4 The public finances

Summary

4.02 This chapter sets out forecasts for the public finances for 1997-98 and 1998-99, the period for which there are public expenditure commitments. It also includes some variant projections for 1999-2000 to 2001-02, based on a range of illustrative assumptions for public expenditure growth. The main features are:

• The budget deficit falls substantially over the next two years on all definitions. This partly reflects the measures in the Budget but also tight control of public spending.

• Since the windfall tax has only temporary effects, trends are clearer when it and the associated spending are excluded. On this basis, the current balance is forecast to swing from a deficit of 2 3/4 per cent of GDP in 1996-97 to a small surplus of 1/4 per cent in 1998-99. This implies that, from that time, the Government will be borrowing only to finance its investment and not its current spending, thereby meeting the "golden rule".

• The general government financial deficit (GGFD), the internationally comparable Maastricht definition, falls from 4 per cent of GDP in 1996-97 to only 1/4 per cent of GDP in 1998-99.

• The PSBR falls less than the GGFD because privatisation proceeds are assumed to fall to zero after the current financial year. But, excluding the windfall tax and associated spending, the PSBR is just 3/4 per cent of GDP in 1998-99.

• Three sets of projections are presented for years after 1998-99 which make different illustrative assumptions about the growth of public expenditure. The projections show a range of possible paths for the current account, government borrowing and debt for given tax rates and economic assumptions. In every case the Government's fiscal objectives are achieved. However, it should be emphasised that these projections are subject to considerable uncertainty; for example, they are heavily dependent on the view taken of the cyclical position of the economy.

4.03 The chapter starts by setting out key assumptions underlying the forecast and medium-term projections. It then describes in turn the forecasts for the budget deficit, public sector debt, government receipts and government expenditure, and goes on to describe the variant projections in a more summary form. Historical series and further detail on the forecasts for 1997-98 are presented in Annex A. Annex B provides a guide to accounting conventions.

Key assumptions

4.05 A number of key assumptions have been changed since the last Budget. The new assumptions are deliberately more cautious and are intended to avoid any optimistic bias in the projections. The new assumptions are:

• Only the direct effects of the "Spend to Save" measures introduced in the last Budget to combat tax evasion have been taken into account. The indirect, deterrent effects, which are more difficult to estimate and monitor, are now excluded.

• Privatisation proceeds are now only scored for sales that have already been announced. Previously, credit had been taken for such proceeds in the later years of the projections even though no specific sales had been identified.

• Unemployment is assumed to remain flat, whereas the last Budget had assumed a continuous decline. This returns to the convention used for many years before the 1996 Budget.

• The assumed rate of output growth over the medium term has been reduced from 2 1/2 to 2 1/4 per cent a year.

• Following the transfer of responsibility for setting interest rates from the Chancellor to the Bank of England, the interest rate assumptions are based on expectations in financial markets.

4.06 These five assumptions have been examined by the Comptroller and Auditor General, the Head of the National Audit Office. His report was published on 19 June [1]. It concluded that the assumptions "have been arrived at systematically on the basis of the available data and by methods which interpret it in a reasonable way".

The budget deficit

Table 4.1 The public sector's finances

	£ billion
	Estimated outturn	Forecast
	1996-97	1997-98	1998-99
Receipts(1)	285.4	310.9	329.6
Current expenditure(2)	306.6	316.4	325.2
Current balance	-21.2	-5.5	4.4
Current balance excluding windfall tax(3)	-21.2	-8.0	2.7
Net capital spending(4)	8.1	7.5	7.9
Financial deficit	29.2	13.0	3.5
Privatisation proceeds and other financial transactions	6.5	2.0	-0.5
PSBR	22.7	10.9	4.0
PSBR excluding windfall tax(3)	22.7	13.3	5.4
General government financial deficit(5)
- £ billion	30.4	11.2	1.6
- per cent of GDP(5)	4	1 1/2	1/4
Money GDP - £ billion	752.2	797.6	838.0

1 On a national accounts accruals basis. Includes capital taxes.

2 Includes depreciation of fixed capital.

3 Excluding windfall tax receipts and associated spending.

4 Net of depreciation, less capital transfer receipts and including capital grants.

5 Definitions on a Maastricht basis.

The current balance

CHART HERE

The Maastricht deficit

The PSBR

The windfall tax

4.13 Table 4.2 gives an alternative presentation of the PSBR in terms of general government expenditure and cash receipts and public corporations' borrowing. Adetailedpresentation of the forecasts for government expenditure and receipts is provided later in this chapter.

Table 4.2 Public sector borrowing requirement

	Outturn	Forecast
	1996-97	1997-98	1998-99
£ billion
General government expenditure	309.0	319.4	331.3
General government receipts(1)	286.3	308.3	327.2
General government borrowing requirement	22.7	11.1	4.1
PCMOB(2)	0.1	-0.2	-0.2
PSBR
- £ billion	22.7	10.9	4.0
PSBR excluding windfall tax(3)	22.7	13.3	5.4
- per cent of GDP	3	1 3/4	3/4

1 On a cash basis.

2 Public corporations' market and overseas borrowing.

3 PSBR excluding windfall tax receipts and associated spending.

Public sector debt

Table 4.3 Public sector debt(1)

	Outturn	Forecast
	1996-97	1997-98	1998-99
Net public sector debt
£ billion(2)	350	363	368
per cent of GDP(3)	45	44 1/4	43
Gross general government debt
£ billion(2)	408	418	426
per cent of GDP(4)	54 3/4	53	51 1/2

1 At end-March.

2 Rounded to the nearest £1billion.

3 GDP centred on end-March.

4 Ratios on a Maastricht-basis. GDP is on an ESA basis, year ending in March.

4.15 The debt burden has been rising steeply over the past five years. Between 1990-91 and 1996-97, net public sector debt rose from 27 to 45 per cent of GDP and gross general government debt rose from 34 to 55 per cent of GDP. The debt burden is projected to start falling from this year as government borrowing declines substantially. The gross debt ratio peaks comfortably below the Maastricht reference level of 60 per cent.

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4.16 The public sector's assets have fallen over the 1990s, reflecting privatisation and low levels of public investment. (The quality of the figures for public sector capital assets is poor in terms of both coverage and reliability, however, and the estimates may be significantly revised when the audited information on departmental assets becomes available from resource accounting.) With debt rising as well, the public sector's net wealth has fallen very steeply, from around 70 per cent of GDP during the 1980s to an estimated 10 per cent of GDP at end-1996. Annual movements in net wealth are very difficult to predict as they are affected by fluctuations in the market value of government securities, property values and the sterling value of foreign exchange reserves. However, the projected small current surplus in 1998-99 would be consistent with a levelling off in the net wealth ratio.

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General government receipts

Table 4.4 General government receipts

	£ billion
	Outturn	Forecast
	1996-97	1997-98	1998-99
Income tax	69.5	76.5	83.7
Corporation tax	27.7	30.1	32.0
Windfall tax		2.6	2.6
Value added tax	46.7	50.0	52.5
Excise duties(1)	30.6	33.4	35.4
Other taxes and royalties(2)	49.7	50.9	53.8
Social security contributions	47.4	49.5	52.0
Other receipts	14.8	15.3	15.2
General government receipts	286.3	308.3	327.2

1 Fuel, alcohol and tobacco duties.

2 Includes council tax and money paid into the National Lottery Distribution Fund, as well as other central government taxes.

The Budget tax measures

Table 4.5 General government receipts as a percent of GDP

	Outturn	Forecast
	1996-97	1997-98	1998-99
Income tax	9.2	9.6	10.0
Corporation tax	3.7	3.8	3.8
Windfall tax		0.3	0.3
Value added tax	6.2	6.3	6.3
Excise duties(1)	4.1	4.2	4.2
Other taxes and royalties(1)	6.6	6.4	6.4
Social security contributions	6.3	6.2	6.2
Other receipts	2.0	1.9	1.8
General government receipts	38.1	38.7	39.0
Total taxes and social security contributions(2)	35.8	36.9	37.4

1 For definitions see footnotes to Table 4.4.

2 On a national accounts (accruals) basis.

The tax burden

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