B

The public finances

The updated projections of the public finances show that the underlying position remains strong. As a result of a continuing commitment to stability and prudence, the Government remains on track to meet its two fiscal rules: the current budget surplus is projected to be £161/2 billion (13/4 per cent of GDP) in 2000-01. A similar surplus is projected for 2001-02, falling to just under 3/4 per cent of GDP from 2003-04 onwards; and public sector net debt is projected to fall to about 321/4 per cent of GDP by the end of financial year 2000-01. It is projected to continue falling as a percentage of GDP over the following year, stabilising at around 30 per cent of GDP from March 2003. Cyclically-adjusted public sector net borrowing is projected to be a repayment of just over 3/4 per cent of GDP in 2000-01, with a repayment of just over 1/4 per cent of GDP in the following year. Modest deficits are projected from 2002-03, reflecting the rapid growth of public investment, consistent with meeting the sustainable investment rule.

INTRODUCTION

B1 Chapter 2 describes the Government's fiscal framework, including the two strict fiscal rules, and shows how the updated projections of the public finances are consistent with meeting these rules. This annex explains in more detail the Government's performance against the fiscal rules. It includes:

• five year ahead projections of the current budget surplus and public sector net debt, the key aggregates for assessing performance against the golden rule and the sustainable investment rule respectively;
• projections of public sector net borrowing, the fiscal aggregate relevant to assessing the impact of fiscal policy on the economy;
• consistent projections of the cyclically-adjusted fiscal balances; and
• detailed analyses of the outlook for government receipts and expenditure.

MEETING THE FISCAL RULES

B2 One of the key roles of the Pre-Budget Report is to provide an update of the projections of the public finances contained in the Budget, taking account of developments in both the public finances and the economy since Budget time. It is important to note that the public finance projections in the Pre-Budget Report present an interim forecast update and do not necessarily represent the final outcome the Government is seeking. Therefore, the projections contained in the Pre-Budget Report should not be interpreted as the Government's desired outcome.

B3 Table B1 compares the PBR projections for the key fiscal aggregates, used for assessing performance against the two fiscal rules, with those made at the time of the last Budget. A current budget surplus of £16¹/₂ billion is now estimated for 2000-01, compared with the Budget projection of £14 billion, and surpluses in subsequent years which are at least as high as in the Budget forecast. A similar improvement is seen for public sector net borrowing. A net repayment of £10 billion is now expected in 2000-01, compared with a projected net repayment of £6¹/₂ billion in the Budget. Net borrowing in later years is lower than in the Budget forecast.

Table B1: Fiscal balances comparison with Budget 2000¹

	Outturn2			Projections
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04	2000- 05
Fiscal balances (£ billion)
Surplus on current budget - Budget 2000	17.1	14	16	13	8	8
Surplus on current budget - PBR 2000	19.4	16.6	16	14	8	8
Net borrowing - Budget 2000	-11.9	-6	-5	3	11	13
Net borrowing - PBR 2000	-16.4	-10.1	-6	1	10	12
Cyclically-adjusted budget balances (per cent of GDP)
Surplus on current budget - Budget 2000	1.8	1.3	1.3	1.0	0.7	0.7
Surplus on current budget - PBR 2000	1.9	1.5	1.4	1.1	0.6	0.7
Net borrowing - Budget 2000	-1.2	-0.5	-0.3	0.5	1.1	1.1
Net borrowing - PBR 2000	-1.6	-0.8	-0.3	0.3	1.1	1.1
1Excluding windfall tax receipts and associated spending. 2The 1999-2000 figures were estimates in Budget 2000.

B4 The Government remains on track to meet the fiscal rules in the years ahead. Table B2 shows latest outturns for the key fiscal aggregates, together with estimates for the current year and projections up to 2005-06. Outturns and projections of other important measures of the public finances, including net borrowing and net worth, are also shown.

Table B2: Summary of public sector finances¹

	Per cent of GDP
	Outturns				Projections
	1998- 99	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04	2004- 05	2005- 06
Fairness and prudence
Surplus on current budget	0.8	2.1	1.7	1.6	1.3	0.7	0.7	0.7
Average surplus since 1999-2000		2.1	1.9	1.8	1.7	1.5	1.4	1.3
Cyclically-adjusted surplus on current budget	0.5	1.9	1.5	1.4	1.1	0.6	0.7	0.7
Long-term sustainability
Public sector net debt2	39.6	36.8	32.3	30.9	30.1	30.2	30.3	30.4
Net worth2,3	12.2	17.3	18.7	20.1	20.4	20.3	20.1	19.6
Primary balance	3.3	4.3	3.3	2.6	1.8	0.8	0.7	0.5
Economic impact
Net investment	0.4	0.3	0.7	1.0	1.4	1.7	1.8	1.8
Public sector net borrowing (PSNB)	-0.3	-1.8	-1.1	-0.6	0.1	0.9	1.0	1.1
Cyclically-adjusted PSNB	0.0	-1.6	-0.8	-0.3	0.3	1.1	1.1	1.1
Financing
Central government net cash requirement2	-0.5	-1.0	-3.0	-0.1	0.5	1.4	1.4	1.4
European commitments
Maastricht deficit4	-0.7	-1.8	-1.1	-0.6	0.1	0.9	1.0	1.1
Maastricht debt ratio5	46.8	43.6	40.1	37.7	36.1	35.6	35.5	35.4
Memo: Output gap	0.4	0.2	0.5	0.4	0.3	0.2	0.1	0.0

¹Excluding windfall tax receipts and associated spending.

²Including windfall tax receipts and associated spending.

³Previously net wealth.

⁴General government net borrowing on an ESA95 basis. The Maastricht definition includes windfall tax receipts and associated spending.

⁵General government gross debt.

B5 The current budget balance improved from a surplus of ³/₄ per cent of GDP in 1998-99 to nearly 2¹/₄ per cent of GDP in 1999-2000. The surpluses are projected to fall gradually over the next few years, from 1³/₄ per cent of GDP in 2000-01 to around ³/₄ per cent of GDP by 2003-04. Consistent with the need to maintain a cautious approach, this profile shows that the Government is well on track to meet the golden rule over the projection period, with the average surplus on the current budget from 1999-2000 projected to be at least 1 per cent of GDP throughout the next five years.

B6 Net borrowing is equal to net investment minus the surplus on the current budget. Public sector net investment is projected to be ³/₄ per cent of GDP in 2000-2001, implying a repayment of net borrowing of around 1 per cent of GDP. The ratio of net investment to GDP is projected to increase steadily over the next three years and then to steady at around 1³/₄ per cent of GDP from 2003-04 onwards. The rapid growth of net investment results in a declining repayment of net borrowing next year and, in conjunction with the effect of slower economic growth, modest deficits over the remainder of the period, consistent with meeting the sustainable investment rule.

B7 The primary balance is equal to net borrowing excluding net debt interest payments - thus abstracting from the implications of past fiscal deficits. If real interest rates exceed trend GDP growth, a primary surplus is required to stabilise the net debt ratio. The primary balance has long since improved from a deficit of ¹/₂ per cent of GDP in 1996-97 and is projected to be in surplus by 3¹/₄ per cent of GDP in 2000-01. It is projected to be in surplus by an average of 1¹/₄ per cent of GDP over the next five years.

B8 The central government net cash requirement was a repayment of 1 per cent of GDP in 1999-2000. This repayment is projected to increase to 3 per cent of GDP in 2000-01, largely reflecting the receipts from the auction of licences to access the electromagnetic spectrum (see paragraph B45). A modest repayment is projected in 2001-02. The net cash requirement moves into deficit from 2002-03 onwards, mirroring the profile of public sector net borrowing. The approximate stock counterpart to the net cash requirement is public sector net debt. The projections of net cash repayments over the next two years imply a steady fall in the debt-GDP ratio, from 36³/₄ per cent in March 2000 to about 30 per cent in March 2003. It is expected to remain steady at around 30 per cent of GDP for the remainder of the projected period as the public sector moves into deficit.

Chart B1

B9 The approximate stock counterpart to the current budget balance is public sector net worth. Current budget surpluses of up to 2 per cent of GDP a year have begun to raise net worth to an estimated 19 per cent of GDP in December 2000. This follows a prolonged period in which the poor state of the public finances led to it falling to 12 per cent of GDP, from over 75 per cent of GDP in 1980. At present net worth is not used as a key indicator of the public finances, due mainly to the difficulties in measuring accurately many government assets and liabilities.

B10 Table B2 also shows the updated estimates of the cyclically-adjusted current budget and net borrowing as a per cent of GDP, which allow underlying, or structural trends in the indicators to be seen more clearly, after the estimated effects of the economic cycle are removed.

Chart B2

B11 The cyclically-adjusted current balance has moved from a deficit of over 2 per cent of GDP in 1996-97 to a similar sized surplus in 1999-2000. It is estimated to have fallen slightly in 2000-01 to 1¹/₂ per cent of GDP. With the economy projected to be slightly above trend during the next five years, the cyclically-adjusted current budget surpluses are a little smaller than the unadjusted projections.

B12 There has been a corresponding improvement in cyclically-adjusted net borrowing, which is used to measure the fiscal stance. From a deficit of 1 per cent of GDP in 1997-98, cyclically-adjusted net borrowing is estimated to be a repayment of ³/₄ per cent of GDP in 2000-01 and a further repayment of ¹/₄ per cent in 2001-02. Modest deficits are projected from 2002-03 onwards, as the share of net investment in GDP rises.

Forecast errors and risks

B13 The fiscal balances, which represent the difference between two large aggregates of spending and receipts, are inevitably subject to wide margins of forecast error. Over the past five years, the average absolute error (i.e. the average error irrespective of whether the errors have been positive or negative) for one-year ahead forecasts of net borrowing has been over 1 per cent of GDP, or plus or minus £9.5 billion at 2000-01 prices. The error tends to
grow as the forecast horizon lengthens. Much of this error arises from forecast errors of GDP.

B14 Short-term forecasts of the public finances are critically dependent on the path of the economy, as most tax revenues and some public expenditure (notably social security) vary directly with the economic cycle. If GDP growth were 1 per cent higher or lower than assumed over the coming year, net borrowing might be lower or higher by 0.4 per cent of GDP in the first year (equivalent to about £4 billion) and lower or higher by a further 0.3 per cent (£3 billion) in the second year.

B15 Errors in short-term growth forecasts may have only a temporary effect on the public finances. For a given path of trend output, higher or lower growth in the short-term will be followed by lower or higher growth later on, and the public finances may be little affected on average over the cycle. However, errors in estimating the cyclical position of the economy in relation to its trend - the output gap - will have a permanent effect on prospects.

B16 It is for this reason that projections in Chapter 2, and above, illustrate the effect of uncertainty over the cyclical position of the economy by showing a cautious case in which the output gap is 1 per cent higher than the central view.

B17 The fiscal projections are based on prudent and cautious assumptions (see paragraphs B18 to B20). Chart B2 above illustrates a still more cautious case, in which the level of trend output is assumed to be 1 per cent lower than in the central projection above. This scenario would imply that a greater proportion of the projected surplus on current budget was due to cyclical strength of the economy: a 1 per cent larger output gap reduces the structural surplus on current budget by about ³/₄ per cent of GDP a year. Even in this more cautious case, the cyclically-adjusted current budget is estimated to have been comfortably in surplus in 1999-2000, and on this more cautious basis, the Government is on track to meet the golden rule over the economic cycle.

ASSUMPTIONS

B18 The fiscal projections assume:

• the economy follows the path described in Annex A. In the interests of caution, the fiscal projections continue to be based on the deliberately prudent and cautious assumption of trend growth of 2¹/₄ per cent a year, the lower end of the GDP growth ranges in Annex A. The main economic assumptions are summarised in Table B3;
• firm departmental expenditure limits as set out in Spending Review 2000, but adjusted for subsequent changes (see paragraph B48);
• annually managed expenditure totals as set out in the Spending Review, but adjusted from 2001-02 to 2003-04 to allow for estimated costs of spending measures announced in the Pre-Budget Report (see Table B4);
• a more than doubling in net investment by the end of the projection period to 1.8 per cent of GDP, which makes a significant contribution to tackling the legacy of under-investment while remaining consistent with the sustainable investment rule. The debt to GDP ratio remains well below 40 per cent throughout the projection period; and
• there are no tax changes beyond those already announced before or in (see Table B4) this Pre-Budget Report and the indexation of rates and allowances.

Table B3: Economic assumptions for public finance projections

	Percentage changes on previous year
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04	2004- 05	2005- 06
Output (GDP)	21/2	3	21/4	21/4	21/4	21/4	21/4
Prices
RPIX	21/4	21/4	21/2	21/2	21/2	21/2	21/2
GDP deflator	21/2	2	21/2	21/2	21/2	21/2	21/2
RPI (September1)	1	31/4	21/2	23/4	21/2	21/2	21/2
Rossi2 (September1)	11/2	11/2	21/4	21/4	21/4	21/4	21/4
Money GDP (£ billion)	907	950	995	1042	1091	1142	1196

1 Used for projecting social security expenditure over the following financial year.

2 RPI excluding housing costs, used for uprating certain social security benefits.

B19 The key assumptions underlying the fiscal projections are audited by the National Audit Office. All these assumptions are now reviewed on a three year rolling basis. For the PBR, the NAO have reviewed the assumptions for equity prices, the consistency of price indices and deflators, and the ratio of VAT receipts to consumption. In each case the review concluded that the assumptions adopted three years ago were reasonable and were generally cautious. The NAO also commented that it was reasonable to continue using these assumptions. The NAO also carried out the postponed review of the assumptions on the November 1996 Spend to Save programmes which were last audited in July 1997. Insufficient information was available to NAO on some of the smaller programmes, but they concluded that the figures on direct savings assumed by most departments were on the whole reasonable and cautious.

B20 As a result of these reviews the key assumptions and conventions used for the Budget public finance projections are unchanged. In accordance with these assumptions and conventions, trend GDP growth is assumed to be 2¹/₄ per cent a year. Details are given in Box B1.

PRE-BUDGET REPORT MEASURES

B21 The effect of the measures announced in the PBR on the fiscal projections are set out in Table B4. The Pre-Budget Report also includes a number of transport measures which have not been included in the forecast since they are subject to consultation. These would cost in total around £1³/₄ billion a year if they were all to be implemented. Decisions on these measures will be taken in the Budget when the Government will also review its AME forecast and the AME margin. In the light of a reduced forecast for AME expenditure in the current year, the £50 increase in this year's winter fuel payment and the rebate of lorry vehicle excise duty, costing £700 million in total, have been absorbed within the AME margin in 2000-01. In line with the usual convention adopted in previous Pre-Budget Reports, changes to the forecast for AME programmes have been offset in the AME margin. The interim forecast shows that the interim AME margin has increased over the level set in the 2000 Spending Review by £1.7 billion in 2001-02, £1.6 billion in 2002-03 and £1.6 billion in 2003-04.

Table B4: Estimated costs for measures announced in the Pre-Budget Report

1 These measures have no effect on overall expenditure in 2000-01 because the costs will be met from the AME margin.

Box B1: Key assumptions audited by the NAO

Privatisation proceeds1,6 Credit is taken only for proceeds from sales that have been announced. Trend GDP growth1,6 21/4 per cent a year. UK claimant unemployment1,4,7 Constant at recent levels, 1.05 million. Interest rates1,6,7 3 month market rates change in line with market expectations (as of October 27). Equity prices2,7 FT-All share index rises from 3046 in line with money GDP. VAT2,7 Ratio of VAT to consumption falls by 0.05 percentage points a year. GDP deflator and RPI2,7 Projections of price indices used to plan public expenditure are consistent with RPIX. Composition of GDP3 Shares of labour income and profits in national income are broadly constant in the medium term. Funding3 Funding assumptions used to project debt interest are consistent with the public finances forecast and with financing policy. Oil prices5 $25.40 a barrel in 2001, the average of independent forecasts, and then constant in real terms. Anti-tobacco smuggling measures6 Only direct effects, including deterrent effects of fiscal marks, are allowed for.

1Audit of Assumptions for the July 1997 Budget Projections, 19 June 1997 (HC3693). 2Audit of Assumptions for the Pre-Budget Report, 25 November 1997 (HC361). 3Audit of Assumptions for the Budget, 19 March 1998 (HC616). 4Audit of the Unemployment Assumption for the March 1999 Budget Projections, 9 March 1999 (HC294). 5Audit of the Oil Price Assumption for the Pre-Budget Report, November 1999 (HC873). 6Audit of Assumptions for the March 2000 Budget, 21 March 2000 (HC348). 7Audit of Assumptions for the Pre-Budget 2000 Report (HC959).

FISCAL AGGREGATES

B22 Tables B5 and B6 provide more detail on the projections of the current and capital budgets, in £ billion and as a per cent of GDP respectively. The tables show the current surplus and net borrowing, both including and excluding windfall tax receipts and associated spending. The latter gives a clearer picture of underlying trends. Latest estimates of associated spending are given in Table 4.1.

Table B5: Current and capital budgets

	£ billion
	Outturn				Projections
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04	2004- 05	2005- 06
Current budget
Current receipts	357.1	380.3	399	416	432	452	473
Current expenditure	323.9	349.6	369	388	408	427	447
Depreciation	14.4	15.0	15	16	17	17	18
Surplus on current budget (including WTAS1)	18.8	15.7	15	13	8	8	8
Surplus on current budget2	19.4	16.6	16	14	8	8	8
Capital budget
Gross investment	22.4	25.8	30	34	38	41	43
less asset sales	-4.8	-3.8	-4	-4	-4	-4	-4
less depreciation	-14.4	-15.0	-15	-16	-17	-17	-18
Net investment	3.2	7.0	11	15	18	20	22
Net borrowing (including WTAS1)	-15.6	-8.7	-5	2	10	12	13
Net borrowing2	-16.4	-10.1	-6	1	10	12	13
Public sector net debt - end year	340.1	314.5	314	321	337	354	373
Memos:
General government net borrowing3	-16.7	-10.1	-6	1	9	11	13
General government gross debt3	395.3	381.0	375	376	388	405	424

1 Windfall tax receipts and associated spending.

2 Excluding windfall tax receipts and associated spending.

3 Maastricht measures of the government deficit and debt.

B23 The current budget surplus in 2000-01 is estimated to be £16.6 billion. Net investment is estimated to be £7 billion this year, giving a repayment of net borrowing of £10.1 billion.

B24 The current budget surplus is projected to fall slightly next year, to £16 billion. Net investment rises to £11 billion, reducing the repayment of net borrowing to £6 billion in 2001-02.

B25 The current budget surplus is projected to decline to £14 billion in 2002-03, and then to fall to £8 billion from 2003-04 onwards. The profile of a modest decline in the current budget surplus from 2001-02 reflects the planned real increase in current DEL expenditure and PBR spending measures, together with receipts projections that are based on a cautious projection of real GDP growth of 2¹/₄ per cent a year. Together with a rising ratio of net investment to GDP, this results in a projection of net borrowing rising to around 1 per cent of GDP in 2003-04.

B26 The profile of significant repayments of net borrowing up to 2001-02 results in a declining net debt-GDP ratio. Public sector net debt falls from 36.8 per cent of GDP in 1999-2000, to about 30 per cent of GDP in 2002-03. (The debt-GDP ratio has been reduced by over 2¹/₄ per cent in 2000-01 by the cash receipts from the auction of licences to access the electromagnetic spectrum.) The debt-GDP ratio stabilises at around this level in the remainder of the projection period.

B27 Table B6 shows the Maastricht measures of the deficit and debt used in the Excessive Deficits Procedure of the Maastricht Treaty, as a per cent of GDP. The Maastricht measures are now reported under ESA95 accounting conventions, and are thus now fully consistent with the UK national accounts, which moved to being on an ESA95 basis in September 1998. The reference levels of 3 per cent of GDP for the deficit and 60 per cent of GDP for debt are achieved comfortably throughout the projection period.

Table B6: Current and capital budgets

	Per cent of GDP
	Outturn	Estimate			Projections
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04	2004- 05	2005- 06
Current budget
Current receipts	39.4	40.0	40.2	40.0	39.6	39.6	39.6
Current expenditure	35.7	36.8	37.1	37.2	37.4	37.4	37.4
Depreciation	1.6	1.6	1.6	1.5	1.5	1.5	1.5
Surplus on current budget (including WTAS1)	2.1	1.7	1.5	1.2	0.7	0.7	0.7
Surplus on current budget2	2.1	1.7	1.6	1.3	0.7	0.7	0.7
Capital budget
Gross investment	2.5	2.7	3.0	3.3	3.5	3.6	3.6
less asset sales	-0.5	-0.4	-0.4	-0.4	-0.3	-0.3	-0.3
less depreciation	-1.6	-1.6	-1.6	-1.5	-1.5	-1.5	-1.5
Net investment	0.4	0.7	1.1	1.4	1.7	1.8	1.8
Net borrowing (including WTAS1)	-1.7	-0.9	-0.5	0.2	0.9	1.0	1.1
Net borrowing2	-1.8	-1.1	-0.6	0.1	0.9	1.0	1.1
Public sector net debt - end year	36.8	32.3	30.9	30.1	30.2	30.3	30.4
Memos:
General government net borrowing3	-1.8	-1.1	-0.6	0.1	0.9	1.0	1.1
General government gross debt3	43.6	40.1	37.7	36.1	35.6	35.5	35.4

1 Windfall tax receipts and associated spending.

2 Excluding windfall tax receipts and associated spending.

3Maastricht measures of the government deficit and debt.

B28 Table B7 sets out the effects of forecasting changes since the Budget on the main fiscal aggregates and of Spending Review 2000 discretionary changes and PBR policy measures. The only effect of Spending Review 2000 on overall spending was the decision to carry forward
£³/₄ billion of the additional £2 billion underspend in 1999-2000 since Budget 2000 into 2000-01 and £³/₄ billion into 2001-02. Of the amount carried forward £¹/₂ billion is capital expenditure and has no effect on the current budget surplus. Details of the forecasting changes are given in subsequent sections.

Table B7: Fiscal balances comparison with Budget 2000¹

1 Excluding windfall tax receipts and associated spending.

2 The 1999-2000 figures were estimates in Budget 2000.

B29 The table shows that the projected current budget surplus and repayment of net borrowing in 2000-01 increased by over £2 billion and £3¹/₂ billion respectively since Budget 2000. Much of this improvement reflects higher projections of receipts.

B30 The effects of higher receipts forecasts on the current surplus from 2001-02 to 2003-04 are partially offset by slightly higher current expenditure than forecast in the Budget. However, the forecast changes still outweigh the effects of policy measures and the current surplus is still at least as high as in the Budget. In line with the usual convention adopted in previous Pre-Budget Reports, changes to the forecast for AME programmes have been offset in the AME margin. With net investment marginally lower than the Budget projections, the improvement in net borrowing since the Budget, at £1-2 billion a year, is slightly greater than for the current budget.

RECEIPTS

B31 Table B8 gives projections of receipts as a percentage of GDP. Changes in the receipts projections since Budget 2000 are shown in Table B9. Table B10 sets out the Budget and PBR projections of the tax-GDP ratio. A detailed breakdown of receipts, in £ billion, for 1999-2000, 2000-01 and 2001-02 is given in Table B11.

Table B8: Current receipts

1 Mainly MIRAS and tax reliefs under the Working Families' Tax Credit and Children's Tax Credit schemes. Includes corporation tax credits (R&D tax credit and tax credit for cleaning contaminated sites).

2 The Working Families' Tax Credit will, subject to legislative constraints, be replaced in 2003 by a new integrated system of support for children and an employment tax credit.

3 Includes oil royalties, petroleum revenue tax and North Sea corporation tax (after ACT set-off).

4 Fuel, alcohol and tobacco duties.

5 Includes Council Tax and money paid into the National Lottery Distribution Fund, as well as other central government taxes.

6 Includes VAT and 'own resources' contributions to EU budget. Net of tax credits. Cash basis.

7 Excludes Children's Tax Credit, which scores as a tax repayment in the national accounts.

8 Accruals basis.

B32 Total receipts are projected to rise by 6¹/₂ per cent this year, and by 5 per cent in 2001-02. This compares with projected money GDP growth of 4³/₄ per cent in both years. Most of the additional buoyancy this year is attributable to income tax and North Sea revenues, as a result of a number of factors, including higher employment and earnings growth and higher oil prices. Non-North Sea corporation tax is expected to fall significantly this year but partially recover in 2001-02.

Table B9: Changes in current receipts since Budget 2000

	£ billion
	1999-00	2000-01	2001-02
Income tax (gross of tax credits)	0.7	2.8	2.4
Non-North Sea corporation tax (gross of tax credits)	0.0	-1.7	-0.8
Tax credits	-0.1	0.1	0.5
North Sea revenues	0.0	1.0	1.8
Capital taxes1	-0.2	-0.3	-1.1
Stamp duty	0.3	1.1	0.6
Value added tax	-0.3	-0.4	-0.5
Excise duties2	0.3	-0.2	-0.8
Social security contributions	0.1	1.0	1.0
Other taxes and royalties3	0.2	1.9	1.2
Net taxes and social security contributions	1.0	5.3	4.3
Other receipts and accounting adjustments	-0.1	-0.6	0.0
Current receipts	0.9	4.7	4.3

1 Capital gains tax and inheritance tax.

2 Fuel, alcohol and tobacco duties.

3 Includes Council Tax and money paid into the National Lottery Distribution Fund, as well as other central government taxes.

Total taxes

B33 Chart B3 and Table B10 show the tax-GDP ratio, measured as net taxes and social security contributions, as a percentage of GDP. The changes in the tax-GDP ratio over the next few years are mainly attributable to North Sea revenues and non-North Sea corporation tax. Much of the increase in the tax ratio in 2000-01 reflects higher oil prices, which increase North Sea revenues. These increase further in 2001-02, but then fall steadily as a per cent of GDP, as North Sea oil production is expected to decline. The temporary rise in the tax-GDP ratio also reflects changes in the corporation tax payment regime. Corporation tax receipts fall as a percentage of GDP when the transitional period for the new system of instalment payments comes to an end. The direct tax burden on a typical family with two children will fall in 2001-02 to its lowest level since 1972.

Chart B3

Table B10: Net taxes and social security contributions¹

	Per cent of GDP
	Outturn2				Projections
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04	2004- 05	2005- 06
Budget 2000	37.0	36.9	37.3	37.1	36.7	36.6
PBR 20003	36.9	37.3	37.5	37.3	36.9	36.9	36.8

1 Net of tax credits; cash basis.
2 The 1999-2000 figures were estimates in Budget 2000.

3 Tax changes subject to consultation are not included in the PBR 2000 projections of the tax burden. If implemented, they would have the following impact:

2001-02	2002-03	2003-04	2004-05	2005-06
-0.2	-0.2	-0.2	-0.2	-0.2

Income tax

B34 Income tax receipts (net of tax credits) in 2000-01 are expected to be about £99 billion, some £3 billion higher than forecast at the time of the Budget. Most of this increase stems from higher PAYE receipts and lower income tax repayments to date. This is partly offset by a lower forecast of tax deducted at source from interest paid by banks and building societies, reflecting lower than expected interest paid in the first half of 2000. There are slightly smaller increases over the Budget forecast in 2001-02 and subsequent years, partly because of PBR measures. As shown in Table B12, data for the first half of 2000-01 shows substantial growth on the same period in 1999-2000, despite the reduction in the basic rate of tax that took effect in April 2000, and the effect of the Working Families' Tax Credit, which only started in October 1999. The increase in receipts in the first half of 2000-01, which is mainly attributable to PAYE, is expected to be maintained in the second half. Some of the increase in PAYE so far in
2000-01 reflects earlier Budget measures. These include the ending of tax relief on profit related pay, which, as announced in the November 1996 Budget, was phased out over a number of years, and the extension of PAYE to cover tax due when certain share options are exercised. This tax would previously have been paid after the end of the year in which the options were exercised. Income tax receipts in 2001-02 increase to £102¹/₂ billion, but fall slightly as a share of GDP, mainly as a result of measures in earlier Budgets.

Non-North Sea corporation tax

B35 Non-North Sea corporation tax in 2000-01 is expected to be about £1³/₄ billion below the Budget forecast. The forecast is based on the latest information available to Inland Revenue, including preliminary data for October 2000. The main contributions to the lower forecast are:

• the final instalment payments and the first tranche of balance payments for tax on profits in 1999 were below forecast, implying lower levels of tax accruals than had been expected. Full explanations of these shortfalls will not be available until further payments are made and assessments are filed.
• in addition, repayments of mainstream corporation tax and advanced corporation tax (ACT) were higher than forecast.
• these reductions were partly offset by higher than forecast receipts of arrears of tax for earlier periods and receipts from small companies (which are not included in the instalment regime).

B36 There are similar effects on forecasts for 2001-02 and later years, but the decreases from the Budget forecast are lower, at around (or slightly less than) £1 billion a year, reflecting higher profits forecasts. Receipts are expected to rise by £4¹/₂ billion in 2001-02 as a result of increasing liabilities and the effect of the third year of the transition to quarterly instalments.

B37 Corporation tax is projected to rise by about £1 billion in 2002-03, but then to fall in 2003-04 back to its 2001-02 level, as the extra tax paid during the four year transition to quarterly instalments ends. The yield is expected to increase steadily with increasing profits thereafter.

B38 As shown in Table B12, receipts of total corporation tax in the first half of 2000-01 are
£0.9 billion higher than in the same period a year earlier. However, such comparisons are affected by the abolition of ACT in 1999 and the transition to quarterly instalments starting at the same time. These reforms will bring payments steadily forward over the four year transition. Whereas in previous years the bulk of corporation tax payments were made in October and January, there will now be a much more even quarterly profile of payments. Receipts in the second half of the year are expected to be about £3 billion lower than in the second half of 1999-2000.

North Sea revenues

B39 North Sea revenues are higher than in the Budget forecast because of higher oil prices, slightly offset by lower oil production. Details of the NAO audited oil price assumption are in Box B1 and the effects of changes to prices are explained in Box B2. Overall revenues are up by £1 billion this year, by £1³/₄ billion next year and by slightly smaller amounts thereafter, as production declines. Most of the increase in 2000-01 is petroleum revenue tax and royalties. North Sea corporation tax is only slightly higher in 2000-01, partly because the price effects take longer to affect receipts and partly because, as with non-North Sea corporation tax, balancing payments on profits made in 1999 were below forecast.

Capital taxes

B40 Capital gains tax in 1999-2000 was about £¹/₄ billion lower than forecast at the time of the Budget. After taking account of this lower than expected outturn and the most recent information on the pattern of asset disposals, the projected outturn for 2000-01 has been revised down by about £¹/₂ billion. Capital gains tax is forecast to drop back by about £¹/₄ billion in 2001-02, reflecting the Budget 2000 measure on taper reform. For 2001-02 onwards capital gains tax receipts are expected to be about £1 billion a year lower than in the Budget forecast. Inheritance tax receipts are broadly unchanged from the Budget.

Stamp duty

B41 Stamp duty receipts for 1999-2000 were some £¹/₄ billion above the Budget forecast due to particularly strong activity in share transactions at the end of the financial year. This higher than expected level continued into the first part of the current year and consequently the receipts forecast is just over £1 billion higher than at the time of the Budget. The higher activity in the second half of 1999-2000 and first half of this year affects comparisons shown in Table B12. Receipts are well up on last year in the first half of the year, which also saw a particularly high level of receipts from mergers and acquisitions, but are expected to be unchanged in the second half.

VAT receipts

B42 VAT receipts in 2000-01 are expected to be broadly in line with the Budget forecast. The forecast of VAT revenues in later years continues to be governed by the National Audit Office audited assumption that, after allowing for the effects of Budget measures, the ratio of VAT receipts to consumer spending declines gradually, by 0.05 percentage points a year. Compared with a flat VAT ratio, this cautious assumption reduces receipts by nearly £2 billion by 2005-06.

Excise duties

B43 Excise duties in 2000-01 are expected to be broadly in line with the Budget forecast. Although tobacco duty has risen strongly in the first half of 2000-01, see Table B12, this reflects a change in the timing of forestalling between 1999-2000 and 2000-01; this change will depress the annual comparison in the second half. Total excise duties in 2001-02 are projected to be £³/₄ billion lower than the Budget forecast, mostly reflecting the nominal freeze in fuel duty in that year. This reduces projected receipts throughout the forecast period. (The Budget forecast assumed that fuel duties increase in line with inflation in all years.) The forecast of tobacco duty remains unchanged from the Budget projections; the forecast of alcohol duty is little changed.

Social security
contributions

B44 Social security (national insurance) contributions are projected to be £59.8 billion this year, an increase of 6 per cent. This compares with projected wages and salaries growth of under 5 per cent. The strong growth of receipts - apparent in the outturns for the first half of 2000-01 (see Table B12) - is probably related to the rapid growth of PAYE receipts over the same period. The ratio of social security contributions to GDP is projected to fall slightly over the next five years, reflecting assumed higher rates of contracting out of the state pension scheme, as individuals increasingly make use of stakeholder pensions.

Box B2: The impact of higher oil prices on government revenue In 1999-2000 total oil-related receipts amounted to about £271/2 billion. This included fuel duties (£221/2 billion), VAT on petrol and diesel (approximately £21/2 billion), and £21/2 billion from North Sea revenues (royalties, petroleum revenue tax (PRT) and corporation tax). Oil companies also pay corporation tax on their profits from refining and distribution. Box A3 discusses the economic impact of higher oil prices on the economy in general and such effects could in turn impact on other government receipts. Only North Sea revenues are significantly affected by higher oil prices. Fuel duties are levied as a fixed amount on each litre purchased, and hence are not directly affected by oil prices (but to the extent higher petrol prices reduce consumption, the impact is negative). Although higher petrol pump prices increase VAT from fuel, this will largely displace VAT receipts from other household spending, with little overall effect on VAT revenues. VAT on petrol and diesel purchased for business use is generally reclaimed. The three components of North Sea revenues have very different assessment and collection regimes. All are scored on a cash receipts basis in the national accounts and hence the impact of higher oil prices on government revenues depends on the time lags involved in the payment of the various taxes. Details of the different regimes can be found in Inland Revenue Statistics available at http://www.inlandrevenue.gov.uk/stats/corporate.htm. Oil royalties for the second half of the calendar year are not paid until February and although the PRT payment system is more complex there are similar time lags - the impact of oil price changes in the second half of the year will not be felt until March. For both royalties and PRT, payments received in a financial year approximately reflect oil prices in the corresponding calendar year. The position is less straightforward for corporation tax. As large companies now pay this tax in quarterly instalments (based on the companies' own estimates of liability) and a later balancing payment, the effect of price changes on tax receipts will depend on exactly when the price changes happen and how the oil companies incorporate this in their estimates of taxable profits for the year as a whole. Some of the impact on receipts will be delayed until the second financial year, but the extent of this is changing during the full transition to quarterly instalments. Price changes in the last three months of a financial year will have no effect on receipts until the following financial year. The average oil price for calendar 2000 is now estimated to be about $6 higher than the $22.40 assumed at the time of the Budget, with much higher prices in second half of the year. North Sea revenues are expected to be £1 billion higher in 2000-01 than in the Budget forecast. This is a slightly lower first year impact than implied by applying the published ready reckoner1, which assumes a constant price change throughout the year. The PBR forecasts also allow for other factors such as exchange rate changes and declining production levels. As set out in Box B1 the PBR projections of North Sea revenue are based on the audited assumption of an oil price of $25.40 for calendar year 2001. This is the average of independent forecasts for the year ahead, which is used in the public finance projections unless it shows a rising oil price. A temporary change of $1 in this price across the whole calendar year would lead to a change of about £225 million in North Sea revenues in financial year 2001-02 and a change of about £60 million in 2002-03. A sustained price change of $1 from 2001 onwards would change revenues by £225 million in 2001-02 and about £300 million in subsequent years, assuming no changes in production from 2001 levels or in the other factors affecting tax liabilities. This assumes that companies will be able to estimate their annual corporation tax liabilities accurately at the time each instalment is due. 1Audit of the Future Oil Price Convention for the November 1999 Pre-Budget Report, HC873 1998-99.

Spectrum licence
receipts

B45 The auction earlier this year of licences to access the electromagnetic spectrum by mobile phone companies raised £22.5 billion. In line with Office for National Statistics latest views on the national accounts treatment of these receipts, they are treated as rent in these forecasts and spread evenly over the whole of the licence period. The actual proceeds were much higher than the amount allowed for in the Budget forecast and this leads to a higher level of accruals of about £0.9 billion a year.

Table B11: Public sector current receipts

	£ billion
	Outturn	Projections
	1999-00	2000-01	2001-02
Inland Revenue
Income tax (gross of tax credits)	95.9	103.8	109.6
Corporation tax (gross of tax credits)1	34.2	32.2	38.7
Tax credits	-3.0	-4.9	-7.0
Petroleum revenue tax	0.9	2.0	2.0
Capital gains tax	2.1	3.0	2.7
Inheritance tax	2.0	2.3	2.4
Stamp duties	6.9	8.3	8.1
Total Inland Revenue taxes (net of tax credits)	139.0	146.7	156.6
Customs and Excise
Value added tax	56.4	59.2	61.5
Fuel duties	22.5	23.2	23.6
Tobacco duties	5.7	7.4	7.6
Spirits duties	1.8	1.8	1.8
Wine duties	1.7	1.7	1.8
Beer and cider duties	3.0	3.0	3.2
Betting and gaming duties	1.5	1.5	1.5
Air passenger duty	0.9	1.0	1.0
Insurance premium tax	1.4	1.7	1.9
Landfill tax	0.4	0.5	0.5
Climate change levy			0.8
Customs duties and levies	2.0	2.1	2.2
Total Customs and Excise	97.3	103.0	107.4
Vehicle excise duties	4.8	4.9	5.1
Oil royalties	0.4	0.6	0.6
Business rates2	15.3	17.0	17.7
Social security contributions	56.4	59.8	62.3
Council Tax	13.0	13.9	14.7
Other taxes and royalties3	8.3	8.8	9.0
Net taxes and social security contributions4	334.6	354.7	373.3
Accrual adjustments on taxes	4.3	2.9	0.9
less VAT and own resources contribution to EU budget	-5.7	-6.6	-5.4
less PC corporation tax payments	-0.4	-0.4	-0.4
Tax credits5	3.0	4.9	5.5
Interest and dividends	3.4	5.2	5.0
Other receipts	17.9	19.6	20.5
Current receipts	357.1	380.3	399.4
Memo:
North Sea revenues6	2.6	5.3	7.3

1Includes advance corporation tax (net of repayments): 1.8 -0.2 0.0

Also includes North Sea corporation tax after ACT set off, and corporation tax on gains. Gross of corporation tax credits (R&D tax credit and tax credit for cleaning contaminated sites.)

2 Includes district council rates in Northern Ireland.

3 Includes money paid into the National Lottery Distribution Fund.

4 Includes VAT and 'traditional own resources' contributions to EU budget. Net of tax credits. Cash basis.

5 Excludes Children's Tax Credit, which scores as a tax repayment in the national accounts.

6 North Sea corporation tax (before ACT set-off), petroleum revenue tax and royalties.

Table B12: Net taxes and social security contributions 2000-01

	£ billion
	Outturn1			Change on 1999-2000
	Apr- Sep	Oct- Mar	2000- 01	Apr- Sep	Oct- Mar	2000- 01
Inland Revenue
Income tax and capital gains tax2	47.5	54.4	101.9	3.2	3.7	6.9
Corporation tax	12.3	19.9	32.2	0.9	-2.9	-2.0
Petroleum revenue tax	0.8	1.2	2.0	0.5	0.6	1.1
Inheritance tax	1.1	1.2	2.3	0.1	0.1	0.3
Stamp duties	4.4	3.9	8.3	1.3	0.0	1.4
Total Inland Revenue taxes (net of tax credits)	66.1	80.6	146.7	6.1	1.6	7.7
Customs and Excise
Value added tax	28.6	30.6	59.2	1.3	1.5	2.8
Fuel duties	11.3	11.9	23.2	0.4	0.2	0.7
Tobacco duties	4.5	2.9	7.4	2.6	-1.0	1.7
Alcohol duties	3.3	3.3	6.6	0.1	0.0	0.1
Other Customs duties and levies	3.4	3.2	6.7	0.3	0.1	0.4
Total Customs and Excise	51.1	51.9	103.0	4.9	0.8	5.7
Vehicle excise duties	2.4	2.6	4.9	-0.2	0.2	0.1
Oil royalties	0.3	0.4	0.6	0.1	0.1	0.2
Business rates3	10.2	6.8	17.0	1.3	0.4	1.7
Social security contributions	29.6	30.1	59.8	1.9	1.4	3.3
Council Tax	7.7	6.2	13.9	0.4	0.6	0.9
Other taxes and royalties4	4.3	4.4	8.8	0.4	0.2	0.5
Net taxes and social security contributions5	171.7	182.9	354.7	14.8	5.4	20.2

¹ Provisional.

² Net of tax credits.

³ Includes district council rates in Northern Ireland.

⁴ Includes money paid into the National Lottery Distribution fund.

⁵ Includes VAT and 'traditional own resources' contributions to EU budget. Net of tax credits. Cash basis.

PUBLIC EXPENDITURE

B46 Table B13 shows projections for public expenditure for the current year and the three years covered by the 2000 Spending Review. The projections cover the whole public sector using the aggregate Total Managed Expenditure (TME). TME is split into Departmental Expenditure Limits (DEL), firm three year limits for Departments' programme spending, and Annually Managed Expenditure (AME), spending that is not easily subject to firm multi-year limits. The table tracks changes to these three aggregates from Budget 2000 through the 2000 Spending Review to the projections set out in this Pre-Budget Report.

B47 The 2000 Spending Review was the first to be conducted on a resource basis. The introduction of resource budgeting moves public spending onto an accruals basis scoring spending as resources are consumed. This is a move away from cash budgeting, as shown in Budget 2000, where budgets score cash payments when they are made. Table B13 shows that the move to resource budgeting does not affect TME but does lead to changes within DEL and AME. Budget 2000 cash figures are therefore set out on a comparable resource basis to allow subsequent changes in DEL and AME allocations within and after the Spending Review to be shown.

B48 The Pre-Budget Report sets out an interim report on the public finances. For this purpose, TME remains unchanged for the current year but has been increased thereafter to accommodate the package for pensioners and other AME measures, rising by £2.9 billion by 2003-04. Table B4 shows the estimated costs of these measures. Departmental Expenditure Limits for the next three years were set at the Spending Review and remain unchanged with the exception of a classification change which leads to a switch from DEL to AME of around £1.5 billion, due to the impact of the Major Repairs Allowance. The introduction of the latter into Housing Revenue Account Subsidies from April 2001 reduces the Department for the Environment, Transport and Regions' DEL but increases AME.

Table B13: Public expenditure aggregates¹

	£ billion
	Outturn2	Estimate3		Projections
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04
Departmental Expenditure Limits (DEL)2
Budget 2000 - cash allocations3	178.9	193.7	202.6
Budget 2000 - resource based allocation4	178.8	194.5	203.2
plus Budget 2000 unallocated addition5	178.8	194.5	209.1
changes in Spending Review 2000	-2.0	0.8	3.0
Spending Review 2000	176.8	195.2	212.1	229.3	245.7
classification changes6	0.0	0.0	-1.6	-1.5	-1.4
PBR 2000	176.8	195.2	210.5	227.7	244.3
Annually Managed Expenditure (AME)2
Budget 2000 - cash estimates	166.3	177.2	183.6
Budget 2000 - resource based estimates4	166.4	176.4	183.0
changes in Spending Review 2000	-2.5	0.0	-2.2
Spending Review 2000	163.9	176.4	180.8	186.2	193.9
changes since Spending Review 2000	0.8	0.0	3.7	4.3	4.3
of which:
classification changes6			1.6	1.5	1.4
revisions/forecasting changes	0.8	-1.8	-1.7	-1.6	-1.6
mid-year changes to AME margin		1.1	1.7	1.6	1.6
PBR policy measures		0.7	2.1	2.8	2.9
PBR 2000	164.7	176.4	184.4	190.5	198.2
Total Managed Expenditure (TME)
Budget 20005	345.2	370.9	392.1
changes in Spending Review 2000	-4.5	0.8	0.8
Spending Review 2000	340.7	371.6	392.9	415.4	439.6
changes since Spending Review 2000	0.8	0.0	2.1	2.8	2.9
PBR 2000	341.5	371.6	394.9	418.3	442.5
of which:
Public sector current expenditure	323.9	349.6	368.8	387.8	407.8
Public sector net investment	3.2	7.0	10.7	14.5	18.2
Public sector depreciation	14.4	15.0	15.4	16.0	16.5
Memo: PBR 2000 TME as a percentage of money GDP	37.7	39.1	39.7	40.1	40.6

1 Figures may not sum due to rounding.

2 Figures for DEL and AME beyond 2001-02 were not published in Budget 2000.

3 Includes £3.1 billion allocated to UK health in 2001-02.

4 On a resource basis and including DEL/AME transfers, to allow comparison with Spending Review figures which are on a resource basis.

5 Includes unallocated Budget addition of £5.9 billion in 2001-02 (see Table C11 of the March 2000 Financial Statement and Budget Report).

6 Classification changes are switches from DEL to AME resulting from the introduction of the Major Repairs Allowance in April 2001.

B49 Forecasts of individual AME programmes have been reviewed for this Pre-Budget Report. Excluding the additional spending on measures from 2001-02 onwards and the DEL/AME switch mentioned above, total AME remains unchanged from the Spending Review and, in line with the convention adopted in previous PBRs, savings in AME programmes have been offset in the margin. Total AME for 2000-01 is unchanged as the costs of the measures are met from the AME margin. The main economic assumptions underpinning the AME projections are set out in Table B3. In addition, the projections assume that UK claimant unemployment remains flat at the recent level of 1.05 million. Forecast of AME programmes will be reviewed at the Budget.

B50 Chart B4 shows the ratio of TME to GDP. The ratio rises over the next few years, reflecting the higher levels of public investment.

Chart B4

B51 Table B14 shows the Departmental Expenditure Limits in terms of the resource and capital budgets. It has been updated since Spending Review 2000 to reflect transfers between departments and programmes.

B52 Tables B15 and B16 analyse the DELs allocated in the 2000 Spending Review. The 1998 Comprehensive Spending Review (CSR) set DELs from 1999-00 to 2001-02. The 2000 Spending Review made additions to 2001-02 allocations and set new plans for 2002-03 and 2003-04. Table B15 sets out the new funding committed in the 2000 Spending Review from the original allocations in 2001-02 as set out in Budget 2000. To ensure the comparison is on a consistent basis, the original 2001-02 allocations are adjusted for transfers between departmental lines and the move to resource budgeting. Table B16 shows average annual real growth rates between 2000-01 and 2003-04.

Table B14: Departmental Expenditure Limits - current and capital budgets

	£ billion
	Outturn	Estimate		Plans
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04
Resource budget
Education and Employment	14.2	16.8	18.8	20.4	21.8
Health	40.0	43.6	46.9	51.2	55.7
of which: NHS	39.4	42.9	45.7	49.1	53.5
Environment, Transport and Regions	4.2	4.4	5.1	5.6	5.7
Local Government	33.9	35.3	36.8	39.0	41.6
Home Office	7.0	7.6	8.8	9.3	9.8
Legal Departments	2.7	2.9	3.0	3.1	3.1
Defence1	16.9	17.8	18.1	18.5	18.7
Foreign and Commonwealth Office	1.0	1.0	1.0	1.0	1.1
International Development	2.2	2.5	2.7	2.9	3.1
Trade and Industry2	2.8	3.3	3.9	3.6	3.2
Agriculture, Fisheries and Food3	1.0	0.9	1.1	1.1	1.1
Culture, Media and Sport	0.9	0.9	1.0	1.1	1.2
Social Security (administration)	3.2	3.2	3.8	4.1	4.1
Scotland4	12.0	12.7	13.6	14.4	15.2
Wales4	6.3	6.9	7.3	7.9	8.5
Northern Ireland Executive4	4.3	4.5	4.9	5.0	5.3
Northern Ireland Office4	1.0	1.0	1.0	1.1	1.0
Chancellor's Departments	3.4	3.8	3.9	4.1	4.1
Cabinet Office	1.2	1.2	1.3	1.3	1.3
Employment Opportunities Fund5	0.5	0.9	0.9	0.9	1.4
Invest to Save Budget		0.0	0.1	0.1	0.1
Capital Modernisation Fund
Policy Innovation Fund		0.0	0.0	0.0	0.0
Reserve6		1.8	1.2	1.6	2.0
Total resource budget DEL	158.9	172.8	185.1	197.3	209.1
Capital budget
Education and Employment	1.0	1.9	2.5	3.0	3.8
Health	0.9	1.8	2.7	3.2	3.3
of which: NHS	0.9	1.7	2.6	3.2	3.2
Environment, Transport and Regions	5.5	6.2	6.4	8.4	10.7
Local Government	0.3	0.0	0.1	0.3	0.3
Home Office	0.5	0.6	0.9	1.0	0.9
Legal Departments	0.1	0.1	0.1	0.2	0.2
Defence1	5.0	5.2	5.5	5.7	6.2
Foreign and Commonwealth Office	0.1	0.1	0.1	0.2	0.2
International Development	0.3	0.3	0.4	0.4	0.4
Trade and Industry2	0.2	0.5	0.7	0.8	1.0
Agriculture, Fisheries and Food3	0.1	0.2	0.2	0.3	0.2
Culture, Media and Sport	0.1	0.1	0.1	0.1	0.1
Social Security (administration)	0.0	0.0	0.1	0.1	0.0
Scotland4	1.7	2.3	2.6	3.0	3.2
Wales4	0.8	0.9	1.0	1.2	1.3
Northern Ireland Executive4	0.6	0.8	0.8	1.0	1.1
Northern Ireland Office4	0.0	0.0	0.1	0.1	0.0
Chancellor's Departments	0.2	-0.1	0.2	0.2	0.2
Cabinet Office	0.2	0.2	0.2	0.2	0.2
Employment Opportunities Fund5	0.4	0.6	0.0	0.0	0.0
Invest to Save Budget			0.0	0.0	0.0
Capital Modernisation Fund		0.1	0.4	0.9	1.2
Policy Innovation Fund		0.0	0.0	0.0	0.0
Reserve6		0.5	0.3	0.4	0.5
Total capital budget DEL	18.0	22.4	25.4	30.4	35.2
Total Departmental Expenditure Limits	176.8	195.2	210.5	227.7	244.3
Total education spending	40.6	46.0	49.5	53.4	57.7

¹Provisional for 1999-2000 and 2000-01.
²Includes the capital expenditure of the Export Credits Guarantee Department.
³Includes spending on BSE related programmes.
⁴For Scotland and Wales, the split between current and capital budgets is decided by the respective Executives. For Northern Ireland, during any period when the Assembly ceases to operate, this is a matter for the Secretary of State.
⁵Formerly Welfare to Work, until 2000-01 includes all spending financed by the windfall tax. Thereafter includes Employment Opportunities Fund spending only.
⁶Reserve has been arbitrarily apportioned between current and capital, with 10% allocated to capital.

Table B15: 2000 Spending Review: Departmental Expenditure Limits new allocations by Department

	£ billion
	Budget	Spending		Change
	cash basis	Review base1
	2001- 02	2001- 02	2003- 04
Education and Employment	19.3	19.6	25.7	6.1
Health	48.82	48.92	59.0	10.1
of which: NHS	48.0	48.1	56.7	8.5
Environment, Transport and Regions	11.9	10.3	16.4	6.1
Local Government	36.6	36.6	41.9	5.3
Home Office	8.1	8.1	10.6	2.5
Legal Departments	2.8	2.9	3.3	0.4
Defence	23.0	23.0	25.0	1.9
Foreign and Commonwealth Office	1.1	1.1	1.2	0.1
International Development	3.1	3.1	3.5	0.5
Trade and Industry	3.6	3.6	4.3	0.7
Agriculture, Fisheries and Food	1.2	1.0	1.3	0.4
Culture, Media and Sport	1.1	1.1	1.2	0.1
Social Security (administration)	3.3	3.3	4.2	0.9
Scotland	15.52	15.72	18.4	2.7
Wales	8.12	8.12	9.8	1.7
Northern Ireland	6.32	6.32	7.4	1.1
Chancellor's Departments	3.7	3.7	4.3	0.6
Cabinet Office	1.3	1.3	1.5	0.2
Employment Opportunities Fund	1.3	1.0	1.4	0.4
Invest to Save Budget	0.1	0.1	0.1	0.0
Capital Modernisation Fund	0.4	0.4	1.2	0.8
Policy Innovation Fund	0.0	0.0	0.1	0.1
Reserve	2.3	2.4	2.5	0.1
Total Departmental Expenditure Limits	202.6	201.6	244.3	42.7

1 Budget 2000 cash numbers adjusted for move to Resource Accounting and Budgeting and including transfers between departments and programmes (see Table A8 in Spending Review 2000 New Public Spending Plans 2001-2004).

2 Includes the allocation of the £3.1billion Budget addition for the NHS in 2001-02.

Table B16: 2000 Spending Review: average annual growth rates in Departmental Expenditure Limits between 2000-01 and 2003-04

	£ billion
			Change	3 year
				real average
				growth
	2000-01	2003-04		(per cent)
Education and Employment	18.6	25.71	7.1	8.6
Health	45.3	59.0	13.7	6.5
of which: NHS	44.5	56.7	12.1	5.7
Environment, Transport and Regions	10.7	16.4	5.8	12.6
Local Government	35.4	41.9	6.5	3.2
Home Office	8.2	10.6	2.5	6.5
Legal Departments	3.0	3.3	0.3	0.9
Defence	22.9	25.0	2.0	0.4
Foreign and Commonwealth Office	1.1	1.2	0.1	0.5
International Development	2.8	3.5	0.8	6.1
Trade and Industry	3.8	4.3	0.5	1.5
Agriculture, Fisheries and Food	1.0	1.3	0.3	6.0
Culture, Media and Sport	1.0	1.2	0.2	4.3
Social Security (administration)	3.2	4.2	1.0	6.3
Scotland	15.0	18.41	3.4	4.5
Wales	7.7	9.81	2.1	5.5
Northern Ireland	6.3	7.41	1.1	2.8
Chancellor's Departments	3.7	4.3	0.6	2.1
Cabinet Office	1.4	1.5	0.1	0.2
Employment Opportunities Fund	1.4	1.4	-0.1	-3.7
Invest to Save Budget	0.0	0.1	0.1
Capital Modernisation Fund	0.1	1.2	1.1
Policy Innovation Fund	0.0	0.1	0.1
Reserve	2.5	2.5	0.0
Total Departmental Expenditure Limits	195.2	244.3	49.0	5.1
Memo items
Education (UK)	46.0	57.7	11.7	5.2
NHS UK	54.2	68.7	14.5	5.6
Transport (DETR - England)	4.9	9.1	4.2	20.0
Criminal Justice System (England and Wales)	12.5	15.3	2.7	4.1

¹ Includes New Deal for Schools money formerly in the Employment Opportunities Fund

B53 Tables B17 and B18 set out the forecast for individual AME programmes and show comparisons between the latest forecasts and projections published in the Budget. Table B19 shows changes to the AME components since the forecasts published in the 2000 Spending Review.

B54 The most significant change since the Budget is the downward revision to the forecast
for social security expenditure. Before taking account of the pensioner package announced in the PBR, this is forecast to be lower by around £1 billion in the current year. There is an even larger reduction of £1.7 billion in 2001-02. Even after allowing for the extra costs of the pensioner package, the total is only slightly higher than in the Budget. The lower forecast is due primarily to lower actual unemployment and, reflecting this, a lower unemployment assumption for the future (see Box B1) and the availability of new data showing lower benefit caseloads than forecast at the Budget.

B55 At the time of the 2000 Spending Review the only changes made to the social security forecast were those stemming from changes to the audited assumptions for unemployment and from new spend to and save and other service modernisation measures. Table B19 sets out the further changes made since then. These mainly represent further updating of the unemployment assumption, the new benefit caseload forecasts and the PBR pensioner package. Before taking account of the package, spending on social security would be, for 2001-02 onwards, £1¹/₂ to £2 billion a year lower than in the Spending Review.

B56 Projections for central government gross debt interest are also substantially lower than forecast at the Budget. This is due to a combination of lower levels of government debt following the higher than expected proceeds from the auction of licences to access the electromagnetic spectrum, a revised DMO remit, and lower market interest rate expectations. The forecast for debt interest was revised in the 2000 Spending Review to take account of the spectrum licence proceeds and the revised remit. Further reductions since then are due to further lower estimates of government borrowing and updated market interest rate expectations.

B57 The other main changes to AME programmes since the Budget are lower forecast expenditure for net public service pensions reflecting lower expenditure to date, and increased lending by the Export Credits Guarantee Department in the current year.

Table B17: Annually Managed Expenditure

Annually Managed Expenditure

Departmental AME:

	£ billion
	Outturn			Projections
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04
Social Security Benefits	97.2	99.0	105.0	108.7	112.8
Housing Revenue Account subsidies	3.2	3.2	4.6	4.3	4.1
Common Agricultural Policy	2.7	2.7	2.8	2.7	2.8
Export Credits Guarantee Department	0.9	1.1	0.3	0.2	0.0
Self-financing public corporations capital spending	1.0	1.4	1.5	1.2	1.0
Net public service pensions	5.2	5.5	5.5	5.7	6.0
National Lottery	1.9	2.2	2.2	2.1	2.1
Other programme expenditure	-0.1	0.0	0.0	0.0	0.0
Non-cash items:
Depreciation	7.3	6.9	7.3	8.4	9.0
Cost of capital charges	13.0	12.8	12.8	12.0	12.3
Provisions and other charges	0.6	0.1	0.0	0.1	0.3
Total departmental AME (inc. non-cash items)	133.0	134.9	141.9	145.4	150.3
Other AME:
Net payments to EC institutions1	2.9	2.8	2.6	2.5	2.8
Locally financed expenditure	17.2	18.4	19.3	20.2	21.1
CG debt interest	25.5	26.9	24.6	24.8	24.4
Accounting and other adjustments2,3	-13.8	-9.2	-6.7	-6.0	-5.0
Total other AME	31.7	38.9	39.8	41.5	43.3
AME Margin	0.0	2.6	2.7	3.6	4.6
Annually Managed Expenditure	164.7	176.4	184.4	190.5	198.2

¹ Net payments to EC institutions exclude the UK's contribution to the cost of EC aid to non-Member States (which is attributed to the aid programme).
Net payments therefore differ from the UK's net contribution to the EC Budget, latest estimates for which are (in £billion):

1999-00	2000-01	2001-02	2002-03	2003-04
3.3	3.4	3.3	3.4	3.7

Figures from 2001-02 are trend estimates.

² Includes adjustments to deduct non-cash items in DEL and departmental AME which do not score in TME.

³ Includes a reconciliation adjustment to national accounts estimate of TME.

Table B18: Changes in Annually Managed Expenditure since Budget 2000¹

	£ billion
	1999-00	2000-01	2001-02
Annually Managed Expenditure
Social Security benefits	0.0	-0.5	0.3
Housing Revenue Account subsidies	-0.1	-0.2	1.3
Common Agricultural Policy	-0.1	0.0	-0.1
Export Credits Guarantee Department	0.0	0.8	0.0
Net public service pensions	-0.4	-0.2	-0.2
National Lottery	-0.1	-0.1	0.2
Net Payments to EC institutions	0.3	0.1	0.1
Locally financed expenditure	0.0	0.3	0.2
CG debt interest	0.0	-0.8	-2.5
AME margin	0.0	1.6	0.7
Other AME	-1.3	-0.9	1.5
Annually Managed Expenditure	-1.7	0.0	1.4

¹ Figures show comparisons between PBR projections and Budget forecasts on a consistent basis, adjusted for the move to resource budgeting and classification changes.

Table B19: Changes in Annually Managed Expenditure since 2000 Spending Review

Annually Managed Expenditure

Departmental AME:

	£ billion
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04
Social security benefits	0.1	-0.4	0.6	1.4	0.9
Housing Revenue Account subsidies	0.0	-0.2	1.3	1.1	1.0
Common Agricultural Policy	0.0	0.0	-0.1	-0.1	0.0
Export Credits Guarantee Department	0.0	0.3	0.0	0.0	0.1
Self-financing public corporations capital spending	0.1	-0.2	0.3	-0.1	-0.3
Net public service pensions	0.1	-0.2	0.0	0.0	0.0
National Lottery	0.0	-0.1	0.2	0.0	0.0
Other programme expenditure	0.0	0.0	0.0	0.0	0.0
Non-cash items:
Depreciation	0.1	-0.4	-0.5	0.1	0.3
Cost of capital charges	0.3	-0.1	-0.5	-1.5	-1.5
Provisions and other charges	0.3	0.5	0.2	0.1	0.1
Total departmental AME (incl. non-cash items)	1.0	-0.9	1.5	1.1	0.5
Other AME:
Net Payments to EC institutions	0.0	0.1	0.1	-0.1	-0.1
Locally financed expenditure	0.0	0.4	0.4	0.4	0.5
CG debt interest	-0.1	-0.1	-1.5	-0.5	-0.3
Accounting and other adjustments	-0.1	-0.7	1.4	1.8	2.1
Total Other AME	-0.2	-0.2	0.5	1.6	2.2
AME Margin	0.0	1.1	1.7	1.6	1.6
Annually Managed Expenditure	0.8	0.0	3.7	4.3	4.3

B58 The main accounting adjustments, those items within TME but outside DEL and AME main programmes, are shown in Table B20. Since the Budget and the Spending Review there have been a number of changes to the adjustments of which the most significant are the higher forecasts for non-trading capital consumption and VAT refunded on general government expenditure. These are due to higher outturn data. The adjustments increase over the next two years mainly because of the introduction of the Working Families Tax Credit.

Table B20: Accounting and other adjustments

		£ billion
		1999- 00	2000- 01	2001-02	2002- 03	2003- 04
1	Non-trading capital consumption	7.9	8.2	8.4	8.7	9.1
2	VAT refunded on general government expenditure	5.9	6.2	6.5	6.8	7.0
3	EC Contributions	-5.7	-6.6	-5.4	-4.8	-4.2
4	Tax credits	3.0	4.9	5.5	5.7	5.9
	of which Working Families' Tax Credit and Disabled Person's Tax Credit1:	1.0	4.5	5.1	5.3	5.5
5	Adjustments for public corporations	3.9	3.8	3.8	3.7	4.1
6	Intra general government debt interest	-3.4	-2.8	-2.9	-3.2	-2.9
7	Financial transactions in departmental budgets	-1.9	-2.4	-1.8	-1.8	-1.9
8	Adjustments for expenditure financed by receipts	0.0	0.0	0.1	0.1	0.1
9	Other accounting adjustments	-0.4	-0.3	-0.5	-0.5	-0.5
10	Reconciliation to national accounts	-1.9
	less
	non-cash items in DEL	0.3	0.3	0.3	0.3	0.3
	non-cash items in AME	20.9	19.8	20.1	20.5	21.5
Total accounting and other adjustments		-13.8	-9.2	-6.7	-6.0	-5.0

¹The Working Families Tax Credit will, subject to legislative constraints, be replaced in 2003 by a new integrated system of support for children and an employment tax credit

B59 Table B21 gives a breakdown of public sector capital expenditure.

Table B21: Public sector capital expenditure

	£ billion
	1999- 00	2000- 01	2001- 02	2002- 03	2003- 04
CG spending and LA support in DEL	9.9	13.7	16.8	20.9	25.0
Locally-financed spending	0.9	0.8	2.2	2.2	2.1
National Lottery	1.4	1.3	1.3	1.3	1.3
Public corporations1	4.5	4.5	4.5	4.7	4.8
Other capital spending in AME	0.9	1.0	1.0	1.1	1.1
Allocation of reserve and AME margin	0.0	0.7	0.3	0.4	0.5
Public sector gross investment2	17.6	22.0	26.2	30.5	34.7
Less depreciation	-14.4	-15.0	-15.4	-16.0	-16.5
Public sector net investment2	3.2	7.0	10.7	14.5	18.2
Proceeds from the sale of fixed assets3	4.8	3.8	3.8	3.8	3.8

1 Public corporations' capital expenditure is partly within DEL and partly within AME.

2 This and previous lines are all net of sales of fixed assets.

3 Projections of total receipts from the sale of fixed assets by public sector. These receipts are taken into account in arriving at public sector gross and net investment, which are net of sales of fixed assets.

B60 Table B22 shows estimated receipts from asset and loan sales from 1998-99 to 2002-03. The table shows that following two years of total sales of fixed assets of over £4 billion the Government continue to forecast further sales of some £4 billion over this year and the next two years.

Table B22: Loans and sales of assets

	£ billion
	Outturn			Projections
	1998- 99	1999- 00	2000- 01	2001- 02	2002- 03
Sales of fixed assets1
Central Government	1.3	1.1	1.0	1.0	1.0
Local Authorities	2.8	3.7	2.8	2.8	2.8
Total sales of fixed assets	4.1	4.8	3.8	3.8	3.8
Loans and sales of financial assets
Sale of student loans portfolio	1.0
Other loans and sales of financial assets	-1.5	-1.7	-3.0	-3.0	-2.9
Total loans and sales of financial assets	-0.5	-1.7	-3.0	-3.0	-2.9
Total loans and sales of assets	3.6	3.1	0.7	0.8	0.9

¹ National accounts definition of capital. Excludes single use fighting equipment by Ministry of Defence, which is treated as capital under resource accounting, and expenditure on and sale of which will be included in the capital budget under resource budgeting.

B61 The figures for sales of financial assets include proceeds from the sale of British Energy debt and from the public private partnerships for National Air Traffic Services and the Defence Evaluation and Research Agency.