{"id":2644,"date":"2008-09-09T10:36:17","date_gmt":"2008-09-09T10:36:17","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=2644"},"modified":"2025-03-27T15:48:42","modified_gmt":"2025-03-27T15:48:42","slug":"consensus-underestimating-uk-fiscal-blow-out","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=2644","title":{"rendered":"Consensus underestimating UK fiscal blow-out"},"content":{"rendered":"

Public sector net borrowing totalled \u00a335 billion in 2007\/08, equivalent to 2.5% of GDP. The average forecast of economists surveyed by the Treasury is for a rise to \u00a347 billion this year and \u00a350 billion in 2009\/10, or about 3 \u00bc% of GDP in both years. I think the consensus is underestimating the sensitivity of the public finances to the economic cycle. Borrowing could reach about 3 \u00bd% of GDP this year and over 5% in 2009\/10, implying nominal figures of \u00a350-55 billion and over \u00a375 billion respectively.<\/p>\n

Conceptually, the public sector balance can be split into discretionary and non-discretionary components. The analysis below assumes the government chooses the percentages of GDP accounted for by spending on goods and services and indirect tax revenues. Other elements of the public finances \u2013 mainly benefit spending and direct tax receipts \u2013 are defined as non-discretionary, i.e. determined by the economic cycle, financial market developments and other factors. (Of course, policy decisions also affect these elements but their impact on year-to-year changes is small relative to cyclical influences.)<\/p>\n

The first chart shows annual changes in the non-discretionary public sector balance, defined as above and expressed as a percentage of GDP, together with the fitted values of a model based on current and lagged rates of change of GDP and stock prices. (The labels on the horizontal axis refer to financial years ending in March of the year stated.) Despite its simplicity, the model is able to explain the major swings in the non-discretionary balance over the last 20 years.<\/p>\n

Using the model to forecast requires assumptions about GDP and stock prices. GDP is projected to be unchanged between the second quarter of 2008 and the first quarter of 2009 and to grow at an annualised rate of 2% thereafter \u2013 close to the current consensus forecast. Similarly, the FT all-share index is assumed to be stable at its current level until the first quarter of next year and then to rise by 10% per annum<\/em>. Based on these inputs, the model projects a year-over-year deterioration in the non-discretionary balance of 1.1% of GDP in 2008\/09 and 1.7% in 2009\/10. <\/p>\n

The change in the overall public sector balance will also depend on the discretionary component. For simplicity, spending on goods and services and indirect tax revenues are assumed to remain stable as percentages of GDP in 2008\/09 and 2009\/10. (The former assumption, in particular, may be optimistic given a possible pick-up in public sector wage settlements.)<\/p>\n

The second chart shows the overall balance as a percentage of GDP, including the forecasts for 2008\/09 and 2009\/10. Projected borrowing of 5.3% of GDP in the latter year would be the highest since 1995\/96. In a full recession \u2013 not the assumption here \u2013 borrowing would probably challenge the 7.8% of GDP peak reached in 1994\/95.<\/p>\n

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<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Public sector net borrowing totalled \u00a335 billion in 2007\/08, equivalent to 2.5% of GDP. The average forecast of economists surveyed by the Treasury is for a rise to \u00a347 billion this year and \u00a350 billion in 2009\/10, or about 3 \u00bc% of GDP in both years. I think the consensus is underestimating the sensitivity of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2644","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2644","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2644"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2644\/revisions"}],"predecessor-version":[{"id":4953,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2644\/revisions\/4953"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2644"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2644"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2644"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}