United Kingdom: Recent Economic Developments

This paper reviews economic developments in the United Kingdom during 1991–95. Following a brisk expansion in 1994, when the economy achieved a rare combination of above-trend output growth and historically low inflation, the pace of economic activity in the United Kingdom has moderated in the course of 1995. Real GDP growth picked up to an annual rate of 4 percent in the first half of 1994, moderating to 3½ percent in the second half. Real GDP growth slowed further to just more than 2 percent in the first half of 1995.

Abstract

This paper reviews economic developments in the United Kingdom during 1991–95. Following a brisk expansion in 1994, when the economy achieved a rare combination of above-trend output growth and historically low inflation, the pace of economic activity in the United Kingdom has moderated in the course of 1995. Real GDP growth picked up to an annual rate of 4 percent in the first half of 1994, moderating to 3½ percent in the second half. Real GDP growth slowed further to just more than 2 percent in the first half of 1995.

II. Fiscal Consolidation: Developments and Prospects 1/

1. Introduction

The departure of sterling from the ERM in September 1992 called for a substantial redesigning of domestic macroeconomic policy in the United Kingdom. The loss of the exchange rate anchor implied that greater reliance needed to be placed on domestic macroeconomic targets if the authorities’ commitment to low inflation and sustainable growth was to be credible. In this context, fiscal policy would have a crucial role both in establishing the credibility of the newly instituted monetary framework, 2/ and in the rebalancing of the policy mix as monetary conditions were significantly eased in the wake of the ERM exit.

An immediate challenge for fiscal policy in the post-ERM period was to address the substantial deterioration in budget balances during the 1990-92 recession. The Public Sector Borrowing Requirement (PSBR) excluding privatization proceeds swung from a surplus of 1 1/2 percent of GDP in 1988/89 to a deficit of 8 percent in 1993/94, as the revenue/GDP ratio fell by 3 1/2 percent and the expenditure/GDP ratio rose by 6 percent. Reflecting this deterioration, the stock of general government debt increased from 41 percent of GDP in 1988/89 to 49 percent by 1993/94. By early 1993 it had become clear that, in the absence of new measures, the government would continue to run budget deficits in excess of 4 percent of GDP for the next several years. 3/

Against this background, the two budgets of March and November 1993 introduced far-reaching measures to contain spending and increase taxes, setting a tight medium-term fiscal path which was later maintained in the November 1994 budget. 4/ The combined impact of these measures entailed a fiscal consolidation of about 4 percent of GDP to be phased over a three-year period. 1/ The main objective was to eliminate the general government deficit once the economy returned to trend by the end of the decade. Along with this objective, the budgets also sought to gradually reduce the share of government in the economy and address some structural issues--notably, the level of long-term unemployment.

This chapter surveys fiscal developments since early 1993. It examines the main budget measures, the extent to which they have achieved their objectives so far, as well as future prospects. The remainder of the chapter is divided into five sections. The next section presents a summary of the budgetary measures and the official medium-term projections. Sections 3 and 4 compare the 1994 budget projections with the fiscal outturn for 1994/95 and the outturn for the first five months of 1995/96, respectively, while section 5 presents staff medium-term projections and estimates of cyclical and structural budget balances. Section 6 concludes with a discussion of expenditure and revenue issues bearing on fiscal objectives.

2. The budget measures

a. The March and November 1993 budgets

The 1993 budgets introduced measures designed to balance the public finances once the economy returned to trend (equivalently, when the output gap is closed). A distinctive feature of the two budgets was the balance struck between revenue increases and spending restraint. Revenue measures aimed to yield savings of about 2 percent of GDP between 1994/95 and 1996/97, while spending restraint would generate an additional 1 3/4 percent. With economic recovery by early 1993 only at an early stage, revenue measures in the March 1993 budget were pre-announced, and phased in from the beginning of the following fiscal year (April 1994).

On the taxation side, the new measures were consistent with the policy initiated in the 1980s of increased emphasis on indirect taxes. 2/ Changes in indirect taxes comprised the introduction of Value Added Tax (VAT) on domestic fuel consumption (to be levied at 8 percent from April 1994 but scheduled to rise to the 17.5 percent standard VAT rate from April 1995), the introduction of new taxes on insurance premiums and air passenger duties, and an increase in excise taxes (tobacco and road fuel). Together these new taxes were expected to generate revenues of £6 1/2 billion (about 1 percent of GDP) once in full effect (by 1996/97). Changes in income taxation involved a 1 percent rise in the national insurance contribution paid by the employee and the self-employed, a reduction in the rate of tax credits on dividends receipts for higher-rate tax payers, and reductions in the married couple’s allowance and mortgage interest relief to 15 percent by April 1995. These changes were expected to yield the government an additional £6 billion. With the exception of the second round of VAT increase on domestic fuel, all measures were implemented as planned. 1/

Spending measures focused on tighter ceilings on the “control total.” 2/3/ The control total was projected to fall in real terms in 1994/95 and then expand at an average rate of 1 percent over the next two years--i.e., well below the projected rate of growth of real GDP. To this end, the government introduced a freeze in central and local government running costs and further tightened eligibility rules for social benefits. In addition, in-depth reviews of spending by departments--the so-called “fundamental expenditure reviews”--were initiated with the aim of identifying areas of public spending which could be made more cost-efficient or eliminated.

A number of measures to foster employment generation and private sector development were also put in place. The employment measures made some inroads in tackling the problem of high structural unemployment through changes in the tax system and in welfare entitlements. To help foster job creation, the employers’ contribution to the National Insurance Scheme was reduced by 1 percent for employees earning less than £200/week, while the overall employer rate was cut by 0.2 percent. 1/ To foster private sector initiative and reduce the government involvement in the economy, new programs under the “Private Finance Initiative” (PFI) were announced. 2/

Overall, the budget envisaged a reduction in the PSBR from 6 1/2 percent of GDP in 1994/95 to about zero by 1998/99--the year in which the economy was estimated to be back on trend. The various spending and revenue measures would contribute to about one-half of the reduction in the deficit; the remaining 4 percent reduction would be accounted for by the cyclical recovery (and the buoyancy of the tax system), and also by the projected increase in road fuel and tobacco taxes which are expected to be legislated in future budgets. 3/

b. The 1994 budget

In contrast with its 1993 predecessors, the 1994 budget was broadly neutral in its impact on the public finances. With the bulk of the contractionary measures already put in place by the 1993 budgets, the November 1994 budget focused on two areas: first, it reduced medium-term spending ceilings to take account of lower-than-expected inflation; and, second, it introduced further measures to enhance incentives to work and promote private sector development.

The new measures can be divided into three broad categories--a package of job allowances, new rules to benefit eligibility and pilot programs aimed to help the long-term unemployed back into work, a net reduction in business taxes targeting small businesses, and a number of individually small tax schemes favoring low-income households, pensioners, and small savers.

The package to reduce structural unemployment consisted of an extension of family credit to those on work and job finder’s grants. It also introduced some pilot programs--notably, “Workstart” and “Work Trials”--aimed at encouraging employers to hire the long-term unemployed. 4/ In addition, the budget reduced employer’s national insurance contributions by 0.6 percent for low wage earners (defined as less than £205 a week) and granted firms a one year exemption from national insurance contributions when hiring someone who has been unemployed for two years. In terms of work incentives, the budget confirmed plans to reduce the period for claiming unemployment benefits from 12 to 6 months (effective October 1996), and the new benefit--renamed as “Job-seeker’s Allowance”--was made conditional on active job search. In a similar vein, the government tightened up the invalidity benefit rules, replacing (from April 1995) both the sickness and the invalidity benefits by a new “incapacity benefit” and making eligibility dependent on more stringent health tests. The aim is not only to reduce spending on invalidity benefits (which has doubled since the early 1980s) but also eliminate this potential source of disguised unemployment. Although savings associated with the introduction of the Jobseeker’s Allowance are expected to be small, 1/ those stemming from tighter eligibility for invalidity benefits should be significant, though their magnitude is still uncertain. 2/

Most of the £1 billion reduction in business taxes aimed to compensate enterprises for the sharp rise in local tax bills associated with the 5-year revaluation of commercial property values in April 1995. The remainder of the £1 billion package aimed at cutting the regulatory burden for small business and granting tax breaks for investors in small firms. Small savers and low-income groups were also favored by measures totalling £400 million. In particular, the tax-exempt five-year saving accounts (TESSAs) 3/--first introduced in 1991 and maturing in 1995--were made renewable while tax-exempted personal equity plans (PEPs) were extended to cover corporate bonds, convertibles and stocks. The budget also widened the lower-rate tax band by more than inflation--by £200 to £3,200--and increased the personal allowances for pensioners by £430 (£330 over the increase due by indexation).

A summary of the revenue impact of these measures is provided in Table 2.1.

Table 2.1.

1994 Budget: Main Revenue Measures

(In millions of pounds: changes from indexed base)

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Source: Financial Statement and Budget Report 1995-96, pp. 102-103.

Includes VAT anti-avoidance measures and new vehicle excise duties.

On the spending side, the main change to previous plans was a reduction in the nominal control total ceilings set in November 1993. This amounted to nominal savings of £24 billion (3 1/2 percent of GDP) over 1995/96-1997/98, mainly (but not entirely) accounted for by lower-than-expected inflation (relative to the 1993 budget). 1/ The differences between the 1993 and the 1994 budget projections regarding nominal and real growth of the control total are shown in Table 2.2.

Table 2.2.

Control Total: Spending in the 1993 and 1994 Budgets

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Source: Financial Statement and Budget Report 1995-96, HMT, p.110.

These figures incorporate classification changes which permit a direct comparison between the two budgets (see FSBR 1995-96, pp. 129-130 for details).

After the effects of lower-than-expected inflation is taken into account, a discrepancy in the projected real growth of the control total between the two budgets still remains. 1/ In this connection, a number of relatively small measures launched in the 1994 budget are expected to reduce previously planned expenditures and save the government about £6 billion (0.9 percent of GDP) over the medium-term. One of them is the restraint on running costs of civil departments, set to be about 3 percent lower in cash terms in 1997/98 than in 1994/95. Within the new guidelines, pay increases will have to be offset by efficiency gains and other economies at a departmental level. The budget also envisaged a reduction in housing benefits and public spending on road programs, expected to be compensated for by projects under the Private Finance Initiative. Outside the control total, anti-fraud measures on cyclical social security are expected to amass savings of up to £2 billion by 1997/98.

A summary of the 1994 budget spending and revenue projections for the medium term is provided in Table 2.3.

Table 2.3.

Summary of the 1994 Budget Projections

(in percent of GDP)

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Source: Financial Statement and Budget Report 1995-96, HMT.

According to these projections, the PSBR will be eliminated by 1998/99, when the output gap is expected to be closed. The Maastricht criterion for the general government deficit would be met in 1996/97, while the “Golden Rule” would be met by 1997/98 when PSBR is about equivalent to net capital spending. 1/

3. The 1994/95 outturn

The PSBR outturn for 1994/95 exceeded mid-year official projections by a small margin--£1 billion or 1/7 percent of GDP. 1/ This was due entirely to a £3.2 billion shortfall in general government revenues (about 1/2 of GDP), as expenditures turned out £1.8 billion below forecast (with the control total £1.6 billion lower). This was the second year in a row that expenditure was less than budgeted. Cyclical social security gave a small but positive contribution to the underspending, as payments on unemployment benefit fell in line with brisk economic growth.

The lower-than-expected revenues in 1994/95 were caused by shortfalls in each of the three main taxes. VAT receipts turned out to be £1.5 billion lower than forecast; income tax payments were down by £1.2 billion and corporation tax receipts by £0.8 billion. None of these shortfalls, however, can be attributed to errors in forecasting real GDP or inflation, as both turned out in line with the 1994 budget projections. In the case of VAT receipts, possible explanations include recent changes in the employment/earnings mix--higher growth of employment in lower earning occupations; substitution of non-VATable for VATable goods and services, which includes spending diversion effects associated with the introduction of the National Lottery in November 1994; 2/ and difficulties in estimating the cost of VAT-related tan reliefs. The shortfall in corporate tax receipts, on the other hand, appears to be partly related to the rise in the profit share in national income during 1994; since corporate tax receipts are subject to longer lags in tax collection, 3/ part of these receipts would not show up in the fiscal accounts prior to 1995/96. Finally, the shortfall in corporate taxes may also reflect the effect on budget projections of an unusually high outturn in October 1994, just before the budget. 4/

4. Developments during 1995/96

As shown in Table 2.3, the 1994 budget envisaged a reduction in PSBR (excluding privatization) in 1995/96 to £24 1/2 billion (3 1/2 percent of GDP). Subsequently, the Treasury’s June 1995 Summer Forecast revised this projection upward to £26 1/2 billion (3 3/4 percent of GDP, compared with the 1994/95 outturn of 6 percent).

During the first five months of 1995/95, however, the PSBR rose slightly to £16.7 billion from £16 billion in the corresponding period a year earlier. As a percent of (annualized) GDP, the PSBR fell only from 6 1/2 percent during April/August 1994 to about 5 3/4 percent during April/August 1995--suggesting that meeting the official projection (3 3/4 percent) for the year as a whole will be a challenge. To some extent, these developments reflect lower revenues associated with the slowing of output expansion, but a higher-than-expected growth of government expenditure has also been observed.

5. Staff medium-term projections and estimates of cyclical and structural budget balances

Staff fiscal projections are based on a macroeconomic scenario in which real GDP growth picks up from 2.5 percent in 1995/96 to 2.7 percent in 1996/97 and then settles down at a 2.5 percent rate until the end of the decade. Given an output gap of close to 3 percent in 1994 and an estimated growth of potential output of about 2 1/4 percent per annum, the economy would then be back on trend by the end of the decade.

On the revenue side, the 1994/95 revenue shortfall is assumed to be carried through. 1/ On the spending side, the official ceilings through 1997/98 for the control total are assumed to be observed. Spending on cyclical social security declines in line with the expected fall in unemployment over the medium-term. Estimates of future privatization proceeds are as in the budget.

On this basis, the PSBR (excluding privatization proceeds) is projected to fall from 6.1 percent of GDP in 1994/95 to 1.2 percent of GDP by the end of the decade. Reflecting this fall in the PSBR, the debt ratio declines to 47 percent. On this basis, the Maastricht fiscal criteria would be observed by 1996/97 and the “Golden Rule” by 1998/99.

Table 2.4.

Staff Medium-Term Projections

(In percent of GDP)

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Source: Staff estimates.

Outturns.

The main differences between staff and official projections refer to the post-1996/97 period. The official projections presented in the November 1994 budget envisage elimination of the deficit by 1998/99. In contrast, staff estimates indicate a residual PSBR of 1 1/4 percent of GDP. Part of this remaining deficit is due to carry-over effects of the 1994/95 revenue shortfall; once this shortfall is allowed in the projections, the difference between official and staff estimates for the period 1995/96 to 1997/98 narrows. 1/ Yet, some difference persists thereafter. The reason is twofold: on the spending side, the control total (in real terms) is then assumed in the staff projections to grow in line with potential output (over 2 percent) whereas the official projections assume spending growth of only 1 percent. On the revenue side, the staff only takes into account tax measures which have been granted parliamentary approval; this excludes prospective rises in real excise taxes (see above) which, in the official projections, account for the continued rise in the revenue/GDP ratio after 1996/97.

Table 2.5 presents estimates of the relative importance of structural and cyclical factors in reducing the deficit. 1/ According to these estimates, the 7.4 percentage point improvement in the PSBR/GDP ratio between the 1993/94 peak and 2000/01 would be roughly balanced between cyclical and structural factors. As one would expect, structural or non-cyclical factors were more important in the initial years when the impact of the phased 1993 measures is felt. Between 1993/94 and 1996/97, the structural balance improves by about 3 1/4 percent of GDP, with expenditure accounting for about 2 1/4 percent and revenue 1 percent.

Table 2.5.

Estimates of Cyclical and Structural Budget Balances

(in percent of GDP)

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Source: Staff estimates.

The structural component of the PSBR levels off during 1997/98-2000/01 to about 1/2 percent of GDP, as the impact of (approved) revenue measures comes off and the control total is assumed to grow with potential output. Almost all the improvement in the PSBR for those years is thus ascribed to the cyclical component. Cyclical effects vanish by the year 2000/01 when the economy is back on trend.

6. Expenditure and revenue prospects and fiscal objectives

As discussed in the preceding sections, the U.K. authorities have set demanding fiscal targets. The goal of eliminating the PSBR by 1998/99 is considerably more stringent than would be implied by other guidelines for fiscal policy, such as the Golden Rule, stabilizing the debt ratio, and meeting the Maastricht criteria (i.e., keeping the deficit at less than 3 percent of GDP and the debt ratio under 60 percent). On the basis of current plans, fiscal consolidation in the U.K. is set to go beyond what is envisaged in most other EU countries.

The official medium term projections are predicated on continued tight expenditure restraint. Chart 2.1 depicts trends in real control total spending since the mid-1980s and extrapolates these into the period 1995-2000. 1/ The projected trend can then be compared with official projections and those of the staff. While real growth in control total averaged 1 1/2 percent between 1986/87 and 1994/95, the 1994 budget projections entail an average real expansion of only 1/2 percent for 1995/96-1999/2000. As the chart clearly shows, the authorities’ plans impart a sharp break with previous trends.

CHART 2.1
CHART 2.1

UNITED KINGDOM REAL CONTROL TOTAL

(In billions of 1993/94 pounds)

Citation: IMF Staff Country Reports 1995, 130; 10.5089/9781451814057.002.A002

Sources: HM Treasury; and staff calculations.

Further insight into possible spending pressure can be gauged from projected spending in the key areas of health, education, non-cyclical social security and public transportation. Together these account for close to 50 percent of the control total; therefore, any slippage in meeting the spending plans in any of those departments are likely to have a substantial impact on the overall spending projection. Among the four departments, the one facing the most stringent budget constraint is transportation. 1/ According to the 1994 plans, transportation expenditure in England alone is set to fall to £8.8 billion over 1995-97, compared with previous spending plans totaling £10.8 billion. Within this, the £2 billion annual expenditure on road-building program is expected to be reduced by 10 percent every year. Since road traffic in the U.K. has been growing at a much faster pace than real GDP, the degree of increase in road congestion will depend on the extent to which the Private Finance Initiative (PFI) will fill the gap. By the end of 1994, however, less than £400 million of private funds were attracted to transportation projects.

Pressures for higher spending on social security are also likely to remain strong. As discussed in section 3, measures have been taken to limit housing benefits, tighten medical eligibility for disability benefits, and replace the unemployment benefit with the Jobseeker’s Allowance. Although savings from these measures could reach £2 billion by 1996/97, the underlying real growth in social security spending will remain on an upward trend. As regards health and education, the prominence of universal entitlements (e.g., child benefits) and the government’s commitments to increase funds to education and improve the National Health Service are factors constraining further savings.

On the revenue side, the projection assumed an unchanged 25 percent standard rate of income tax. The government has re-stated the objective of eventually reducing the standard rate of income tax to 20 percent. As each percentage point reduction in the standard rate of income tax would cost the government about £2 billion or 0.3 percent of GDP, 2/ “cuts” in the standard rate of income tax would have a substantial impact on the present PSBR projections, unless compensated by further spending restraint or a rise in indirect taxes.

Regarding indirect taxes, a range of goods are currently VAT-exempted and zero-rated, 1/ with foregone revenues estimated at about £20 billion in 1994/95. 2/ This suggests considerable potential for raising revenues through a widening of the VAT base--a policy which would also be consistent with the government’s announced objective of shifting gradually the burden of taxation from income to spending. Yet, the potential efficiency gains of widening the VAT base would have to be traded off against equity implications, particularly in light of the fact that goods which are currently zero-rated or VAT-exempt have a larger weight in the consumption basket of lower-income households. 3/ In addition, the minimum scope for changing the system of VAT exemption in the U.K. is also constrained by EU rules. Regarding excise taxes, they are now substantially higher in the U.K. relative to the EU average, and future increases in fuel and tobacco have already been factored in the official projections.

1/

Prepared by Luis Catāo.

2/

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.

3/

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.

4/

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.

1/

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.

2/

In 1994/95, taxes on expenditure accounted for 39 percent of general government revenues, while taxes on income and royalties accounted for 34 percent.

1/

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.

2/

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.

3/

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.

1/

This was expected to be partially offset by employers’ increased responsibility for expenses related to statutory sick pay.

2/

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.

3/

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.

4/

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.

1/

This is because means-tested social security benefits will continue to be available for the jobless beyond the six-month period.

2/

Government spending on invalidity benefits is around £6 to £7 billion per year.

3/

The maximum investment in a TESSA is limited to £9,000 per person.

1/

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.

1/

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.

1/

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.

1/

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.

2/

Consumer spending on the National Lottery is not VAT Table.

3/

See Summer Economic Forecast, p.49.

4/

The bulk of corporate tax receipts arrive in the months of January and October.

1/

This is in line with the new set of official projections published in the 1995 Summer forecast.

1/

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.

1/

The estimation of these factors followed the same procedure outlined in SM/94/257, pp. 48-53.

1/

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.

1/

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.

1/

Institute for Fiscal Studies, Options for 1995: The Green Budget, p. 143.

1/

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.

2/

Institute for Fiscal Studies, options for 1995: The Green Budget, London 1994, p. 70.

3/

Ibid., pp. 69-74.