Memorandum by Mr David Walton, Specialist
Adviser to the Committee
1. The Chancellor has followed precisely
the same approach as that taken in previous yearsthe unintended
overshoot in the budget surplus which has arisen in 2000-01 is
given back through some mildly stimulative measures in 2001-02.
This leaves the medium term path for the public accounts unchanged
from last year's plans.
2. Mr Brown has turned his back on the advice
of the IMF, who recently argued that there should be no net tax
cuts or expenditure increases in this year's Budget. Surprisingly,
the IMF implicitly seems to favour using the budget to manage
demand over short periods, something which has repeatedly failed
in the past. Mr Brown is right to rely instead on an independent
central bank to manage demand through changes in interest rates.
3. On a fairly wide definition of the measures
included in the "Budget", we calculate that the stimulative
effect of the package will amount to £5.4 billion, or half
a per cent of GDP in 2001-02. The fiscal stance will ease by about
1 per cent of GDP between 2000-01 and the new fiscal year. This
will almost exactly offset the unintended tightening in the fiscal
stance which has occurred in the year just ended. Hence, the change
in fiscal stance over the two years is exactly the same as announced
4. As usual, the Chancellor's fiscal projections
are based deliberately cautious economic assumptions. In particular,
the Treasury continues to assume medium term GDP growth in only
2.25 per cent per annum. On Goldman Sachs' more optimistic assumption
of underlying GDP growth of 2.5-3.0 per cent per annum, the Government
will have around £10 billion more to "give away"
in the new Parliament, while still meeting the fiscal rules with
Maintaining a medium-term focus to fiscal policy
Prior to the Budget, the IMF Executive Board
argued on balance that "it would be prudent for the Government
to abstain from introducing new spending commitments or tax cuts
in the March 2001 Budget". In the event the Chancellor chose
to ignore these calls. The Budget measures consisted of the following:
Implementation of the measures announced
for consultation in last November's Pre-Budget Report (PBR). These
amount to £2.0 billion in both 2001-02 and 2002-03. (This
is on top of the measures announced in the PBR and implemented
without further consultation worth £2.6 billion in 2001-02
and £3.9 billion in 2002-03).
Additional Budget measures worth
£1.6 billion in 2001-02 and £2.4 billion in 2002-03.
An increase in Departmental Expenditure
Limits of £0.8 billion in both 2001-02 and 2002-03. DELs
are boosted by a further £1 billion in 2001-02 as this year's
estimated underspend is carried forward under the Government's
end-year flexibility arrangements.
Thus, as Exhibit 1 shows, the overall Budget
package is worth £4.4 billion in 2001-02 (£5.4 billion
if the carryover of this year's £1 billion estimated underspend
in departmental spending is included) and £5.2 billion in
2002-03. Although sizeable, these policy measures do nothing more
than bring the public finances back broadly on to the course envisaged
a year ago. Relative to Budget 2000, PSNB and the surplus on current
budget is £1 billion better than expected in 2001-02 and
£1-2 billion a year better in future years (see Exhibit 2).
Many will accuse the Chancellor of indulging
in a pre-election giveaway but his actions are entirely consistent
with the Government's previous approach to fiscal policy. This
was set out clearly by Gus O'Donnell, H.M Treasury's Managing
Director of Macroeconomic Policy and International Finance, in
evidence to the Treasury Select Committee after the last Budget.
He stated that "there is no Government intention to run up
surpluses forever. The intention is to move back towards meeting
the Golden Rule with a reasonable margin". He likened the
situation to a golfer who had hit the ball straight down the fairway
when an unanticipated wind comes along and blows the ball to the
right. The next shot aims back towards the target.
In general, I believe that the Chancellor is
right to maintain the medium-term focus of fiscal policy. Fiscal
policy is not best suited to managing demand, except when there
is no alternative (within the EMU, for example), and it is surprising
that the IMF is advocating its use. The Government's fiscal rules
ensure that the public finances remain on a sustainable footing.
Equally, as important, they are transparentthis was one
of the easiest Budgets in years to predict because the fiscal
framework is clear. Monetary policy is a much better instrument,
particularly when in the hands of independent central bankers,
to keep overall demand in the economy growing at a pace consisent
with maintaining inflation on target.
There will doubtless be the usual debate about
the fiscal stance. The Chancellor argued that the Budgetary measures
were prudent because cyclically adjusted net borrowing on the
Government's fiscal projections is no greater than in Budget 2000
(see Exhibit 3). Nevertheless the fiscal stance is projected by
the Treasury to ease by 1.1 per cent of GDP in 2001-02. A year
ago the Treasury expected the fiscal stance to ease by only 0.2
per cent of GDP in 2002-02. But the fiscal stance is only easing
by more next year because it tightened by more in 2000-01. This
may be no bad thing. The fiscal easing will provide support to
the economy over the next couple of years at a time when the global
economy is looking fragile.
The Chancellor's projections are, as usual,
based on cautious economic assumptionsin particular, medium-term
GDP growth of 2.25 per cent a year. In particular, the Treasury
continues to assume medium term GDP growth of only 2.25 per cent
per annum. On Goldman Sachs' more optimistic assumption of underlying
GDP growth of 2.5-3.0 per cent per annum, the Government will
have around £10 billion more to "give away" by
2005-06 while still meeting the fiscal rules with ease (see Exhibit
12 March 2001