A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Emmerson, Carl (Ed.); Johnson, Paul (Ed.); Miller, Helen (Ed.) Research Report IFS green budget: February 2014 IFS Report, No. R91 Provided in Cooperation with: Institute for Fiscal Studies (IFS), London Suggested Citation: Emmerson, Carl (Ed.); Johnson, Paul (Ed.); Miller, Helen (Ed.) (2014) : IFS green budget: February 2014, IFS Report, No. R91, ISBN 978-1-909463-35-6, Institute for Fiscal Studies (IFS), London, http://dx.doi.org/10.1920/re.ifs.2014.0091 This Version is available at: http://hdl.handle.net/10419/119780 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu The IFS Green Budget The IFS Green Budget The IFS Green Budget Since 1982, the Institute for Fiscal Studies (IFS)’s annual Green Budget has examined the challenges and choices confronting the Chancellor of the Exchequer as he prepares his keynote statement on fiscal policy and the economy. As the government continues to have to contend with the consequences year’s Green Budget include: of the Great Recession for the public finances and household incomes, the issues discussed in this • The outlook for the global economy and the UK economy • The planned fiscal consolidation and risks to the outlook for government borrowing • Policies aimed at stimulating the housing market and boosting homeownership 2014 • Options for reforming state support for childcare 20I 20I 20I • The squeeze on household living standards and possible policy responses to help the low paid 3 3 3 The IFS Green Budget • Options for government intervention in energy markets • Policy options for reforming business rates Funded by the Nuffield Foundation • Potential improvements to the taxation of private pensions February 2014 InstituteInstituteInstitute for forfor Fiscal FiscalFiscal Studies StudiesStudies Tel:Tel: +44 +44 (0) (0) 20 20 7291 7291 4800 4800 Edited by “However uncomfortable it may be, the Fax:Fax: +44 +44 (0) (0) 20 20 7323 7323 4780 4780 Carl Emmerson Paul Johnson Institute for Fiscal Studies tend to get [email protected]@ifs.org.uk “The Institute for Fiscal Studies, the ultimate arbiter of what is and what Helen Miller www.ifs.org.ukwww.ifs.org.uk isn’t doable in the budget” things right and they tend to do things 77 Ridgmount Ridgmount Street Street Larry Elliott, The Guardian in a fair way” LondonLondon WC1E WC1E 7AE 7AE With analysis from “It [IFS] has become known as the institution that tells you the truth about Ed Balls the Budget” ISBN:ISBN:ISBN:ISBN: 978-1-909463-35-6 978-1-909453- 978-1-909453-978-1-909453-02-802-8 Philip Aldrick, The Telegraph “The much respected independent “The Institute for Fiscal Studies (IFS) has achieved almost totemic status in Institute for Fiscal Studies” matters fiscal in Britain.... Its judgement on the annual budget is regarded George Osborne as the one against which everyone else calibrates their own assessment” Hamish McRae, The Independent “The Institute for Fiscal Studies is the most-respected independent auditor of the Treasury’s Budget decisions” Ed Conway, Sky News “The most important review of all economic policies these days tends to come from the independent watchdog, the IFS” Tom Bradby, ITV News 79861 IoFS-COVERS.indd 1 30/01/2014 17:20 The IFS Green Budget February 2014 Stuart Adam Abi Adams Mike Brewer Sarah Cattan Daniel Chandler Claire Crawford Rowena Crawford Richard Disney Carl Emmerson Andrew Goodwin Andrew Hood Cloda Jenkins Robert Joyce Soumaya Keynes Peter Levell Helen Miller David Phillips Oliver Salmon Adam Slater Copy-editor: Judith Payne Editors: Carl Emmerson, Paul Johnson and Helen Miller The Institute for Fiscal Studies 7 Ridgmount Street London WC1E 7AE Published by The Institute for Fiscal Studies 7 Ridgmount Street London WC1E 7AE Tel: +44 (0) 20-7291 4800 Fax: +44 (0) 20-7323 4780 Email: [email protected] Website: http://www.ifs.org.uk funded by The Nuffield Foundation 28 Bedford Square London WC1B 3JS http://www.nuffieldfoundation.org with support from The Economic and Social Research Council (ESRC) through the Centre for Microeconomic Analysis of Public Policy (CPP, reference RES-544-28-5001) http://www.esrc.ac.uk/ analysis from Oxford Economics Abbey House, 121 St Aldates Oxford OX1 1HB http://www.oxfordeconomics.com/ Printed by Pureprint Group, Uckfield © The Institute for Fiscal Studies, February 2014 ISBN 978-1-909463-35-6 Foreword The Nuffield Foundation is again pleased to fund much of the work that informs the IFS Green Budget, as well as its publication. For 32 years the Institute for Fiscal Studies has produced a “Green Budget” – so called by analogy with a ‘green paper’ compared to a ‘white paper’. Published about a month before the Chancellor’s Budget Statement and free of political influence, it provides a detailed and independent analysis of the public finances and Budget policy options. It also plays a crucial role in informing public debate and scrutiny of the Chancellor’s Budget in the weeks and months that follow. The Green Budget has a wide scope – comprising eleven chapters covering all major areas of UK economic policy. The independence of the IFS, along with its ability to consider alternative policy options and a wider range of data than those from government, means its contribution is distinct from that of the Office for Budget Responsibility and other organisations. The Foundation supports the Green Budget in order to promote better and wider debate of the annual Budget and other policy options, based on the transparent presentation of evidence that others can use to formulate their own responses. Some of the work IFS draws on for the Green Budget is funded by the Economic and Social Research Council as part of its support for the IFS Centre for the Microeconomic Analysis of Public Policy, but the Nuffield Foundation is delighted to support the additional analyses and the publication and launch of this important annual volume. Professor David Rhind CBE FRS FBA Chairman of the Trustees of the Nuffield Foundation The Nuffield Foundation is an endowed charitable trust that aims to improve social well- being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at http://www.nuffieldfoundation.org. Preface Welcome to the Institute for Fiscal Studies (IFS)’s 2014 Green Budget. In the following pages, we discuss some of the many issues confronting Chancellor George Osborne as he prepares his fifth Budget. Despite the relatively positive recent data, with growth increasing and unemployment falling, the largest challenge for the Chancellor remains having to contend with the consequences of the Great Recession for the public finances and household incomes. In this book, we examine in detail some of the key risks to the Chancellor’s plans for reducing the deficit. We set out in detail what has been happening in the housing market and the role of government policies aimed, at least in part, at boosting homeownership. We also document what has been happening to incomes across the distribution and compare this with the rates of inflation that different types of households have been facing. We examine how the UK energy market operates, and discuss in detail policy options for increasing state support for childcare, improving the taxation of private pensions and reforming business rates. As ever, we collaborate with others to write the macroeconomic chapters. We are grateful to Oxford Economics, and in particular to Andrew Goodwin, Oliver Salmon and Adam Slater, for the chapters they have contributed on the outlook for the UK economy and the global economy. This year we offer our particular thanks to the Nuffield Foundation for the funding it has provided to support the Green Budget. Our most important aim for the Green Budget is to influence policy and inform the public debate. It is particularly appropriate then that it should be supported by the Nuffield Foundation, for which these are also central aims. We are also extremely grateful for the continuing support that ESRC provides for our ongoing research work via the Centre for the Microeconomic Analysis of Public Policy at IFS. This underpins all our analysis in this volume. The Labour Force Survey (LFS), the Family Resources Survey (FRS) and the Living Costs and Food Survey and its predecessors are Crown Copyright, and are reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland. The LFS is produced by the Office for National Statistics and the FRS is produced by the Department for Work and Pensions; both are distributed by the UK Data Archive (UKDA).