Prepared by Hossein Samiei.
The fiscal year begins in April.
The PFI entails the private provision of public facilities—not only their construction but also their design and operation. This initiative is discussed in Chapter IV.
The estimation of these factors followed the same procedure outlined in SM/94/257, pp. 48-53.
The benefits of lower fiscal deficits, especially through cutting current expenditure, are well known, see for example Alesina and Alberto Perrotti, “Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects” International Monetary Fund Working Paper, WP/96/70 (July 1996). Simulations using the Oxford Economic Forecasting model suggest that a cut in current expenditure equivalent to ¼ percent of GDP relative to the baseline (as suggested by the staff for 1997/98) would lower short term interest rates by about 0.5 percentage points two years ahead, long-term rates by 0.25 percentage points, and inflation by 0.4 percentage points. Moreover, over the medium term fiscal balances would improve by more than the initial reduction in expenditure, as tax revenues rise because of higher consumer expenditure resulting from lower interest rates.
Control total spending in 1995/96 was higher in real terms by about ¼ percent than the 1994 and 1995 budgets.
This has, in part, resulted from the replacement of some public investment by private investment through the Private Finance Initiative scheme. The authorities have also argued that cuts in public investment were also intended to bring capital spending back to the more normal levels of the 1980s.
By European standards the current standard rate of VAT levied in the United Kingdom is still relatively low (see, for example, Options for 1996: The Green Budget, Institute for Fiscal Studies, Commentary No. 50, October 1995).
The list of goods that are zero-rated are determined primarily by distributional considerations. For example an indirect tax on food would be regressive because food’s share in total expenditure falls as income rises. The list of exempted goods and services, on the other hand, is determined largely by practical considerations relating to measuring value added.
A zero rating implies that not only is the finished product VAT exempt but the producer also receives a VAT refund for the inputs. The United Kingdom is one of only two EU countries—the other being Ireland—making extensive use of the zero rating.
See the discussion in Options for 1996: The Green Budget, Institute for Fiscal Studies, Commentary No. 50, October 1995.
The ratio of VAT to private consumption, 9.6 percent in 1996, is also higher than its average of the past 10 years.
This specification is in line with the work reported in Public Finances and the Cycle, Treasury Occasional Paper No. 4, HM Treasury, September 1995.
See, for example, Stephen Hall, John O’Sullivan and Andre Sentance, “U.K. Fiscal Policy Over the Medium Term”, Center for Economic Forecasting, Discussion Paper No DP. 09-96, (May 1996).
Estimates suggest that the revenue lost due to zero rating and exemption could be up to £23 billion a year. See Options for 1996: The Green Budget, Institute for Fiscal Studies, Commentary No. 50, October 1995.