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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of United Kingdom published on 29 June 2009.
The government deficit is widening rapidly and is expected to reach around 14% of GDP in 2010 according to OECD projections, which is helping to cushion the downturn. Moreover, support for the financial system has led to direct fiscal costs and substantially added to implicit government liabilities. The UK authorities have provisionally estimated that the losses may lie within a potential range from 1½ to 3½ per cent of GDP and the authorities have included the upper end of this range in their projections for borrowing and debt, as the basis for setting fiscal policy. After around the turn of the century, the underlying fiscal position weakened more than anticipated, while there was some subsequent improvement, particularly in tax receipts. Tax receipts have been significantly affected by the current downturn. According to OECD projections, the gross government debt-to-GDP ratio is now on course to reach around 90% by 2010. The November Pre-Budget Report and Budget 2009 outlined a path to fiscal consolidation starting in 2010, based on income tax rises for those on high incomes, increases in national insurance contributions and revised spending assumptions, alongside “value for money” savings. Although the deficit should be allowed to support activity in the near term, the government has set out an ambitious consolidation plan for when the recovery takes hold. The delivery of the consolidation will require specifying the “value for money” savings beyond 2011-12 in the upcoming Spending Review. This would signal the commitment to getting the public finances back onto a sustainable and prudent footing. Further action may be required if the economy does not recover as quickly as anticipated.
GDP growth, unemployment and the current budget balance
Source: OECD (2009); OECD Economic Outlook 85 database and ONS.
In 1997, the government introduced a principles-based fiscal framework which, alongside the new independent monetary policy regime, sought to shift the focus of macroeconomic policy to long-term sustainability within a credible and transparent framework. The fiscal framework is operationalised through two fiscal rules: the golden rule, which requires that over the economic cycle the government should borrow only to invest and that current spending (including the consumption of capital) should be paid for by taxation; and the sustainable investment rule, which requires that over the economic cycle the government should ensure the level of public debt as a proportion of national income is held at a stable and prudent level (defined as net public debt below 40% of GDP on average over the cycle running from 1997-98 to 2006-07). In November 2008, the government suspended the two fiscal rules on the grounds of extraordinary circumstances. This decision reflected the suddenness and severity of the downturn. The government has adopted a temporary operating rule: to set policies to improve the cyclically-adjusted current budget each year, once the economy emerges from the downturn, so it reaches balance and debt is falling as a proportion of GDP once the global shocks have worked their way through the economy in full. The Budget projects that the cyclically adjusted budget will return to balance by 2017-18 with the net debt to GDP ratio falling from 2015-16.
The original fiscal rules could be amended in a number of ways, rather than being reinstated. The reformulated rules should be forward looking, ensure medium-term spending discipline and account more explicitly for off balance sheet public liabilities. Finally, income tax thresholds and national insurance thresholds should be linked to wage, rather than price inflation so that fiscal drag is handled more transparently.
G7 fiscal balances and outlays
Per cent of GDP
1. G7 countries outcomes
Source: OECD (2009); OECD Economic Outlook 85 database.
How to obtain this publication
The complete edition of the Economic Survey of the United Kingdom is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the United Kingdom Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat’s report was prepared by Petar Vujanovic, Sebastian Barnes, Philip Davis and Peter Smith under the supervision of Peter Hoeller. Statistical assistance was provided by Joseph Chien.