Prepared by Luis Catāo.
The use of PSBR targets as a mechanism to enhance the credibility of monetary targets had been an integral part of the government’s Medium-Term Financial Strategy (MTFS) since the 1980s. A comprehensive survey of the U.K. experience with the MTFS can be found in Bean, C. and J. Symons “Ten Years of Mrs. T”, National Bureau of Economifć Research Macroeconomics Annual, 1989.
See, for example, the staff update of the Medium Term Financial Statement for the period 1992/93 to 1997/98, in United Kingdom - Selected Background Issues, SM/93/23.
Prior to 1993, it was practice in the U.K. to have in effect two budgets in the same calendar year--one announcing revenue measures (the March budget) and another dealing with expenditure decisions (the “Autumn Statement”). Beginning in November 1993, revenue and expenditure decisions are now presented in a unified budget.
Budgetary planning and control in the U.K. is run on a three-year framework, wherein each year the authorities review the plans for the years t+1 and t+2 and set new targets for year t+3.
In 1994/95, taxes on expenditure accounted for 39 percent of general government revenues, while taxes on income and royalties accounted for 34 percent.
The increase to the standard VAT rate on domestic fuel was rejected by Parliament in December 1994. To compensate for the respective loss of revenues, the government raised excises on other goods beyond the originally budgeted increases.
The concept of control total comprises the non-cyclical, non-interest component of government expenditure. It is measured as general government spending excluding privatization proceeds, central government debt interest payments and cyclical social security spending. The control total accounts for about 85 percent of general government spending.
Following a tradition initiated in 1981, spending plans are based on cash limits. This implies that departmental expenditures are constrained to an authorized nominal total for the following three years. For the subsequent years, spending projections are specified in terms of real growth of the control total.
This was expected to be partially offset by employers’ increased responsibility for expenses related to statutory sick pay.
This program, first introduced in February 1993, aims to promote joint-ventures with the private sector to finance activities traditionally under public sector domain, ranging from transportation projects to the operation of prisons. The project of the channel tunnel rail link, for example, is an outcome of this initiative.
In the November 1993 budget, the Chancellor stated that future budgets would raise road fuel and tobacco excises by at least 5 percent and 3 percent per annum, respectively, in real terms.
The Workstart consists of subsidy paid to those hiring a person who has been out of work for more than two years. The Work Trials program allows the worker to live on benefits while on a trial period with a prospective employer.
This is because means-tested social security benefits will continue to be available for the jobless beyond the six-month period.
Government spending on invalidity benefits is around £6 to £7 billion per year.
The maximum investment in a TESSA is limited to £9,000 per person.
The November 1993 Budget projected inflation (as measured by the GDP deflator) to reach 4 percent in 1994/95 and 3 3/4 percent in 1995/96. The actual outcome for 1994/95 was 1 3/4 percent. The most recent official projections, published in the 1995 Summer Forecast, point to an inflation rate of 3 percent in 1995/96.
The discrepancy for 1994/95 reflects the fact that by end-1994, it became clear that the November 1993 projections of negative real growth in the control total during 1994/95 would not materialize; this information was thus incorporated in the November 1994 projections for that year.
The basis of the Golden Rule is that sound investment projects should yield a return equal or greater than the cost of borrowing, and so do not need to be financed by extra taxes. One problem with the application of the Golden Rule to public finances, however, is that returns on social capital do not necessarily accrue to the Government and the rule therefore does not assure sustainable public finances.
When compared with the November 1993 projections, however, actual PSBR figures for 1994/95 turned out £2 1/2 billion lower, largely due to lower-than-expected inflation and higher-than-expected real GDP growth.
Consumer spending on the National Lottery is not VAT Table.
See Summer Economic Forecast, p.49.
The bulk of corporate tax receipts arrive in the months of January and October.
This is in line with the new set of official projections published in the 1995 Summer forecast.
According to the 1995 Treasury Summer Forecast--which allow for such carry-over effects but does not present updated projections beyond 1996/97--the PSBR excluding privatization is estimated at 3.7 percent of GDP for 1995/96 and 2.6 percent of GDP for 1996/97, compared with staff projections of 4.1 percent and 2.7 percent, respectively. The staff projections are based on a somewhat slower pace of economic expansion in the near term.
The estimation of these factors followed the same procedure outlined in SM/94/257, pp. 48-53.
This is done through a simple log-linear regression of real control total on a constant time trend and one-year lag of real control total over the period 1984/85 through 1994/95. The resulting R-square for such a regression is 0.85, while diagnostic statistics do not indicate residual autocorrelation.
The restraint in social security spending was alleviated by an extra £3 billion spending in real terms in 1994/95 out of the contingent reserves set aside within the control total. As regards education and health, both have also been given some priority over other departments in the 1994 budget projections, with more funds having been allocated to them than originally planned in 1993.
Institute for Fiscal Studies, Options for 1995: The Green Budget, p. 143.
Zero-rated goods (i.e., those entirely untaxed since manufacturers are entitled to claim back the VAT on inputs) currently include: Food, construction of new dwellings, books, children’s clothing, water and sewage services, and medicines on prescription. VAT-exempted goods include rents, private education, health services, postal services, burial and cremation, financial services and insurance.
Institute for Fiscal Studies, options for 1995: The Green Budget, London 1994, p. 70.
Ibid., pp. 69-74.