Geeks bearing graphs? Economists and economics at the

Geeks bearing graphs? Economists and economics at the

Geeks bearing graphs? Economists and economics at the IFS Robert Chote, Director, Institute for Fiscal Studies Outline Programme About the IFS Goals Activities People The Pre-Budget Report Readers, a reality check. Beware geeks bearing graphs. Theyre just economists guessing. And be honest: how interested are you in fiscal studies? (Greg Hurst, The Times) Institute for Fiscal Studies, 2008 Programme 10.00 10.45 10.45 11.30 11.30 11.45 11.45 12.30 12.30 13.30 13.30 14.15 14.15 15.00 15.00 15.15 15.15 16.00 16.00 16.45 Introduction and public finances, Robert Chote (IFS Director) Pension policy, Gemma Tetlow (IFS) Break Higher education funding, Haroon Chowdry (IFS)

Panel session on careers in economics: Stephanie Flanders (BBC) Rupert Harrison (Conservatives) Steve Webb MP (Liberal Democrats) Lucy Chennells (Bank of England) Lunch The UK tax system, James Browne (IFS) Break Environmental taxation, Cormac O'Dea (IFS) Inequality and poverty, Ali Muriel (IFS) What is the IFS? An independent research institute a charity. Our mission: To contribute to better economic and social policies through rigorous analysis of their impact on the behaviour of individuals, families, firms and the governments finances. 50 people. 4.5m turnover. Funded by Economic and Social Research Council, charitable foundations, government departments, international organisations & members. No paid consultancy. Think Tank of the Year 2005 Prospect Magazine Most respected think-tank among MPs Communicate Research

Its criticism is measured but firm where it believes the government is in error. It doesnt allow governments to get away with sham policies. (Polly Toynbee, The Guardian) Institute for Fiscal Studies, 2008 Why was the IFS created? The IFS came into existence because four professional people from the world of finance were appalled by the way in which the 1965 Finance Act, introducing capital gains tax, reached the Statute Book. Bill Robinson (Director, 1986-91) never again should a government, regardless of its political colour and intentions, introduce far-reaching tax legislation without the benefit of deep and thorough analysis of its second- and third-order effects. John Chown (Co-founder) The IFS is studiously neutral when it comes to politics, which lends it extra value when the Government has swapped analysis for spin. (City Comment, Daily Telegraph) Institute for Fiscal Studies, 2008 What do we work on? Tax system and the welfare state Government finances and fiscal management Productivity and innovation Inequality and poverty Education and human capital

Saving and consumption Development micro-economics Micro-econometrics: theory and practice All the parties treat the Institute for Fiscal Studies as if it were the Bible. (Jonathan Dimbleby, Any Questions) Institute for Fiscal Studies, 2008 Who uses our research? Policymakers Parliamentarians Media and general public Advocacy groups International organisations Academics Businesspeople The independent IFS provides evidence and facts that are essential for others to use for informed lobbying and campaigning. It speaks with authority and clarity. (Martin Barnes, former Director, Child Poverty Action Group) Institute for Fiscal Studies, 2008 What do we try to achieve?

Policy relevance Analytical rigour Best-practice use of quantitative evidence Effective communication Independence Transparency Institute for Fiscal Studies, 2008 What sort of people work for us? Seeking policy influence, academic rigour and communication Most from universities, some from government, central banks etc Gender: 50% 50% Women Men Nationality: 55% 30% 10% 5%

British Rest of Europe Latin America / USA Asia Qualifications: 55% 90% PhD (complete or in progress) MSc (complete or in progress) The Institutes success is also in its way simple. First, it hires the brightest and the best (Lord David Lipsey) Institute for Fiscal Studies, 2008 What do IFS alumni do? Civil service Media Economics Editor, BBC Presenter, Today & Dragons Den Economics Editor, Financial Times Social policy leader writer, Guardian

Global organisations Academia Dep Dir, Strategy Unit Econ, British Embassy in Tokyo Director of Strategy, D of health Private sector Professors: UCL, Surrey, Bristol, Warwick Principal, St Hughs College, Oxford Dir, Centre for Econ Performance, LSE Chief UK Business Economist, PriceWaterhouseCoopers

Director, Frontier Economics Politics / think tanks Special advisor, Shadow Chancellor Shadow Health Secretary, Lib Dems Research Director, IPPR Head of Tax Policy, OECD Chief, Tax Policy Division, IMF Politicians, journalists, business people and the City, not to mention the Treasury itself, look to the IFS to judge the Governments conduct of budgetary policy. (David Smith, Economics Editor, Sunday Times) Institute for Fiscal Studies, 2008 The Pre-Budget Report Big deterioration in outlook for the economy Big deterioration in outlook for the public finances Short-term fiscal stimulus to ameliorate recession Long-term fiscal contraction to strengthen public finances Institute for Fiscal Studies, 2008 The Treasury view at Budget time 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Economic growth (change on previous year) Pub sector net borrowing (share of GDP) Public sector net debt (share of GDP)

3% 1.75% 2.5% 2.5% 2.5% 2.5% 2.6% 2.9% 2.5% 2.0% 1.6% 1.3% 37.1% 38.5% 39.4% 39.8% 39.7% 39.3%

Short and shallow economic slowdown Borrowing peaks this year, then falls as spending squeezed and tax burden rises Debt peaks below 40% ceiling set out in sustainable investment rule Institute for Fiscal Studies, 2008 The Treasury view at PBR time 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Economic growth (change on previous year) Pub sector net borrowing (share of GDP) Public sector net debt (share of GDP) 3% 3% 1.75% -0.25% 2.5% -0.5% 2.5% 2% 2.5% 3% 2.5% 3% 2.6% 2.6% 2.9%

5.3% 2.5% 8.0% 2.0% 6.8% 1.6% 5.3% 1.3% 4.1% 37.1% 36.3% 38.5% 41.2% 39.4% 48.2% 39.8% 52.9% 39.7% 55.6% 39.3% 57.1% Economy shrinks for two financial years running Borrowing peaks at post-war high next year Debt rises until 2012-15 and stays above 40% ceiling for foreseeable future Institute for Fiscal Studies, 2008

Why is borrowing rising so much? Recession depresses tax revenues and increases social security bills Falls in housing market and stock market depress tax revenues Higher-than-expected September inflation pushes up benefit bills Short-term fiscal stimulus package and earlier tax cuts And why does it stay so high for so long? Credit crunch leads to permanent loss of economic potential, so big part of the increase in borrowing does not disappear with recovery Institute for Fiscal Studies, 2008 A demand shock on top of a supply shock 120 Output (2006-07 = 100) 115 110 105 Potential (Budget 08) Actual (Budget 08) 100 Potential (PBR 08) Actual (PBR 08) Institute for Fiscal Studies, 2008 2013-14 2012-13

2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 95 No return to boom and bust? Output gap since 1978 March 2008 Budget November 2008 PBR with higher Budget 2008 trend output November 2008 PBR 8% Percentage of trend output 6% 4% 2% 0% -2% -4% -6% 1978 1979 1980 1981

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -8% Year and quarter

Institute for Fiscal Studies, 2008 Sources: HM Treasury; Authors calculations. Forecasting changes since Budget 2008 Public sector net borrowing, billion 200809 200910 201011 201112 201213 Budget 2008 42.5 38 32 27 23 Revisions +25.8 +63 +77

+73 +70 4% GDP loss +22.3 +38 +43 +46 +49 Cyclical component 2.3 +8 +16 +15 +10 +1 +3 +3 +3

+3 +7 +7 +7 +7 +8 +7 +1 +2 Equity prices House prices Other +5 Discretionary changes +9.3 +16 4 14 22

PBR 2008 77.6 118 105 87 70 Institute for Fiscal Studies, 2008 Sources: HM Treasury; Authors calculations. Measures: giveaway and then takeaway billion 200809 200910 201011 201112 201213 Tax giveaway 6.9 13.6 5.5

6.2 6.6 Tax takeaway +0.3 +1.2 +2.2 +9.1 +10.6 Spend giveaway 2.7 4.1 0.7 0.3 0.3 Spend takeaway 0 +0.2 +8.8

+5.0 +5.0 Lower spend growth 0 0 0 +6.5 +13.9 Net tax increase 6.6 12.4 3.3 +2.9 +4.0 Net spending cut 2.7 3.9 +8.1

+11.2 +18.6 Net takeaway 9.3 16.3 +4.8 +14.1 +22.5 Institute for Fiscal Studies, 2008 Sources: HM Treasury; Authors calculations. The stimulus Normally rely on monetary policy to manage demand, but concern that interest rate cuts may be unusually ineffective 16bn giveaway next year = 1% of GDP Biggest elements are temporary VAT cut and capital spending Government hopes that economy will shrink 0.5% less than otherwise Will the VAT cut work? Best guess may be that people spend the same: buying 1% more stuff at roughly 1% lower prices Any alternatives? Bigger giveaway to poor then take from richer Institute for Fiscal Studies, 2008 The contraction Spending squeeze much more important than tax increases 5 billion cut in spending in 2010-11 efficiency savings Reduce growth rate over next 3 years from 1.8% a year to 1.1% a year

Investment spending takes bigger hit than current spending Spending to fall by 2.5% of GDP or 37 billion in todays money over three years of next spending review Institute for Fiscal Studies, 2008 How big would a 37bn spending cut be? The Conservative Party is committed to making cash cuts of 35 billion from Labour's public spending plans cuts so large they could only be found from cutting deep into front-line public services, including schools, hospitals and the police. (Alistair Darling, 17 March 2005) Institute for Fiscal Studies, 2008 Tax increases Net tax increase only 4bn in 2013-14 Much smaller than tax raising budgets of 1993 Biggest revenue raiser is 0.5% rise in NICs rates - 5bn Institute for Fiscal Studies, 2008 NI change for those of working-age (April 2011) 15% 150 10% 100 5% 50 0%

0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 -5% -50 Old NI rate New NI rate -10% Extra NI paid -100 Annual earnings Ignores employer NI, which also rises by 0.5 ppts

Institute for Fiscal Studies, 2008 50,000 Extra NI paid (/yr) Rate of employee NI Assumes UEL follows BRT in April 2010 Tax increases Net tax increase only 4bn in 2013-14 Much smaller than tax raising budgets of 1993 Biggest revenue raiser is 0.5% rise in NICs rates - 5bn Also hoping for 3.2bn (full year) from income tax rises for rich But will they raise as much money as the Treasury hopes? Institute for Fiscal Studies, 2008 Income tax changes (April 2011) 70% 7,000 income tax rate New IT MTR 6,000 Extra tax 50% 5,000

40% 4,000 30% 3,000 20% 2,000 10% 1,000 0% 0 25,000 50,000 75,000 100,000 125,000 Annual income Institute for Fiscal Studies, 2008 150,000 175,000 0

200,000 Extra income tax/year Old IT MTR 60% The fiscal rules The rules Sustainable Investment Rule Maintain debt below 40% of national income in each and every year Golden Rule Borrow only to invest over the economic cycle In other words, cumulative current budget must be in balance or surplus Both were met over the 1997-98 to 2006-07 cycle Golden rule met by 20bn over last cycle; missed by 296bn over next Debt to stay well above 40% for foreseeable future Rules temporarily abandoned reliant on market discipline Institute for Fiscal Studies, 2008

Questions looking forward Is Treasury right about: Depth and duration of recession? Size of permanent output loss? Amount that tax increases will raise? Underlying revenue growth as economy recovers? Will we need more stimulus and/or a bigger contraction? If so, how would do it? Institute for Fiscal Studies, 2008

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