Fiscal Policy in the UK - Key Facts in 2018

A quick look at some of the key fiscal policy numbers ahead of the 2018 economics exams and a section on longer term risks to the amount of tax revenue the UK Chancellor might be able to expect!

In 2017:
UK budget (fiscal) deficit was £46 billion, or 2.3 per cent of GDP (peaked 10.1% in 2009)
Public sector net debt was 87% of GDP
Government debt now stands at £1.8 trillion
Debt interest payments last year by the government were £48 billion 
In 2018, total UK government spending is expected to be £814.0 billion 
Health care - £150 billion
Pensions - £165 billion 
Education - £85 billion
Defence - £47 billion
Government spending forecast to be 41% of UK GDP in 2018 (48% in 2010)

Main fiscal aims: 

1. Cut the structural fiscal deficit to below 2% of GDP by 2020-21
2. Achieve a balanced budget (G=T) by the middle of the next decade

Unemployment is closing in on 4% of the labour force and by most estimates, the UK economy is close to productive potential as measured by the output gap.

Normally at this stage of the economic cycle, the government would expect to be running either a balanced budget or even a surplus. 

But the UK continues to run a budget deficit – suggesting that there is structural gap between government spending and tax revenues.

Long term fiscal risks for the UK

Macroeconomic risks

• Risks to potential output growth – secular stagnation / slow productivity growth
• Risks associated with UK exit from the EU including a fall in net migration / divorce bill

Financial sector risks

• Direct costs include cost of bail-outs of banks and other financial institutions
• Indirect costs that reflect the fiscal effects of the damage that financial crises do to the economy such as lower profits and rising unemployment

Long term risks arising from structural change in the economy

1. Decline in sectors such as North Sea Oil and Gas
2. Demographic change – rising media age, increasing age-dependency ratio
3. Impact of technological change e.g. electric vehicles cutting taxes from fuel duties
4. Growth of self employment / the Gig Economy (less payment of national insurance)
5. Long term trends in (legal) tax avoidance e.g. in digital businesses