Annex B The Public Finances

The public finances have improved more sharply than expected this year, and are projected to improve further on current policies. After a brief summary, this annex sets out the assumptions underlying the forecasts and projections outlined in Chapter2. It then deals in turn with budget deficits, debt, government receipts and government expenditure, and concludes with some further analyses of government borrowing and funding. Historical series for different measures of the budget deficit, expenditure and receipts, and a description of the accounting conventions used in presenting the public finances are given at the end of the annex.

SUMMARY

The Government is fully on course to meet its five year deficit reduction plan. Excluding windfall tax receipts, the PSBR will probably be about £5 billion in 1997-98. This is £7 billion lower than forecast in the November Pre-Budget Report. Public spending has been lower than planned, while tax receipts have turned out higher than expected.
The current balance, which has been continuously in deficit since 1990-91, could be close to balance in 1997-98 and be in surplus next year.
The burden of public debt, which had risen sharply over the first half of the 1990s, has fallen slightly over the past year, as would be expected at this stage of the economic cycle, and is likely to fall further next year.
On internationally comparable definitions (which cover only general government and exclude public corporations), both the budget deficit and debt burden were comfortably within Maastricht reference levels in calendar 1997.
On the three illustrative public expenditure assumptions used in last July's Budget for the years beyond 1998-99 and with no further tax changes, the public finances would be expected to continue to improve over the medium term.

Assumptions

B.01 The projections:

take account of the effects of the Budget measures, but assume that there are no further tax changes beyond the annual real increases in fuel and tobacco duties (announced in the November 1993 Budget) and the indexation of rates and allowances;
assume that public spending is in line with cash plans in 1998-99, and for later years is as in the three illustrative projections shown in the July Budget and November Pre-Budget Report (ie real growth in the Control Total of 3/4 ,1 1/2 and 2 1/4 per cent a year); and
assume that the economy follows the path described in Appendix A. In the interest of caution, the lower end of the range of projections of GDP growth has been used.

Table B1: Economic assumptions for public finance projections

	Percentage change on a previous year
	1997-98	1998-99	1999-00	2000-01	2001-02	2002-03
Output (GDP)	3	1 3/4	2	2 1/4	2 1/4	2 1/4
Prices:
RPI excluding MIPs	2 3/4	2 3/4	2 1/2	2 1/2	2 1/2	2 1/2
GDP deflator	2 3/4	3	2 1/2	2 1/2	2 1/2	2 1/2
RPI (September)(1)	3 1/2	3 1/4	2 1/4	2 1/2	2 1/2	2 1/2
Rossi (September)(1)	2 1/2	2 1/4	2 1/4	2 1/4	2 1/4	2 1/4
Money GDP (£ billion)	797	834	872	914	958	1 004

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

B.02 Eleven of the key assumptions and conventions underlying the projections have been audited by National Audit Office (NAO). Unemployment is assumed flat at its January level and interest rates are projected in line with market expectations.

NAO audit of assumptions and conventions

The National Audit Office (NAO), in response to invitations from the Chancellor of the Exchequer, has now examined eleven of the key assumptions and conventions underlying the forecasts of the public finances. The results of previous NAO audits were published in a Command Paper issued before the July Budget (Cm3693) and a House of Commons Paper issued at the time of the November Pre-Budget Report (HC361). A report covering the assumptions on factor income shares and funding used in this Budget will be issued by the NAO on Thursday, 19 March (HC616).

The eleven assumptions and conventions that have been audited cover privatisation proceeds and most of the key aggregate determinants of tax revenues and of cyclical social security and debt interest, the main components of public expenditure outside the Control Total.

	Key determinants	Audited assumptions
Tax receipts	Economic growth	Trend GDP
	Inflation	GDP deflator, RPI
	Composition of GDP	Factor shares
	Asset prices	Equity prices
		Oil prices
	Effectiveness of anti-evasion etc. measures	"Spend to Save"
	VAT shortfall	Effective VAT rate
Cyclical social security	Claimant count	Unemployment
	Inflation upratings	RPI, Rossi, GDP deflator
Debt interest	Interest rates	Short-term interest rates
	Composition of debt	Funding assumptions
	Inflation	RPI
Privatisation proceeds		Privatisation proceeds

Budget Deficits

1997-98 estimates

B.03 Excluding windfall tax receipts and associated spending, the PSBR in 1997-98 is estimated at £5 billion. This estimate is still subject to significant error, given the difficulty of predicting public spending and receipts towards the end of the financial year. It compares with forecasts of £13 1/4 billion in the July Budget and £12 billion in the November Pre-Budget Report. The undershoot chiefly reflects an underspend on the Control Total, estimated at £1 1/2 billion, and higher tax receipts, principally from income tax following the introduction of self-assessment, VAT and social security contributions.

B.04 In spite of a reduction of over £2 1/2 billion in privatisation proceeds, the estimated PSBR (excluding windfall tax) is £17 3/4 billion lower than in 1996-97. About one quarter of this reduction is accounted for by tax measures in recent Budgets and by the introduction of self-assessment; the remainder reflects relatively fast economic growth and tight control of public spending.

B.05 The outturn for the current balance - the concept relevant to the "golden rule" - is still uncertain, since full figures are available only for the first three quarters of the financial year. It is estimated that the current balance will be close to zero in 1997-98. This follows six years of substantial deficits.

B.06 The general government financial deficit was larger than the PSBR, as it did not benefit from privatisation proceeds or a debt repayment by public corporations. On the Maastricht definition (which does not exclude the windfall tax), the provisional outturn for calendar 1997 was 1 3/4 per cent of GDP, which is the same as forecast in the Pre-Budget Report and comfortably below the excessive deficits criterion of 3 per cent.

1998-99 forecasts

B.07 The current balance is projected to continue to improve next year. On a national accounts basis, total receipts are projected to rise by over £17 billion between 1997-98 and 1998-99, at a rate slightly faster than money GDP, while current public spending is projected to rise by £13 billion. As a result, the current account is projected to move into surplus (even when the windfall tax is excluded).

Table B2: Budget deficits (including and excluding the windfall tax)

	£ billion
	Outturn	Estimate	Forecast
	1996-97	1997-98	1998-99
Receipts(1)	288.1	315.7	333.0
Current expenditure(2)	308.3	314.5	327.5
Current balance	-20.2	1.2	5.5
Current balance excluding windfall tax(3)	-20.2	-1.3	3.6
Net capital spending(4)	6.7	6.3	7.0
Public sector financial deficit	26.9	5.1	1.6
Privatisation proceeds and other financial transactions	4.2	2.5	-0.8
PSBR	22.7	2.6	2.3
PSBR excluding windfall tax(3)	22.7	5.0	3.9
General government
financial deficit(5) - £ billion	29.7	5.7	1.3
- per cent of GDP(5)	3.9	0.7	0.1
Money GDP - £ billion	752.3	796.8	833.6

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 and less capital transfer receipts and includes capital grants.
5 Definitions on a Maastricht basis (which does not exclude the windfall tax and associated spending).

B.08 With net capital spending projected to rise, the financial deficit improves slightly less than the current balance between 1997-98 and 1998-99. There is little difference between the projected levels of the PSBR and public sector financial deficit, as privatisation proceeds are assumed to be zero, or between the public sector financial deficit and the general government financial deficit, as public corporations are projected to be close to financial balance. On all three measures, the deficit is projected to be around 1/2 per cent of GDP when the windfall tax is excluded.

PSBR

B.09 Table B2 gives a national accounts (accruals) presentation of the public finances. Table B3 presents an alternative way of looking at the PSBR, in terms of general government expenditure and cash receipts and public corporations' borrowing.

Table B3: Public sector borrowing requirement

	£ billion
	Outturn	Estimate	Forecast
	1996-97	1997-98	1998-99
General government expenditure	309.1	317.1	332.5
General government receipts(1)	286.4	313.1	330.1
General government borrowing requirement	22.7	3.9	2.4
	PCMOB(2)	0.0	-1.4	-0.1
PSBR
- £ billion	22.7	2.6	2.3
PSBR excluding windfall tax(3)	22.7	5.0	3.9
	- per cent of GDP	3.0	0.6	0.5

1 On a cash basis.
2 Public corporations' market and overseas borrowing.
3 PSBR excluding windfall tax receipts and associated spending.

Changes since last Budget

B.10 The PSBR in 1997-98 is now estimated to be £8 1/4 billion lower than forecast in the July 1997 Budget. This reflects the shortfall in general government expenditure (detailed in Table B13), higher government receipts (see Table B10) and an unexpected repayment of debt by public corporations.

Table B4: Changes since July Budget(1)

	£ billion
	1997-98	1998-99
General government expenditure	-2.3	1.2
General government receipts(2)	4.8	2.9
General government borrowing requirement	-7.2	-1.7
PCMOB(3)	-1.2	0.1
PSBR
- £ billion	-8.3	-1.6
- per cent of GDP	-1.0	-0.2

1 Budget forecast has been adjusted for classification and other accounting changes. See conventions used in presenting the public finances.
2 On a cash basis.
3 Public corporations' market and overseas borrowing.

Illustrative medium-term projections

B.11 Public expenditure plans for years after 1998-99 will not be known until the summer when the results of the Comprehensive Spending Review are announced. TableB5 sets out stylised projections based on the same three illustrative assumptions for spending growth that were used in the July Budget and November Pre-Budget Report (see paragraph B.29).

Budget 1998 index