 1.78 Back

173   OBR, Economic and Fiscal Outlook - March 2014, p 141, table 4.28 Back

174   HM Treasury, Budget 2014, 19 March 2014, p 27, table A.2 Back

175   Q41 Back

176   Q42 Back

177   Q40 Back

178   Q75 Back

179   Q74 Back

180   Q73 Back

181   Q79 Back

182   HM Treasury, Charter for Budget Responsibility, March 2014 update,29 March 2014, p10, para 3.30 Back

183   HM Treasury, Budget 2014, 19 March 2014, p 26, para 1.76 Back

184   Q78 Back

185   Q72 Back

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Prepared 12 May 2014