Britain’s fiscal problems

Britain's public sector deficit in the 1990s has been much too large to allow the public sector to maintain its balance sheet position. In order to do this the current account deficit has to be reduced from its 1995/6 figure of 3_ per cent of GDP to close to zero. Government plans show this being achieved by 1999/2000. A comparison of the current position with past behaviour shows that the deficit is unusually high, after due account is taken of the state of the economy and of electoral influences on the public finances. The high deficit is a consequence of unusually high spending rather than low taxation and the position has worsened since Britain left the ERM. The National Institute model allows us to compare with our base run a situation in which public finances evolve in line with past behaviour. This reduces consumption in the 1990s but raises it after 2000. An internal real rate of return of 3.85 per cent p.a. equates the current value of the two consumption paths. On the other hand the level of employment is considerably higher in the early stages of our base run and only slightly lower in the later stages.

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