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Matteo Carrozza, Economic and Fiscal Outlook


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Matteo Carrozza, Economic and Fiscal Outlook

  1. 1. Welcome to the Influence Conference 2013 Nicky Alberry Chairman
  2. 2. Economic and FiscalOutlookMarch 2013Matteo CarrozzaSenior Economist
  3. 3. What to expect in the next 50 minutes: Economic and fiscal analysis – Growth prospects – UK fiscal outlook vs. other economies – Current spending plans What could be done. – How to analyse proposals (effect on short term, long term, distributional) – Proposals advanced so far Q & A, and your proposals 3
  4. 4. Sluggish is an understatement…..worse than the 1930s103 UK Economic Output (Index, t = business cycle peak) 1930s102101100 Source: ONS/BoE 99 98 2008 97 96 95 94 93 92 t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18Quarters 4
  5. 5. Global outlook bleak, but UK performance disappointing 5
  6. 6. Employment is only ‘positive’… UK Employment (Business Cycle Peak = 100)101 2008100 99 98 97 1980 96 95 1990 94 93 t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+36 t+40 t+44 t+48 t+52 t+56 t+60 t+32 6
  7. 7. …but wage growth weak, and productivity low 7
  8. 8. UK deficit remains very high… 8
  9. 9. …although debt position is considerably better 9
  10. 10. …and borrowing costs remain low 10
  11. 11. Current plans expect 4 more years of fiscal consolidation  Scale of tightening broadly unchanged over the next two years, pace of tightening starts easing only by 2015/16.  Most of the tightening comes from spending cuts, rather than tax rises Cumulative tightening, as % of GDP 9 Other current spend Percentage of national income 8 Debt interest 7 Benefits 6 5 Investment 4 Tax increases 3 2 1 0 2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 11
  12. 12. With most of the cuts still to come % of cuts not implemented by March 2013 90% 77% 80% 67%% not implemented by … 70% 58% 59% 60% 50% 40% 33% 30% 17% 20% 10% 0% All fiscal Tax increases Total Investment Benefit cuts Other tightening spending cuts current cuts spending cuts 12
  13. 13. Time for changing fiscal policy? Arguments for changes – Growth has been much worse than expected, indicating that perhaps fiscal tightening ought to be postponed – Size of the fiscal multiplier may be larger than expected – Borrowing costs remain low, as long as return on investment is higher than 3%, postponing adjustment may be beneficial in short and long run Arguments against changes – Danger that changes to fiscal policy result in eventual rise in borrowing costs, which could be sudden – Uncertainty with regards to amount of spare capacity, which may be smaller than we think (note: not an argument the OBR/HMT make) 13
  14. 14. How to evaluate fiscal policy changes? What is the short run impact? This depends on the fiscal multiplier of policy change, and generally the higher the propensity to spend the higher the multiplier. i.e. an infrastructure project has generally a higher multiplier than say a tax cut. Some of the windfall of tax cut will be saved, rather than spent. Also, how much is spent domestically? What is the long run impact? This depends on whether this measure provides positive long term incentives. A policy which for instance encourages more people to work, or invest, would have a beneficial long run effect. With regards to investment, is it a useful investment project, or is it a wasteful project. What is the distributional effect? Politics, not economics, though distribution is important as it can impact effectiveness of the proposal. 14
  15. 15. What changes are scheduled to take place? Departmental spending & benefits – Further departmental cuts BENEFIT CHANGE JSA, Employment allowance and Rise limited to 1% other work benefits Child benefits Frozen till 2014. Then 1% Maternity leave Rise limited to 1% Housing benefits New rules, bedroom tax, + 1% increase Taxes – Small increases in personal allowance – Income tax rate above 150,000 from 50% to 45% – Freezing of special personal allowance for people older 65, i.e ‘granny tax’ 15
  16. 16. Should there be higher government investment?  Short run effect – Large multiplier. Very labour intensive, most spent domestically – ‘Shovel ready’?  Long run effect – Effectiveness would depend on usefulness of investment. Most likely to have positive long-run effect are investments in transport, energy, and housing. Note: these are the type of projects which generally attract most opposition (HS2, Heathrow expansion, wind farms, etc)  Distributional – Many people benefit from better infrastructure, but there are localised losers 16
  17. 17. Should there be tax cuts?  Short run effect – Multiplier depends on propensity to consume it, rather than save it. ‘US- style tax rebates’ would have highest multiplier, changes in tax allowance or VAT cuts less so.  Long run effect – Hard to assess. It partly depends on assessment of spare capacity, and how deficient demand is  Distributional – Depends on how they are applied 17
  18. 18. What Budget proposals have been advanced? CBI – They propose a fiscally neutral Budget, in which £2.2bn of further cuts in current spend is used to finance extra £1.25bn of investment and £950m in tax cuts. – Infrastructure investment focused on housing and improved transport. Tax cuts focused on cap on business rates, and freeze of air passenger duty. – Measures are quite small (£2.2bn), and neutral, so unlikely to have a major impact. Using OBR’s own estimates of multipliers for different policies - which range from 0.3 to 1 – and assuming that proposals deliver most ‘bang for your buck’ the increase in GDP would be negligible. Others – Various politicians have proposed making further cuts to current spend, either in welfare or in some specific department, to fund increased investment. 18
  19. 19. To conclude Don’t expect much change, with fiscal tightening to continue for until 2016/17, probably longer Fiscally neutral changes unlikely to deliver much stimulus, especially in the short term If growth is priority, then extra borrowing to finance infrastructure would deliver most bang for your buck. See IFS simulations 19
  20. 20. Your proposals and Q&A? 20
  21. 21. Thank you We hope you’ve enjoyed your day. Keep up to date with Influence at and If you would like to receive the Influence Update Bulletin, please leave your business card on your seat.Thanks to Vox and Business West for their help in organising today.