Reforming Britain’s Economic and Financial Policy: Towards Greater Economic Stability

414 Pages·2002·3.232 MB·English

by  Ed Balls, Gus O’Donnell (eds.)

Reforming Britain's Economic and Financial Policy
Reforming Britain's Economic and Financial Policy
Reforming Britain's
Economic and
Financial Policy
Towards Greater Economic Stability
HMTREASURY
Foreword by Gordon Brown,
Chancellor of the Exchequer
Edited by Ed Ballsand GusO'Donnell
palgrave
macmillan
© Crown Copyright 2002
Softcover reprint of the hardcover I st edition 2002 978-0-333-96610-5
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First published 2002 by
PALGRAVE
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Companies and representatives throughout the world
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ISBN 978-0-333-96611-2 ISBN 978-0-230-59983-3 (eBook)
DOI 10.1057/9780230599833
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Library of Congress Cataloging-in-Publication Data
Reforming Britain's economic and financial policy I HM Treasury.
p.cm.
Includes index.
1. Great Britain-Economic policy. 2. Fiscal
policy-Great Britain. 3. Great Britain. Treasury.
HC256.65 .R44 2001
338.941-dc21
2001021739
10 9 8 7 6 5 4 3 2
11 10 09 08 07 06 05 04 03 02
Contents
List of Tables vi
List of Figures viii
Forewordby Gordon Brown, Chancellor of the Exchequer x
Introduction 1
1 Lessons from Past Policy Experience 4
2 Overview: Key Principles for Policy Making in an
Open Economy 27
3 The New Monetary Policy Framework 44
4 The Benefits of Maintaining Low and Stable Inflation 58
5 The Specification of the Inflation Target 71
6 The UK Model of Central Bank Independence: An Assessment 85
7 Reforms to Financial Regulation 110
8 An Overview of the New Fiscal Policy Framework 132
9 Understanding the Fiscal Rules 155
10 Analysing UK Fiscal Policy 182
11 The Public Finances and the Economic Cycle 203
12 Planning and Controlling Public Spending 230
13 Resource Accounting and Budgeting 239
14 Assessing Long-Term Sustainability 249
15 The Public Sector Balance Sheet 263
16 Debt Management: Theory and Practice 280
17 Reforming the International Financial Architecture 299
18 The EU Macroeconomic Framework 317
19 An Assessment of the New Macroeconomic Policy
Framework 332
Notes 355
Glossary of Monetary and Fiscal Policy Terms 361
Bibliography 372
Index 386
List of Tables
1.1 Monetary policy targets (1979–97) 13
1.2 Change in interest rates, structural deficit and output
gap, 1985–86 to 1989–90 25
1.3 Post-Budget interest rate changes 25
4.1 Recent studies of the impact of inflation on growth 61
4.2 Recent studies of the impact of inflation on the level
of GDP 65
4.3 Net welfare benefit of reducing inflation from
2 per cent to zero 66
4.4 Income of the poor and inflation in 19 OECD countries 68
4.5 Inequality and inflation in 19 OECD countries 68
5.1 Years taken for price level to increase given various
annual inflation rates 73
5.2 Boskin Report estimates of bias in the US consumer
price index 76
5.3 Sacrifice ratios for the UK 78
5.4 International comparison of inflation targets 84
10.1 Using the key fiscal aggregates 193
10.2 Summary of Budget 2001 194
10.A1 Public sector primary balance required to stabilise
net public debt at 40 per cent of GDP 202
11.1 Historical growth in trend output 210
11.2 Contributions to annual trend growth 218
11.3 Treasury ‘ready reckoners’ for estimating cyclically
adjusted fiscal indicators 220
11.A1(a) General government expenditure and the cycle 225
11.A1(b) Total managed expenditure and the cycle 225
11.A1(c) Public sector current expenditure and the cycle 226
11.A2 Cyclical social security and the cycle 226
11.A3 Debt interest and the cycle 226
11.A4(a) Aggregate tax burden and the cycle:
Occasional Paper results 227
11.A4(b) Aggregate tax burden and the cycle: new results 227
11.A5(a) Tax bases and the cycle: Occasional Paper results 228
11.A5(b) Tax bases and the cycle: new results 228
vi
List of Tables vii
11.A6(a) Receipts and the tax base: Occasional Paper results 229
11.A6(b) Receipts and the tax base: new results 229
14.1 Long-term economic assumptions 254
15.1 Public sector balance sheet, end 1999 265
15.2 Public sector net worth and the current balance 274
18.1 Key characteristics of the euro-area as at the start
of EMU Stage III 321
19.1 Range of inflation expectations, 1997 and 2001 344
List of Figures
1.1 Three decades of high inflation 6
1.2 G7 average inflation rates and volatility (1980–97) 6
1.3 Inflation expectations 10 years ahead 9
1.4 Inflation and unemployment 11
1.5 The output gap and interest rates: late 1980s and early
1990s 15
1.6 UK base rates (1980–97) 16
1.7 G7 countries interest rate volatility (1985–98) 17
1.8 Successive projections of real GDP 20
1.9 Published public sector net cash requirement
projections and outturn 21
1.10 Public sector net borrowing 24
4.1 Average inflation and inflation volatility 62
5.1 Real short-term interest rates in the UK, Germany and
the US 82
6.1 Central bank independence and inflation in the 1980s:
Cukierman index 89
6.2 Central bank independence and inflation between 1961
and 1992: GMT index 90
6.3 Nordhaus model policy game 103
8.1 The new fiscal framework 133
9.1 Public sector net investment 161
9.2 Surplus on current budget 163
9.3 Public sector net wealth 165
9.4 Primary budget surplus required to stabilise the public
debt ratio 172
9.5 Public debt in the UK 176
9.6 General government financial liabilities 177
9.7 Net public debt 179
9.8 General government net financial liabilities 180
10.1 Public sector net debt and net worth 195
10.2 Public sector net borrowing – actual and cyclically
adjusted 197
10.3 Meeting the golden rule – cautious assumptions 200
11.1 CBI survey of capacity utilisation in manufacturing 209
viii
List of Figures ix
11.2 Non-oil GDP – actual and trend (quarterly) 211
11.3 Average population growth until 2005 and the current
employment rate 213
11.4 Annual and smoothed labour productivity rates 216
11.5 Surplus on current budget – actual and cyclically
adjusted 223
11.6 Public sector net borrowing – actual and cyclically
adjusted 224
13.1 Linkages between the fiscal framework, the spending
control framework and RAB 242
14.1(a) UK population by age and sex, 2000 251
14.1(b) UK population by age and sex, 2036 251
14.2 Baseline projections 256
14.3 Effects of higher labour market participation rate 257
15.1 Public sector net worth 267
15.2 Net worth by level of government 268
15.3 Public sector net worth by type of asset 269
15.4 Net worth versus net debt 273
18.1 Organisational structure of the ESCB as of
1 January 2001 323
19.1 Inflation performance and expectations against target 333
19.2 The output gap and interest rates 336
19.3 The output gap and inflation 337
19.4 UK–German 5-year forward rate differential 340
19.5(a) UK forward nominal interest rates 341
19.5(b) German forward nominal interest rates 341
19.6 Inflation expectations 10 years ahead 343
19.7 Average of independent forecasts of RPIX inflation
one year ahead 345
19.8 Surplus on current budget – actual and cyclically
adjusted 350
19.9 Net public debt 352