Growth and borrowing on the rise: Pre-Budget Report 2003
The Pre-Budget Report reveals that the previous forecasts for growth were not as imprudent as some commentators had suggested. Nevertheless, the government will need to borrow £37 billion this year, £10 billion more than previously thought.
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Economic growth is forecast to rise from 2.1% in 2003 to between 3% and 3.5% in both 2004 and 2005. The government's new inflation target, based on the European Union's Harmonised Index of Consumer Prices, is set at 2%. The Budget deficit will rise to £37 billion for 2003/04, £10 billion more than originally forecast. There are further measures to boost employment and productivity, as well as the work-life balance. Public sector pay flexibility remains a key government target. |
The Chancellor's 2003 Pre-Budget Report was delivered to parliament on 10 December1. This was Gordon Brown's opportunity to set out the Treasury's updated forecasts for economic growth and public expenditure, and outline the monetary, fiscal and other reforms the government is considering ahead of the 2004 Budget.
With output growth strengthening, unemployment low, inflation relatively subdued, and base rates pitched at just 3.75%, there is much to admire in the UK's recent economic performance. Yet there are questions as to whether this can be sustained in the long term, particularly as much of the current success is founded on a massive consumer credit boom and substantial increases in government borrowing in the face of tumbling tax receipts.
Growth outlook bullish
The highly unsettled global outlook had a negative effect on the short-term prospects for the world economy at the start of 2003. The threat of war and terrorism, volatility in international markets and uncertain growth prospects combined to cast a pall over the major economies. However, the UK was well placed to weather the storm, and the Chancellor was able to report that gross domestic product (GDP) grew by 0.6% in the second quarter of 2003, and by 0.7% in the third quarter.
While risks undoubtedly remain, the government says there are clear signs that world economic activity is strengthening and, combined with what Gordon Brown describes as "sound fundamentals" at home, GDP growth is forecast to accelerate in line with previous Budget predictions, rising from 2.1% for 2003 to between 3% and 3.5% in both 2004 and 2005. Thereafter, it is expected to fall back in early 2006 as slack in the economy is absorbed and output reverts to trend.
New inflation target confirmed
In June 2003, the Chancellor announced that he intended to change the basis of the government's inflation target as overseen by the Bank of England's Monetary Policy Committee. The Pre-Budget Report confirms this move, effective from 10 December 2003. Under the revised arrangements, the government's preferred measure of inflation changes from the retail prices index excluding mortgage interest payments (known as RPIX) to that based on what is known as the harmonised index of consumer prices (HICP), re-named by the National Statistician as the consumer prices index (CPI). The HICP is an international measure of inflation, and allows national inflation rates across the European Union (EU) to be compared on a like-for-like basis. Crucially, this new yardstick excludes housing costs and house price appreciation.
As a result, the government's inflation target is now based on a CPI rate of 2% over the next five, 10 and 25 years, as opposed to the previous RPIX target of 2.5% over the same period. However, the uprating of pensions and other state benefits will continue to be calculated on exactly the same basis as now - either with reference to the all-items RPI, or a derivative of this headline measure.
Borrowing to rise, but "golden rule" remains
The Pre-Budget Report also provides updated projections for public spending. These, the Treasury points out, "are based on a series of cautious, audited, assumptions that help to build a margin against unexpected events". Nevertheless, the figures do not make for particularly happy reading, with the deficit set to rise to £37 billion in 2003/04, £10 billion more than forecast at the time of the April 2003 Budget. The gap between government spending and the amount it raises will fall back to £31 billion in 2004/5, although this is still £7 billion more than expected.
Despite this, Gordon Brown's latest forecasts show that he expects to stick by what is known as the "golden rule", but by a sharply declining margin. The Chancellor's self-imposed ordinance states that, on average over the economic cycle, the government should borrow only to invest, and not to fund current expenditure. So, to accord with the rule, the average surplus on current budget over the cycle should be positive. The surplus on current budget is defined as current income (such as taxes), less current expenditure (such as government spending on consumption, interest payments and social benefits), less capital consumption plus capital taxes.
Various commentators have pointed out that, in order to maintain expenditure, the Chancellor has been forced to run down the substantial budget surpluses he built up over the early years of the Labour government. At the time of the 2003 Budget, the Treasury noted that: "The average surplus on the current budget since 1999-2000, which is the government's provisional judgement on the start of the current cycle, is comfortably positive throughout the forecast period by at least 0.5 per cent of GDP." Now, the average surplus is down to a markedly less impressive 0.2% of GDP.
There have also been accusations that the Chancellor has "moved the goalposts" by changing the year the economic cycle began to 1997/98, instead of 1999 as set out in his 2003 Budget. There are also question marks over when the Treasury predicts the current cycle will end. Gordon Brown says it will be in 2005/06, arguably giving him enough time to shore up his declining surpluses. If this turns out to be wrong, or if the tax take is lower than expected, the much vaunted golden rule may have to be breached if politically embarrassing public spending cuts or tax rises are to be avoided.
Boosting employment
The government has stated that its goal is to achieve "full employment," defined in this context by Gordon Brown as "employment opportunity for all". The aim, he adds, is to "ensure a higher proportion of people in work then ever before by 2010".
In pursuit of this goal, the Pre-Budget Report outlines a number of measures, including:
Productivity is the key
The Chancellor has repeatedly emphasised the importance of creating the right conditions for strong and sustained economic expansion and rising living standards. Boosting output per unit of labour is a key pre-requisite for this. The Pre-Budget Report states that the UK's long-term aim is to achieve a faster rate of productivity growth than its main competitors, primarily through "promoting enterprise and securing greater flexibility in labour, product and capital markets".
Pre-Budget Report measures designed to achieve this include a revised tax credit for research and development. Employer Training Pilots (ETPs) have also been extended to a third year, and to cover more geographical areas. ETPs were first introduced in September 2002 to test new ways of improving access to training. They offer low-skilled workers in employment support in gaining basic qualifications. Employers who provide eligible staff with paid time off to attend courses receive a wage subsidy that varies according to the size of the firm and location, with the training also free or heavily subsidised.
An independent evaluation of the ETP's first year found that by August 2003, more than 3,000 employers and 14,000 learners had registered to participate. Three months later, these figures had risen to over 5,000 employers and 20,000 learners. Almost three-quarters of the organisations participating in the scheme employ fewer than 50 staff, and two-fifths had no previous involvement with a government agency, indicating that the programme is reaching workplaces where training has not hitherto been a priority.
Childcare and the work-life balance
According to Gordon Brown, the government is hard at work "putting into practice the principle of progressive universalism, with support for all, and more help for those who need it most, when they need it most." A key element of this philosophy is his belief that the provision of employer-supported childcare "can play an important role in helping employees to balance their work and family lives, and can improve staff morale and work performance." In 2003, the government consulted on proposals to encourage more employers to help their workers with the cost of safe, high-quality, childcare. As a result, from April 2005:
In addition, and to ensure that government support is only targeted at high-quality childcare provision, the tax and National Insurance exemption for employer-provided facilities and childcare vouchers will be restricted to approved arrangements, and will be set at £50 per week per employee.
The combined net effect of these measures, Gordon Brown says, is to extend help with childcare costs to almost 300,000 parents, compared to the 47,000 who were eligible for similar assistance in 1997.
Perhaps unsurprisingly as a new father, Gordon Brown is keen on helping parents balance their work and family responsibilities. The Pre-Budget Report says that the government is considering further measures in this area, including:
In addition, the government has also consulted on allowing fathers time off to attend key antenatal appointments. This idea, it says, was "favourably received" by employers, many of whom already offer this option. It will now work to promote this as best practice across British industry.
Elsewhere in the Chancellor's package of announcements, the child element of the Child Tax Credit (CTC) rises by £180 to £1,625 a year from April 2004, equivalent to a weekly increase of £3.50. The Treasury says that, as a result, the government is on course to meet or exceed its target to reduce the number of children in low-income households by a quarter by 2004/05 (on a "before housing costs" basis). The CTC was introduced in April 2003 to replace the child element of the working families' tax credit, the disabled person's tax credit, income support or JSA, and the children's tax credit (See The 2003 Budget ).
Public sector pay flexibility stays on agenda
The 2003 Budget documentation pointed out that, while pay setting in the private sector is largely decentralised (and so it is relatively easy to encourage wage flexibility, whether regionally or by sector), this is by no means true in large parts of the public sector, where what the Treasury described as "institutional constraints" - a coded term for national rate setting - remain (See The 2003 Budget ).
The solution, according to the Treasury, was to use wages and other terms and conditions as a vehicle to encourage greater "flexibility and responsiveness" within the public sector. Despite a sharp reaction from trade unions opposed to regionalized pay determination, the government pushed ahead with its plan to amend the remits of the various pay review bodies to include a "stronger local and regional dimension". The Pre-Budget Report extends this principle, with Gordon Brown announcing that he plans "to increase the use of geographically differentiated pay across the public sector, within existing national bargaining frameworks."
This is likely to cause further dismay among public sector trade unions, and their fears may have been heightened by an initial review of the way government statistics are compiled. Published by the Treasury on the same day as the Pre-Budget Report, the document notes that it is feasible to collate regional inflation data, and that the matter is worthy of further consideration2.However, this first report is a largely consultative document, seeking views on the issues and the proposals contained within it. Comments received during this process will help shape a second report, due to be published around the time of the 2004 Budget.
1."2003 Pre-Budget Report", December 2003, available from HM Treasury, tel: 020 7270 4558, price £45. Also available on the internet at www.hm-treasury.gov.uk.
Review of statistics for economic policymaking - first report to the Chancellor of the Exchequer, the Governor of the Bank of England and the National Statistician, December 2003, available from HM Treasury, tel: 020 7270 4558, free. Also available on the internet at www.hm-treasury.gov.uk/allsopp.
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Table 1: Economic growth and net borrowing - 2003/04-2006/07 |
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GDP growth (% pa) |
2003 |
2004 |
2005 |
2006 |
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Budget 2003 |
2-2.5 |
3-3.5 |
3-3.5 |
- |
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Pre-Budget Report 2003 |
2 |
3-3.5 |
3-3.5 |
2.5-3 |
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Net borrowing (£ billion) |
2003/04 |
2004/05 |
2005/06 |
2006/07 |
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Budget 2003 |
27.3 |
24.0 |
23.0 |
22.0 |
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Pre-Budget Report 2003 |
37.4 |
31.0 |
30.0 |
27.0 |
Source: HM Treasury.
