Letter from Mr John Butler, HSBC Investment
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