In this blog we show how we can apply fiscal metrics to assess the UK government’s fiscal stance. This captures the extent to which fiscal policy contributes to the level of economic activity in the economy.
Changes in the fiscal stance can then be used to estimate the extent to which discretionary fiscal policy measures represent a tightening or loosening of policy. We can measure the size and direction of fiscal impulses arising from changes in the government’s budgetary position.
Such an analysis is timely given the Autumn Budget presented by Rachel Reeves on 30 October 2024. This was the first Labour budget in 14 years and the first ever to be presented by a female Chancellor of the Exchequer.
We conclude by considering the forecast profile of expenditures and revenues for the next few years and the new fiscal rules announced by the Chancellor.
The fiscal stance
At its most simple, the fiscal stance measures the extent to which fiscal policy increases or decreases demand, thereby influencing growth and inflation (see Box 1.F, page 28, Autumn Budget 2024: see link below).
The fiscal stance is commonly estimated by measures of pubic-sector borrowing. To understand this, we can refer to the circular flow of income model. In this model, excesses of government spending (an injection) over taxation receipts (a withdrawal or leakage) represent a net injection into the circular flow and hence positively affect the level of aggregate demand for national output, all other things being equal.
A commonly used measure of borrowing in assessing the fiscal stance of the is the primary deficit. Unlike public-sector net borrowing, which is simply the excess of the sector’s spending over its receipts (largely taxation), the primary deficit subtracts net interest costs. It therefore excludes the interest payments on outstanding public-sector debts (and interest income earned on financial assets). The primary deficit can therefore be written as public-sector borrowing less net interest payments.
As discussed in our blog Fiscal impulses in November 2023, the primary deficit captures whether the public sector is able to afford its present fiscal choices by abstracting from debt-serving costs that reflect past fiscal choices. In this way, the primary deficit is a preferable measure to net borrowing both in assessing the impact on economic activity, i.e. the fiscal stance, and in assessing whether today’s fiscal choices will require government to issue additional debt.
Chart 1 shows public-sector net borrowing and the primary balance as shares of GDP for the UK since financial year 1975/76 (click here for a PowerPoint). The data are from the latest Public Finances Databank published by the Office for Budget Responsibility, published on the day of the Autumn Budget in October (see Data links below).
Over the period 1975/6 to 2023/24, public-sector net borrowing and the primary deficit had averaged 3.8% and 1.3% of GDP respectively. In the financial year 2023/24, they were 4.5% and 1.5% (they had been as high as 15.1% and 14.1% in 2020/21 as a result of COVID support measures). In 2024/25 net borrowing and the primary deficit are forecast to be 4.5% and 1.6% respectively. By 2027/28, while net borrowing is forecast to be 2.3% of GDP, there is forecast to be a primary surplus of 0.7% of GDP.
The Autumn Budget lays out plans for higher tax revenues to contribute two-thirds of the overall reduction in the primary deficit over the forecast period (up to 2029/30), while spending decisions contribute the remaining third.
The largest tax-raising measure is an increase in the employer rate of National Insurance Contributions (NICs) by 1.2 percentage points to 15% from April 2025. This will be levied on employee wages above a Secondary Threshold of £5000, reduced from £9100, which will increase in line with CPI inflation each year from April 2028. (See John’s blog, Raising the minimum wage: its effects on poverty and employment, for an analysis on the effects of this change.) This measure, allowing for other changes to the operation of employer NICs, is expected to raise £122 billion over the forecast period. This amounts to over two-thirds of the additional tax take from the taxation measures taken in the Budget.
Chart 2 shows both net borrowing and the primary deficit after being cyclically-adjusted (click here for a PowerPoint). This process adjusts these fiscal indicators to account for those parts of spending and taxation that are affected by the position of the economy in the business cycle. These are those parts that act as automatic stabilisers helping, as the name suggests, to stabilise the economy.
The process of cyclical adjustment leads to estimates of receipts and expenditures as if the economy were operating at its potential output level and hence with no output gap. The act of cyclically adjusting the primary deficit, which is our preferred measure of the fiscal stance, allows us to assess better the public sector’s fiscal stance.
Over the period from 1975/6 up to and including 2023/24, the cyclically-adjusted primary deficit (CAPD) averaged 1.1% of potential GDP. In 2024/25 the CAPD is forecast to be 1.5% of potential GDP. It then moves to a surplus of 0.5% by 2027/28. It therefore mirrors the path of the unadjusted primary deficit.
Measuring the fiscal impulse
To assess even more clearly the extent to which the fiscal stance is changing, we can use the cyclically-adjusted primary deficit to measure a fiscal impulse. This captures the magnitude of change in discretionary fiscal policy.
The term should not be confused with fiscal multipliers which measure the impact of fiscal changes on outcomes, such as real GDP and employment. Instead, we are interested in the size of the impulse that the economy is being subject to. Specifically, we are measuring discretionary fiscal policy changes that result in structural changes in the government budget and which, therefore, allow an assessment of how much, if at all, a country’s fiscal stance has tightened or loosened.
The size of the fiscal impulse is measured by the year-on-year percentage point change in the cyclically-adjusted public-sector primary deficit (CAPD) as a percentage of potential GDP. A larger deficit or a smaller surplus indicates a fiscal loosening. This is consistent with a positive fiscal impulse. On the other hand, a smaller deficit or a larger surplus indicates a fiscal tightening. This is consistent with a negative fiscal impulse.
Chart 3 shows the magnitude of UK fiscal impulses since the mid-1970s (Click here for a PowerPoint file). The scale of the fiscal interventions in response to the COVID-19 pandemic, which included the COVID-19 Business Interruption Loan Scheme (CBILS) and Job Retention Scheme (‘furlough’), stand out sharply. In 2020 the CAPD to potential output ratio rose from 1.7 to 14.4%. This represents a positive fiscal impulse of 12.4% of GDP.
This was followed in 2021 by a tightening of the fiscal stance, with a negative fiscal impulse of 10.1% of GDP as the CAPD to potential output fell back to 4.0%. Subsequent tightening was tempered by policy measures to limit the impact on the private sector of the cost-of-living crisis, including the Energy Price Guarantee and Energy Bills Support Scheme.
For comparison, the fiscal response to the global financial crisis from 2007 to 2009 saw a cumulative positive fiscal impulse of 5.6% of GDP. While smaller in comparison to the discretionary fiscal responses to the COVID-19 pandemic, it nonetheless represented a sizeable loosening of the fiscal stance.
Chart 4 focuses on the implied fiscal impulse for the forecast period up to 2029/30 (click here for a PowerPoint). The period is notable for a negative fiscal impulse each year. Across the period as a whole, this there is a cumulative negative fiscal impulse of 2.6% of GDP. Most of the ‘heavy-lifting’ of the fiscal consolidation occurs in the three financial years from 2025/26 during which there is a cumulative negative impulse of 2.0% of GDP.
Looking forward
To conclude, we consider the implications for the projected profiles of public-sector spending, receipts and liabilities over the forecast period up to 2029/30.
Chart 5 plots data since the mid-1950s (click here for a PowerPoint). It shows the size of total public-sector spending (also known as ‘total managed expenditures’), taxation receipts (sometimes referred as the ‘tax burden’) and total public-sector receipts as shares of GDP. This last one includes additional receipts, such as interest payments on financial assets and income generated by public corporations, as well as taxation receipts.
The OBR forecasts that in real terms (i.e. after adjustment for inflation), public-sector spending will increase on average over the period from 2025/26 to 2029/30 by 1.4% per year, but with total receipts due to rise more quickly at 2.5% per year and taxation receipts by 2.8% per year. The implications of this, as discussed in the OBR’s October 1014 Economic and Fiscal Outlook (see link below), are that:
the size of the state is forecast to settle at 44% of GDP by the end of the decade, almost 5 percentage points higher than before the pandemic” while additional tax revenues will “push the tax take to a historic high of 38% of GDP by 2029-30
Finally, the government has committed to two key rules: a stability rule and an investment rule.
The stability rule. This states that the current budget must be in surplus by 2029/30 or, once 2029/30 becomes the third year of the forecast period, it will be in balance or surplus every third year of the rolling forecast period thereafter. The current budget refers to the difference between receipts and expenditures other than capital expenditures. In effect, it captures the ability of government to meet day-to-day spending and is intended to ensure that over the medium term any borrowing is solely for investment. It is important to note that ‘balance’ is defined in a range of between a deficit and surplus of no more than 0.5% of GDP.
The stability rule replaces the borrowing rule of the previous government that public net borrowing, therefore inclusive of investment expenditures, was not to exceed 3% of GDP by the fifth year of the rolling forecast period.
The investment rule. The government is planning to increase investment. In order to do this in a financially sustainable way, the investment rule states that public-sector net financial liabilities (PSNFL) or net financial debt for short, is falling as a share GDP by 2029/30, until 2029/30 becomes the third year of the forecast period. PSNFL should then fall by the third year of the rolling forecast period. PSNFL is a broader measure of the sector’s balance sheet than public-sector net debt (PSND), which was targeted under the previous government and which was required to fall by the fifth year of the rolling forecast period.
The new target, as well as now extending to the Bank of England, ‘nets off’ not just liquid liabilities (i.e. cash in the bank and foreign exchange reserves) but also financial assets such as shares and money owed to it, including expected student loan repayments. While liabilities are broader too, including for example, the local government pension scheme, the impact is expected to reduce the new liabilities target by £236 billion or 8.2 percentage points of GDP in 2024/25. The hope is that both rules can support what the Budget Report labels a ‘step change in investment’.
As Chart 6 shows, public investment as a share of GDP has not exceeded 6% this century and during the 2010s averaged only 4.4% (click here for a PowerPoint). The forecast has it rising above 5% for a time, but easing to 4.8% by end of the period.
This suggests more progress will be needed if the UK is to experience a significant and enduring increase in public investment. Of course, this needs to be set in the context of the wider public finances and is illustrative of the choices facing fiscal policymakers across the globe after the often violent shocks that have rocked economies and impacted on the state of the public finances in recent years.
Articles
- What exactly is PSNFL?: Explaining the new headline target for government debt
- Reeves’s radical change to fiscal rules could go further – New Zealand shows how
- There are big risks lurking in this budget
- The UK gets it wrong again on fiscal rules
- Rachel Reeves confirms change to UK fiscal rules to help fund £20bn of annual investment
National Statistical (ONS), Jessica Barnaby (30/10/24)
The Guardian, Richard Partington (28/10/24)
Institute for Fiscal Studies, Paul Johnson (31/10/24)
FT Alphaville, Tej Parikh (5/11/24)
Financial Times, Sam Fleming and Anna Gross (24/10/24)
Official documents
- Autumn Budget 2024
- Economic and fiscal outlook – October 2024
HM Treasury (30/10/24)
Office for Budget Responsibility (30/10/24)
Data
- OBR Data (including Public finances databank)
- Public sector net financial liabilities (PSNFL)
- Public sector finance
Office for Budget Responsibility (30/10/24)
Office for National Statistics (30/10/24)
Office for National Statistics
Questions
- Explain what is meant by the following fiscal terms:
(a) Structural deficit,
(b) Automatic stabilisers,
(c) Discretionary fiscal policy,
(d) Public-sector net borrowing,
(e) Primary deficit,
(f) Current budget balance,
(g) Public-sector net financial liabilities (PSNFL). - Explain the difference between a fiscal impulse and a fiscal multiplier.
- In designing fiscal rules what issues might policymakers need to consider?
- What are key differences between the fiscal rules of the previous Conservative government and the new Labour government in the UK? What economic arguments would you make for and against the ‘old’ and ‘new’ fiscal rules?
- What is meant by the ‘sustainability’ of the public finances? What factors might impact on their sustainability?
The first Budget of the new UK Labour government was announced on 30 October 2024. It contained a number of measures that will help to tackle inequality. These include extra spending on health and education. This will benefit households on lower incomes the most as a percentage of net income. Increases in tax, by contrast, will be paid predominantly by those on higher incomes. The Chart opposite (taken from the 
It has been an objective of governments for several years to relate the minimum wage to the median wage. In 2015, the Conservative Government set a target of raising the minimum wage rate to 60 per cent of median hourly earnings by 2020. When that target was hit a new one was set to reach two-thirds of median hourly earnings by 2024.
Figure 1 shows the growth in minimum wage rates since their introduction in 1999. The figures are real figures (i.e. after taking into account CPI inflation) and are expressed as an index, with 1999 = 100. The chart also shows the growth in real median hourly pay. (Click 
The UK minimum wage compares relatively favourably with other high-income economies. Figure 2 shows minimum wage rates in 12 high-income countries in 2023 – the latest year for which data are available. (Click 
This is illustrated in Figure 3 (click 
Assume initially that there is no minimum wage. The supply of labour to the monopsony employer is given by curve SL1, which is also the average cost of labour ACL1. A higher employment by the firm will drive up the wage; a lower employment will drive it down. This gives a marginal cost of labour curve of MCL1. Profit-maximising employment will be Q1, where the marginal cost of labour equals the marginal revenue product of labour (MRPL). The wage, given by the SL1 (=ACL1) line will be W1. 
What, however, has concerned commentators more is the rise in employers’ National Insurance contributions (NICs) that were announced in the Budget. In April 2025, the rate will increase from 13.8% to 15%. Employers’ NICs are paid for each employee on all wages above a certain annual threshold. This threshold will fall in April from £9100 to £5000. So the cost to an employer of an employee earning £38 000 per annum in 2024/25 would be £38 000 + ((£38 000 – £9100) × 0.138) = £41 988.20. For the year 2025/26 it will rise to £38 000 + ((£38 000 – £5000) × 0.15) = £42 950. This is a rise of 2.29%. (Note that £38 000 will be approximately the median wage in 2025/26.)