Select Committee on Treasury Appendices to the Minutes of Evidence


Letter from Mr John Butler, HSBC Investment Bank

  In response to your invitation to submit written evidence commenting on the UK budget, please accept my thoughts which are set out below. In summary, I have two over-riding issues which are concerning me: first, what I call "creative accounting" (which may be a slightly unfair description!); and, second, his mis-leading interpretation of what is a fiscal loosening.

1.   "Creative" accounting

  The Chancellor has announced a number of additional spending and tax measures over and above that which were announced, or placed in consultation, in the Pre-Budget Report. These amount to between £3-3.5 billion each financial year. Despite this, however, the Government's net borrowing forecasts are unchanged. How is this done? Well, the Chancellor has revised up his estimate of households' tax compliance. Essentially for given income and activity, tax receipts are assumed to be permanently higher. OK, this happened in 2000 and in my estimates also happened, to a lesser degree, in 1999 (over and above surprises in the economic environment). But is this enough evidence to make such drastic revisions to past relationships?

  This change in assumption must mean there is now a huge risk that this assumption is proved wrong and the Government moves back even faster into deficit. It just cannot be described as a "prudent" assumption to make! More importantly, is this not exactly the type of change in structural assumptions that the Chancellor has repeatedly refused to do, and in broadly his own words ". . . threatens repeating the same mistakes made by previous Chancellors"?

2.   Fiscal loosening

  The Chancellor informs us that the budget does not represent a fiscal loosening relative to the Pre-Budget Report and hence, should not concern the MPC. And the MPC always appears to simply accept the Treasury's line! But although I would agree that the fiscal stance going forward is unchanged ie net borrowing is identical to previous forecasts, that is not necessarily the same thing as a fiscal loosening.

  In my view the magnitude of any fiscal loosening must depend on the change in the fiscal stance from one year to the next, not the level in any one year. As the public finances start from a tighter than expected position, to get back to the same net spending position going forward implies a stronger boost to GDP growth in 2001. In my estimates this is equivalent in the latest budget to a significant additional fiscal loosening between 2000 and 2001 of around 0.6 per cent of GDP. That is not small and far from irrelevant, and something, I believe, is brushed under-the-carpet by both the Chancellor and the MPC.

  I would be interested in the Chancellor's or the MPC's response to this. Why do the MPC always accept the Chancellor's interpretation? In some eyes, this seems to cast a shadow over the independence of the Committee.

14 March 2001

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