© Institute for Fiscal Studies
UK public finances and the financial crisis
Carl Emmerson and Gemma Tetlow
Presentation given at workshop on “European public finances through the financial crisis”, ZEW Centre for European Economic Research, Mannheim, Germany, 11 June 2014.
Outline
• Background: the state in the UK
• UK economy before, during and after the crisis
• Fiscal policy before the crisis
• Fiscal effects of the crisis
• Fiscal (and monetary) response to the crisis
– Changes to taxation, spending and the fiscal framework
– Distributional effect of changes to taxation and welfare spending
– Did the tax and spending changes make the system more or less efficient?
• Note:
– UK fiscal years run from April to March
– UK public finance aggregates differ from Maastricht definitions
© Institute for Fiscal Studies
UK spent around 40% of GDP publicly pre-crisis
30
35
40
45
50
55
19
48
-49
19
51
-52
19
54
-55
19
57
-58
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-61
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63
-64
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66
-67
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69
-70
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72
-73
19
75
-76
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78
-79
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81
-82
19
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-85
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90
-91
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93
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96
-97
19
99
-00
20
02
-03
20
05
-06
Pe
rce
nta
ge
of
GD
P
© Institute for Fiscal Studies
Total managed expenditure, 1948 to 2007
Source: Office for Budget Responsibility’s public finances databank.
Composition of spending over time
10.4 13.4 11.7
13.5 15.8 14.4
11.6
14.4 17.2
12.3
12.2 13.3 10.0
7.2 5.7 4.9 5.2 5.4 3.6 2.2 3.4 10.0 7.5 5.4
23.6 22.2 23.4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1989-90 1999-00 2007-08
Sh
are
of
pu
bli
c sp
en
din
g Other
Debt interest
Transport
Public order and safety
Defence
Education
Health
Pensioner benefits
Working age benefits
© Institute for Fiscal Studies
Source: Authors’ calculations based on data from HM Treasury and Department
for Work and Pensions.
Weak contributory principle:
most spending is on means-
or health-tested benefits and
near-universal pensions
Health spending has become
increasingly important
Offset by declining defence
and debt interest spending
Total managed expenditure, selected years
© Institute for Fiscal Studies
25.7 28.0 28.6
17.3 16.8 19.5
15.6 16.8 15.6
11.0 9.8 7.9 2.7 3.3 4.5
27.7 25.2 23.9
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1989–90 1999–00 2007–08
Sh
are
of
tota
l n
et
taxe
s a
nd
NIC
s Other
Capital taxes
Onshore corporation tax
VAT
NICs
Income tax
Notes and sources: see Table 2.5 of The IFS Green Budget: February 2014. Source: Figure 2.5 of IFS Green Budget: February 2014.
Changing composition of revenues
Net taxes and national insurance contributions, selected years
© Institute for Fiscal Studies
GDP growth had averaged 3.2% a year over the decade up to 2007–08
-4
-2
0
2
4
6
8
19
56
-57
19
59
-60
19
62
-63
19
65
-66
19
68
-69
19
71
-72
19
74
-75
19
77
-78
19
80
-81
19
83
-84
19
86
-87
19
89
-90
19
92
-93
19
95
-96
19
98
-99
20
01
-02
20
04
-05
20
07
-08
20
10
-11
Gro
wth
ra
te (
%)
© Institute for Fiscal Studies
Real GDP growth rate, 1956 to 2012
Source: Office for National Statistics, Quarterly National Accounts (series ABMI).
Inflation had been low and stable since the mid-1990s but rose during the crisis
-5
0
5
10
15
20
25
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
Gro
wth
ra
te (
%)
Retail Prices Index
Consumer Prices Index
© Institute for Fiscal Studies
Source: Office for National Statistics (series DODO, DODP, DODQ, CZVJ, CRAB,
CHAW, D7BT, KAB9, KAC4, KAC7).
Growth in prices, 1949 to 2007
Employment rates had been rising steadily since mid-1990s
40
50
60
70
80
90
100 1
97
1
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
Em
plo
ym
en
t ra
te (
%)
Men
Women
All
© Institute for Fiscal Studies
Employment rate among those aged 16 to 64, 1971 to 2013
Source: Office for National Statistics (series LF24, MGSV, LF25).
Hours worked per worker
had been declining over time
and continued to do so
Unemployment peaked at much lower level than seen during previous recessions
0
2
4
6
8
10
12
14
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
Un
em
plo
ym
en
t ra
te (
%)
Men
Women
All
© Institute for Fiscal Studies
Unemployment rate among those aged 16 to 64, 1971 to 2013
Source: Office for National Statistics (series MGSX, MGSY, MGSZ).
Average real earnings have fallen
100
105
110
115
120
125 2
00
7
20
08
20
09
20
10
20
11
20
12
20
13
Ind
ex,
20
07
=1
00
Retail Prices Index
Consumer Prices Index
Whole economy earnings
Private sector earnings
Public sector earnings
© Institute for Fiscal Studies
Source: Office for National Statistics (series DODO, DODP, DODQ, CZVJ, CRAB,
CHAW, D7BT, KAB9, KAC4, KAC7).
Growth in prices and average weekly earnings, 2007 to 2013
UK fiscal policy prior to the crisis
• Two fiscal rules
– Golden rule: current budget must be in balance or surplus over the course of an economic cycle
– Sustainable investment rule: debt must not exceed 40% of GDP
– No official sanctions for breaching these
– Perception that “the goalposts were moved” – redating the cycle
• Economic and fiscal forecasts produced by HM Treasury, officially controlled by the Chancellor of the Exchequer
• Public service spending totals set in cash terms for 3-year periods
– 2007 Comprehensive Spending Review: covered 2008–09 to 2010–11
– Intended to be ‘tight’: cutting public service spending as % of GDP
• Default was for (most) tax thresholds and benefit rates to increase in line with Retail Price inflation each year
– Few reforms had been announced pre-crisis but not yet implemented: reduction in generosity of disability insurance, increase in pension eligibility age for women
© Institute for Fiscal Studies
Pre-crisis plan was for fiscal consolidation by 2012–13
30
35
40
45
50
55
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
20
12
-13
20
13
-14
20
14
-15
20
15
-16
20
16
-17
20
17
-18
20
18
-19
% o
f G
DP
Revenues Spending
Revenue forecast, Mar 2008 Spending forecast, Mar 2008
© Institute for Fiscal Studies
Public sector receipts and total managed expenditure, 1997 to 2018
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
-6
-4
-2
0
2
4
6
8
10
12
14 1
94
8-4
9
19
51
-52
19
54
-55
19
57
-58
19
60
-61
19
63
-64
19
66
-67
19
69
-70
19
72
-73
19
75
-76
19
78
-79
19
81
-82
19
84
-85
19
87
-88
19
90
-91
19
93
-94
19
96
-97
19
99
-00
20
02
-03
20
05
-06
20
08
-09
20
11
-12
Bo
rro
win
g (
% G
DP
)
Public sector net borrowing
Borrowing, forecast Mar 2008
Treaty deficit
Borrowing was forecast to fall to 1¼% of GDP...
© Institute for Fiscal Studies
Alternative measures of borrowing, 1948 to 2012
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
On eve of the crisis: UK
had one of largest
structural deficits in OECD
and had done less than
most to improve this over
the preceding decade.
...and debt was forecast to peak just below 40%
0
40
80
120
160
200
240 1
94
8-4
9
19
51
-52
19
54
-55
19
57
-58
19
60
-61
19
63
-64
19
66
-67
19
69
-70
19
72
-73
19
75
-76
19
78
-79
19
81
-82
19
84
-85
19
87
-88
19
90
-91
19
93
-94
19
96
-97
19
99
-00
20
02
-03
20
05
-06
20
08
-09
20
11
-12
De
bt
(% G
DP
)
Public sector net debt
PSND, forecast Mar 2008
Treaty debt ratio
National debt
© Institute for Fiscal Studies
Alternative measures of debt, 1948 to 2012
Source: Office for Budget Responsibility’s public finances databank.
On eve of the crisis: UK
also had one of the
highest levels of debt in
OECD (although lower
than most other G7).
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than previously expected
© Institute for Fiscal Studies
A large hit to future potential output?
90
95
100
105
110
115
120
125
130
135
Le
ve
l o
f re
al
GD
P (
ind
ex,
GD
P i
n
20
07
–0
8 =
10
0)
Trend (March 2008)
Actual (March 2008)
Actual (March 2014)
Trend (March 2014)
© Institute for Fiscal Studies
Source: Authors’ calculations based on HM Treasury and Office for Budget
Responsibility forecasts and Office for National Statistics data on outturns.
Trend
GDP:
17%
lower
Real GDP back to pre-
crisis level in 2014, but
GDP per capita not set to
bounce back until 2016
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than previously expected
• Tax revenues fell as GDP fell in cash/real terms
– Small fall as % of GDP due to fiscal drag and compositional changes
– Falls in housing prices and transactions reduced stamp duty revenues
– Falls in stock prices reduced capital taxes and associated with lower bonus payments
– Financial sector contraction reduced corporation tax revenues
© Institute for Fiscal Studies
Spending and revenues, without action
30
35
40
45
50
55
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
20
12
-13
20
13
-14
20
14
-15
20
15
-16
20
16
-17
20
17
-18
20
18
-19
% o
f G
DP
Revenues - without action
© Institute for Fiscal Studies
Public sector receipts and total managed expenditure, 1997 to 2018
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than previously expected
• Tax revenues fell as GDP fell in cash/real terms
– Small fall as % of GDP due to fiscal drag and compositional changes
– Falls in housing prices and transactions reduced stamp duty revenues
– Falls in stock prices reduced capital taxes and associated with lower bonus payments
– Financial sector contraction reduced corporation tax revenues
• Around half of spending set in advance in cash terms and upward pressure on cyclical spending during recession
– Spending increased a lot as % of GDP
– Policy default would have been for spending to remain high as % GDP without “action”
© Institute for Fiscal Studies
Spending and revenues, without action
30
35
40
45
50
55
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
20
12
-13
20
13
-14
20
14
-15
20
15
-16
20
16
-17
20
17
-18
20
18
-19
% o
f G
DP
Revenues - without action Spending - without action
© Institute for Fiscal Studies
Public sector receipts and total managed expenditure, 1997 to 2018
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Borrowing would
have been over
10% of GDP
Borrowing
-6
-4
-2
0
2
4
6
8
10
12
14 1
94
8-4
9
19
51
-52
19
54
-55
19
57
-58
19
60
-61
19
63
-64
19
66
-67
19
69
-70
19
72
-73
19
75
-76
19
78
-79
19
81
-82
19
84
-85
19
87
-88
19
90
-91
19
93
-94
19
96
-97
19
99
-00
20
02
-03
20
05
-06
20
08
-09
20
11
-12
20
14
-15
20
17
-18
Bo
rro
win
g (
% G
DP
)
Public sector net borrowing
Borrowing (without policy action)
© Institute for Fiscal Studies
Alternative measures of borrowing, 1948 to 2018
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Structural borrowing
would have been
9.0% of GDP higher
than anticipated pre-
crisis
Effect of the crisis on UK’s public finances
• Level of trend GDP now forecast to be permanently lower than previously expected
• Tax revenues fell as GDP fell in cash/real terms
– Small fall as % of GDP due to fiscal drag and compositional changes
• Around half of spending set in advance in cash terms and upward pressure on cyclical spending during recession
– Spending increased a lot as % of GDP
– Policy default would have been for spending to remain high as % GDP without “action”
• Without “action”
– Borrowing would have remained above 10% of GDP
– Unsustainable fiscal position
© Institute for Fiscal Studies
Fiscal policy response to the crisis (1)
• Two new fiscal targets adopted in May 2010
– Fiscal mandate: cyclically-adjusted current budget must be forecast to be in balance or surplus at the end of the rolling five-year forecast horizon
• Currently being met
– Supplementary target: debt must be falling as a share of GDP between 2014–15 and 2015–16
• Currently on course to be missed
© Institute for Fiscal Studies
Fiscal policy response to the crisis (2)
• The “no policy change” baseline
– Tax and benefit rates/thresholds uprated as set out in legislation (mainly RPI-indexed)
• Include pre-announced policy changes
– Public service spending growth
• Pre-announced cash plans up to 2010–11
• 1.8% a year real terms growth from 2011–12 to 2014–15 (pencilled into March 2008 Budget)
• Grows in line with GDP thereafter
• Short-term fiscal stimulus followed by fiscal tightening
– Stimulus in 2008–09 and 2009–10
– Stimulus reversed and tax rises/spending cuts started in April 2010
– Tax rises largely complete by April 2014
– Spending cuts to continue to March 2019
© Institute for Fiscal Studies
Cure
-2
0
2
4
6
8
10
12
% o
f G
DP
Other current spend
Debt interest
Benefit spend
Investment spend
Tax
© Institute for Fiscal Studies
Composition of the policy response
Source: Authors’ calculations based on HM Treasury and Office for Budget
Responsibility figures.
March
2014: 49%
done
Reduce
borrowing
by 10.3%
of GDP
12% from tax rises
8% from investment spending cuts
14% from welfare spending cuts
52% from other current spending
Spending and revenues, with action
30
35
40
45
50
55
19
97
-98
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
20
12
-13
20
13
-14
20
14
-15
20
15
-16
20
16
-17
20
17
-18
20
18
-19
% o
f G
DP
Revenues - without action Spending - without action
Revenues - with action Spending - with action
© Institute for Fiscal Studies
Public sector receipts and total managed expenditure, 1997 to 2018
Source: Office for Budget Responsibility’s public finances databank and authors’
calculations.
Now aiming for tighter
fiscal position than
planned pre-crisis
Debt forecast to peak in 2015–16
0
50
100
150
200
250 1
94
8-4
9
19
51
-52
19
54
-55
19
57
-58
19
60
-61
19
63
-64
19
66
-67
19
69
-70
19
72
-73
19
75
-76
19
78
-79
19
81
-82
19
84
-85
19
87
-88
19
90
-91
19
93
-94
19
96
-97
19
99
-00
20
02
-03
20
05
-06
20
08
-09
20
11
-12
20
14
-15
20
17
-18
De
bt
(% G
DP
)
Public sector net debt
Treaty debt ratio
National debt
© Institute for Fiscal Studies
Alternative measures of debt, 1948 to 2018
Source: Office for Budget Responsibility’s public finances databank.
Aside: Fiscal institutions after the crisis
• Office for Budget Responsibility (OBR) created in May 2010
– Independent fiscal council: accountable to Parliament, not the government
– Produces fiscal and economic forecasts based on announced policy
– Tasked with assessing compliance with the new fiscal targets
• OBR has significantly increased the transparency and credibility of official fiscal and economic forecasts
© Institute for Fiscal Studies
Aside: Monetary policy response
• Bank of England significantly loosened monetary policy
– Interest rates: cut from 5.75% in July 2007 to 0.5% by March 2009
– Central bank asset purchases started in March 2009 at £75bn, rising to £375bn by July 2012
• Sterling devalued significantly
– By 25% against trade-weighted basket of currencies
© Institute for Fiscal Studies
© Institute for Fiscal Studies
Specific measures
• Deep cuts to spending on some areas of public services
© Institute for Fiscal Studies
Planned cuts to public spending
Between 2010–11 and 2018–19 and after economy-wide inflation
• Total spending cuts of 4.4%
• But
– debt interest spending rising
– social security spending, particularly on pensioners, rising
– other non-departmental spending such as on PAYG spending public service pensions and UK contribution to the EU budget rising
• Departmental spending on public services cut by 19.9%
Whitehall departments: ‘winners’
-11.0
-10.4
-8.2
-7.4
4.3
9.4
35.3
-80 -60 -40 -20 0 20 40
Total DEL
Defence
Education
Transport
NHS (Health)
Energy and Climate Change
International Development
Real budget increase 2011–12 to 2015–16
© Institute for Fiscal Studies
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
Note: Figures show cumulative change in total DEL after economy-wide inflation.
Adjusted for consistency, including for business rate retention policy, movement of
cost of operations into the special reserve, financial transactions associated with
‘Right to Buy’ policy, and the Green Investment Bank.
Whitehall departments: ‘losers’
-11.0
-35.4
-35.3
-33.4
-30.3
-28.8
-28.4
-19.1
-59.5
-80 -60 -40 -20 0 20 40
CLG Communities
Work and Pensions
Justice
Culture, Media and Sport
Environment, Food and Rural Affairs
Home Office
CLG Local Government
Business, Innovation and Skills
Total DEL
Real budget increase 2011–12 to 2015–16
© Institute for Fiscal Studies
Departmental budget in 2015–16 compared to 2010–11, after economy-wide inflation
Note: Figures show cumulative change in total DEL after economy-wide inflation.
Adjusted for consistency, including for business rate retention policy, movement of
cost of operations into the special reserve, financial transactions associated with
‘Right to Buy’ policy, and the Green Investment Bank.
© Institute for Fiscal Studies
Specific measures
• Deep cuts to spending on some areas of public services
• Very large tax increases partially offset by some large tax cuts
Decomposing the net tax increases
© Institute for Fiscal Studies
Measures since Budget 2008 estimated to be a £24 billion net takeaway
-25
-20
-15
-10
-5
0
5
10
15
20
25
VAT NICs North sea taxes
£ b
illi
on
, 2
01
4–
15
Tax instrument
Source: Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Decomposing the net tax increases
© Institute for Fiscal Studies
Measures since Budget 2008 estimated to be a £24 billion net takeaway
-25
-20
-15
-10
-5
0
5
10
15
20
25
VAT NICs North sea taxes
Income tax
£ b
illi
on
, 2
01
4–
15
Tax instrument
Source: Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Decomposing the net tax increases
© Institute for Fiscal Studies
Measures since Budget 2008 estimated to be a £24 billion net takeaway
-25
-20
-15
-10
-5
0
5
10
15
20
25
VAT NICs North sea taxes
Income tax
Fuel duties
On-shore CT
Other taxes
£ b
illi
on
, 2
01
4–
15
Tax instrument
Source: Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
Decomposing the net tax increases
© Institute for Fiscal Studies
Measures since Budget 2008 estimated to be a £24 billion net takeaway
arising from an £74 billion takeaway and a £50 billion giveaway from 483
measures
-25
-20
-15
-10
-5
0
5
10
15
20
25
VAT NICs North sea taxes
Income tax
Fuel duties
On-shore CT
Other taxes
£ b
illi
on
, 2
01
4–
15
Tax instrument
Takeaway
Giveaway
Net
Source: Authors’ calculations using data from the Office for Budget Responsibility. Estimates
for impact in 2018–19 expressed in 2014–15 terms by deflating by nominal GDP growth.
© Institute for Fiscal Studies
Changes to the tax system (1/2)
• Increasing rates of NICs and main rate of VAT not particularly bad ways to raise large sums of money
– VAT increase is in part a windfall tax on those with savings so, if thought to be one-off, could be efficient
– but UK VAT base very narrow: increase in main rate increases distortions for both producers and consumers
– both weaken work incentives
• Cutting main rate of corporation tax and getting rid of low profit rate is a good way to cut taxes
• Recent reforms have made direct personal tax schedule less coherent
– many have been taken out of income tax at considerable cost, but over one million low earners who don’t pay income tax still pay National Insurance
– system of pensions tax relief for those on high incomes has been made less efficient, more complicated and, arguably, unfair
© Institute for Fiscal Studies
0%
10%
20%
30%
40%
50%
60%
70%
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
Ma
rgin
al in
com
e t
ax a
nd
em
plo
ye
e
NIC
s ra
te
Gross annual income (£1,000s)
2009–10 2015–16
Personal tax schedule
Income tax allowance and
NI threshold moving further apart
Note: 2015–16 system assumes married to a non-income tax paying partner.
Transferable allowance
withdrawn “Personal allowance
tapered away”
© Institute for Fiscal Studies
Changes to the tax system (2/2)
• Housing taxation shifted from council tax towards stamp duty
– bad as stamp duty strong contender for the UK’s worst tax
– lack of reform of council tax: still regressive with respect to property values and, in England, based on 1991 values
• Rates of fuel duties have been cut substantially without a long-run strategy
– currently 58p/l and falling in real terms
– motor vehicles becoming more efficient and congestion worsening
– every year the Chancellor cancels the next planned increase
© Institute for Fiscal Studies
25.7 28.0 28.6 29.6
17.3 16.8 19.5 19.0
15.6 16.8 15.6 17.4
11.0 9.8 7.9 5.7 2.7 3.3 4.5 5.0
27.7 25.2 23.9 23.3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1989–90 1999–00 2007–08 2018–19
Sh
are
of
tota
l n
et
taxe
s a
nd
NIC
s
Other
Capital taxes
Onshore corporation tax VAT
NICs
Income tax
Notes and sources: see Table 2.5 of The IFS Green Budget: February 2014.
Increasingly coming from a
relatively small number of
high income people
Top 1% contributed:
11% in 1979
21.3% in 1999-2000
27.5% in 2011-12
Highest proportion of
net taxes and NICs
from capital taxes
since at least 1978
Changing composition of revenues
Source: Crawford, Keynes and Emmerson (2014).
© Institute for Fiscal Studies
Specific measures
• Deep cuts to spending on some areas of public services
• Very large tax increases partially offset by some large tax cuts
• Large cuts to benefit spending focussed on working age individuals
© Institute for Fiscal Studies
Changes to the benefit system
• Pensioner benefits largely protected from cuts
– most working age benefits now indexed less generously, pensioner benefits indexed more generously
– cuts to housing benefit and disability benefits don’t apply to pensioners (and they are little affected by cuts to child-related benefits)
• Cuts to health-related benefits involve attempt to restrict benefits to least healthy through more stringent, more frequent, testing
• Increase in the earliest age at which individuals can receive a state pension has been brought forward and further increases mooted
– coherent response to the public finance challenge of rising longevity
• Work incentives, on average, strengthened by benefit reforms
Cure: all in this together?
© Institute for Fiscal Studies
Impact of tax and benefit reforms implemented January 2010 - April
2015 inclusive, no Universal Credit, by income decile
-2.9%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Poorest 2 3 4 5 6 7 8 9 Richest All
Ch
an
ge
in
ne
t in
com
e
Income decile group
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Phillips (2014).
Cure: all in this together?
© Institute for Fiscal Studies
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Poorest 2 3 4 5 6 7 8 9 Richest All
Ch
an
ge
in
ne
t in
com
e
Income decile group
Working-age without children
Pensioner households
Households with children
Impact of tax and benefit reforms implemented January 2010 - April
2015 inclusive, no Universal Credit, by family type
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Phillips (2014).
Cure: all in this together?
© Institute for Fiscal Studies
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Poorest 2 3 4 5 6 7 8 9 Richest All
Ch
an
ge
in
ne
t in
com
e
Income decile group
Working-age without children
Pensioner households
Households with children
Impact of tax and benefit reforms implemented January 2010 - April
2015 inclusive, no Universal Credit, by family type
Note: Assumes full take-up of means-tested benefits and tax credits.
Source: Phillips (2014).
© Institute for Fiscal Studies
Effect on work incentives
• Fall in real earnings between 2010 and 2015 would have led to a significant, though not enormous, weakening of work incentives
• Tax & benefit reforms have an ambiguous impact on work incentives
– strengthened by: cuts to (some) out-of-work benefits and, for most earners, increases in tax allowances
– weakened by: increases in tax rates, increases to (some) out-of-work benefits and, for higher earners, cut to tax thresholds
– complicated effects of cuts to in-work support
• Adam and Browne (2013) find that, on average, the reforms strengthen incentives to be in work and more than offset effects of falling real earnings
– strengthened less for those with children than those without
• Benefit cuts primarily responsible for that average strengthening
– but not dramatic given scale of cuts, partly because of nature of tax credit reforms
© Institute for Fiscal Studies
Conclusions
• Pre-crisis
– planned to reduce structural borrowing from 2.7% to 1.2% of GDP
• Trend GDP now expected to be substantially lower
• Without action, structural borrowing would have risen by 9% of GDP
• 9-year fiscal consolidation plan
– 10.3% of GDP
– 88% from spending cuts
• Deep cuts to spending on some areas of public services
– share of budget going on NHS continues to grow
• Very large tax increases partially offset by some large tax cuts
– some changes have improved operation of tax system, but many have worsened it
• Large cuts to benefit spending focussed on working age individuals
– on average strengthen work incentives
© Institute for Fiscal Studies
UK public finances and the financial crisis
Carl Emmerson and Gemma Tetlow
Presentation given at workshop on “European public finances through the financial crisis”, ZEW Centre for European Economic Research, Mannheim, Germany, 11 June 2014.
