30 May 2008
A change in the way gross domestic product is calculated could get the government off the hook as its fiscal rules are threatened by worsening economic forecasts, experts have suggested.
The government faced more gloomy financial news this week as both the Bank of England and the International Monetary Fund predicted that economic growth would be lower than Treasury forecasts.
Carl Emmerson, deputy director of the Institute for Fiscal Studies, told Public Finance the lower GDP projections threatened the government's sustainable investment rule – that borrowing be limited to 40% of GDP. But a change in the way the Office for National Statistics calculates GDP, due in September, could offer a
get-out clause, he said.
'If you take the Treasury forecasts from the Budget and add the £2.7bn they've spent [to compensate for abolition of the 10p tax rate], they are right up against the ceiling,' Emmerson said. Any more news 'on the bad side' would make it 'more likely that the rule will be breached'.
But the ONS adjustments to the GDP would increase its value, giving the government more room to borrow beneath the 40% ceiling. 'That's going to save them a bit,' Emmerson said.
'The IMF is forecasting that the economy will be worth £10bn less come 2009/10. The revision the ONS is planning is expected to add 2% to the GDP – about £30bn – which is enough to offset that.'
Further relief for the chancellor came from ONS figures showing a budget surplus of £0.6m. IFS senior researcher Gemma Tetlow said the figures also showed the budget deficit for last year was smaller than calculated in April – down from £7.9bn to £5.7bn. 'The chancellor will have been pleased to see that the current budget deficit last year was almost £2bn smaller than it appeared [in April],' she said.
ONS estimates also revealed that leaving the costs of nationalising Northern Rock off the balance sheet had kept the sustainable investment rule intact. Had those costs been included, public sector net debt would have hit 43.1% of GDP.
The positive news came after the Bank of England published figures on May 21 showing projected GDP growth averaging 1.46% in 2009 – substantially below Chancellor Alistair Darling's Budget forecast of between 2.25% and 2.75%.
And in a May 23 statement on the UK economy, the IMF also put projected growth below the government's estimates, averaging about 1.75% in 2008 and 2009.
The IMF warned that economic conditions were putting the UK's policy framework 'under strain'. Its statement says: 'The inflation targeting regime faces difficult circumstances and its toughest test to date, the margin for error under the fiscal rules has been all but eliminated, and weaknesses in the financial stability framework have come to light.'
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