Prepared by Hossein Samiei.
The shares of expenditure and revenue in GDP are not lower than in 1978, but are now low relative to other European countries, largely because the United Kingdom has been able to control growth in public spending more than elsewhere in Europe.
For an analysis of developments during this period, see N. Rajah and S. Smith, “Fiscal Developments in the United Kingdom since 1980,” European Economy, Towards Greater Fiscal Discipline, No. 3, 1994.
As emphasized in Chapter III of last year’s Recent Economic Developments, SM/96/254 (10/9/96), the United Kingdom experience shows that reducing public expenditure mainly through cutting capital expenditure is not sustainable.
The staff continues to assume 2½ percent potential growth.
Excluding the temporary effect on the fiscal balance of the lag between receipts of the windfall tax and the associated spending.
Alternative measures of excess profits such as total returns on shareholders minus return on an aggregate index, would also have suffered from similar problems; see IFS Election Briefing, The Institute for Fiscal Studies, April 1997.
See S. R. Bond, M. P. Devereux, and M. J. Gammie, “Tax Reform to Promote Investment,” Oxford Review of Economic Policy, Vol. 12, No. 2, 1996.
TESSAs are tax-exempt savings accounts; PEPs are personal equity plans.
Structural GGFD is estimated based on the judgement that accrual adjustments to cash balances are of a noncyclical nature. These adjustments (reported in Table 4 A. 5 of the July Red Book) result from, among other things, changes to the timing of 1996/97 VAT payments in the 1995 budget, changes in income taxes and the introduction of gilt strips in 1996/97, the buoyancy of national insurance contributions and local business tax cash receipts in 1996/97, the sale of student loans, and the redemption of index-linked gilts in 1996/97.
One could perhaps argue that a rise in the GDP deflator relative to public sector wages would have a smaller impact on aggregate demand than a reduction in spending on goods and services—analogous to the reasoning underlying the balanced-budget multiplier. This appears to be a second-order consideration, however.