Chapter C: The public finances

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INTRODUCTION

C1 Chapter 2 describes the Government's fiscal framework and shows how the projections of the public finances are consistent with meeting the fiscal rules. This chapter explains the latest outturns and the fiscal projections in more detail. It includes:

• five year projections of the current budget surplus and public sector net debt, the key aggregates for assessing performance against the golden rule and the sustainable investment rule respectively;
• projections of public sector net borrowing, the fiscal aggregate relevant to assessing the impact of fiscal policy on the economy;
• projections of the cyclically-adjusted fiscal balances; and
• detailed analyses of the outlook for government receipts and expenditure.

C2 The fiscal projections continue to be based on deliberately cautious key assumptions audited by the National Audit Office (NAO). The latest assumptions are set out in Box C1 and include a revised assumption for trend output growth of 2¹/₂ per cent a year.

MEETING THE FISCAL RULES

C3 The Government remains firmly on track to meet the fiscal rules throughout the next five years. Table C1 compares the latest estimates for the main fiscal balances with those in the Pre-Budget Report and Budget 2001.

C4 In the Pre-Budget Report, receipts for 2001-02 were revised down significantly - mainly as a result of the effects of the global economic downturn. An explanation of the impact of the slowdown on different taxes was included in the Pre-Budget Report. Receipts outturns since November have been about £1 billion lower than in the Pre-Budget Report. However, reflecting lower outturns for spending, the provisional outturn for the current surplus in 2001-02 is £10.6 billion, £0.3 billion higher than projected in November.

C5 The provisional outturn for net investment in 2001-02 is slightly lower than in the Pre-Budget Report, and public sector net borrowing is £1.2 billion lower at £1.3 billion. The revised fiscal projections show that fiscal policy supported monetary policy in 2001 through the automatic stabilisers as the economy moved slightly below trend, while continuing to meet the two fiscal rules.

C6 Receipts in 2002-03 are considerably lower than projected in Budget 2001 but much the same as in the Pre-Budget Report. The current surplus is expected to return to its Pre-Budget Report level in 2002-03 and is higher in 2003-04 and 2004-05 because of Budget measures and stronger economic growth, mainly resulting from the change to the trend output growth assumption. Over the five year period as a whole the projected current surplus is higher than in the Pre-Budget Report.

C7 In both 2002-03 and 2003-04, cyclically-adjusted net borrowing is projected to be 0.2 per cent of GDP lower than in the Pre-Budget Report, before returning to its Pre-Budget Report level in 2004-05. The fiscal stance this year and over the next two years is therefore at least as tight as projected in November. Compared with the Pre-Budget Report, there is a small fiscal tightening this year and next as growth gathers pace during 2002 and the economy returns to trend. Over the medium term, the Government has decided to increase net borrowing modestly to fund investment in improving the public infrastructure, increasing public sector net investment gradually from less then³/₄ per cent of GDP in 2000-01 to over 2 per cent of GDP by 2006-07. With net debt of around 31 per cent of GDP over the projection period, these planned increases are fully consistent with meeting the fiscal rules comfortably.

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1 Including Windfall Tax receipts and associated spending.

2 The 2000-01 figures were estimates in Budget 2001; the 2001-02 figures were projections in Budget 2001 and PBR 2001.

3 These figures are estimates in 2001-02.

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C8 Table C2 shows five-year projections of the current budget surplus and public sector net debt as a percentage of GDP, the key fiscal aggregates for assessing performance against the golden rule and the sustainable investment rule respectively. Outturns and projections of other important measures of the public finances, including net borrowing and net worth, are also shown.

1 See box 2.4.

2 At end December; GDP centred on end-December.

3 General government net borrowing on an ESA95 basis.

4 General government gross debt on Maastricht basis.

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C9 The projections show that, as in Budget 2001 and the Pre-Budget Report, the Government remains on track to meet the golden rule over the forecast period. The current budget balance improved from a deficit of 3 per cent of GDP in 1996-97 to surpluses of over 2 per cent in 1999-2000 and 2000-01, and 1 per cent in 2001-02. While the surplus temporarily falls to about ¹/₄ per cent of GDP in 2002-03, it recovers to around ³/₄ per cent over the rest of the period. The average surplus on the current budget from 1999-2000 is projected to be over 1 per cent of GDP in each year, consistent with the golden rule over the projection period. Table C2 also shows the updated estimates of the cyclically-adjusted current budget. These allow underlying or structural trends in the indicators to be seen more clearly, once the estimated effects of the economic cycle are removed.

C10 The sustainable investment rule is also comfortably met over the projection period. In 1996-97, public sector net debt stood at 44 per cent of GDP. The tough decisions on taxation and spending taken by the Government over the course of the last Parliament, including the decision to use the proceeds from the auction of spectrum licences to repay debt, means that net debt is projected to stay around 31 per cent of GDP throughout the projection period.

C11 As explained in Box 2.4, in order to increase the transparency of the framework, Table C2 now includes figures for a measure of net debt excluding cyclical fluctuations - core debt. The Budget 2002 projections show that over the next few years core debt will grow slowly as the Government borrows modestly to fund increased investment in priority public services, consistent with the fiscal rules.

C12 Net worth is the approximate stock counterpart of the current budget balance. Current budget surpluses of over 2 per cent of GDP in recent years have begun to raise net worth to an estimated 21 per cent of GDP in 2001-02. At present, net worth is not used as a key indicator of the public finances, mainly due to the difficulties in measuring accurately many government assets and liabilities.

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C13 The primary balance is equal to net borrowing excluding net debt interest payments - thus abstracting from the implications of past fiscal deficits. If real interest rates exceed trend output growth, a primary surplus is required to stabilise the net debt ratio. The primary balance is projected to be in surplus by over 1¹/₂ per cent of GDP in 2001-02, and to remain positive throughout the projection period.

C14 As a result of the spending measures announced in the Budget, public sector net investment is projected to rise steadily to 2.1 per cent of GDP by 2006-07. These increases are sustainable and fully consistent with the Government's long-term approach and the fiscal rules, since net debt is being held at a stable and prudent level, well below 40 per cent of GDP. This increase in net investment, together with the new projections of the surplus on the current budget, mean that public sector net borrowing is expected to rise from 0.1 per cent of GDP in 2001-02 to 1.4 per cent in 2006-07.

C15 The central government net cash requirement was a repayment of 3³/₄ per cent of GDP in 2000-01. This largely reflected the receipts from the auction of licences to access the electromagnetic spectrum. The net cash requirement moved to a modest deficit in 2001-02, and the deficit is projected to increase in 2002-03 and subsequent years, mirroring the profile of public sector net borrowing.

C16 Table C2 also shows the Treaty measures of the deficit and debt used in the Excessive Deficits Procedure. The reference levels of 3 per cent of GDP for the deficit and 60 per cent of GDP for net debt are comfortably achieved throughout the projection period.

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FORECAST ERRORS AND RISKS

C17 The fiscal balances represent the difference between two large aggregates of spending and receipts and are inevitably subject to wide margins of forecast error. Over the past five years, the average absolute error (the average error irrespective of whether the errors have been positive or negative) for one-year ahead forecasts of net borrowing has been around 1 per cent of GDP. The error tends to grow as the forecast horizon lengthens. Much of this error arises from forecast errors of GDP.

C18 Short-term forecasts of the public finances are critically dependent on the path of the economy, as most tax revenues and some public expenditure - notably social security - vary directly with the economic cycle. Earlier work¹ suggested that if GDP growth were
1 percentage point higher or lower than assumed over the coming year, net borrowing might be lower or higher by 0.4 per cent of GDP in the first year and by a further 0.3 per cent of GDP in the following year. Allowing for the reduction in the lag between profits and corporation tax receipts resulting from the introduction of the instalment system, these figures are now closer to 0.5 and 0.2 per cent respectively. However, not all cycles will conform exactly to these parameters, notably because the estimates are based on historical data (since which time both the economy and tax regime have changed) and because cycles differ in respects other than magnitude.

C19 Errors in short-term growth forecasts may have only a temporary effect on the public finances. For a given path of trend output, higher or lower growth in the short-term will be followed by lower or higher growth later on, and the public finances may be little affected on average over the cycle. However, errors in estimating the cyclical position of the economy in relation to its trend - the output gap - will have a permanent effect on prospects.

C20 For this reason, the public finance projections are deliberately based on assumptions for key economic variables, including the trend rate of growth of the economy in the medium term. These are audited by the NAO to ensure they remain both reasonable and cautious. Details of these assumptions are given in Box C1.

C21 In addition, the public finance projections are stress-tested against an alternative cautious case, in which the output gap is assumed to be 1 percentage point higher than the central view. This scenario would imply that a greater proportion of the projected surplus on the current budget was due to the cyclical strength of the economy: a 1 per cent larger positive output gap reduces the structural surplus on the current budget by about ³/₄ per cent of GDP a year. This is illustrated in Chart C2. Even in this more cautious case, the cyclically-adjusted current budget is estimated to have been comfortably in surplus over the past four years. The impact of the temporary fall in receipts means that it moves into deficit over the short term, before returning broadly to balance from 2004-05. However, the average surplus on the cyclically-adjusted current budget in the cautious case from 1999-2000 only falls to a minimum of ¹/₄ per cent of GDP in each year.

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ASSUMPTIONS

C22 The fiscal projections are based on the following assumptions:

• the economy follows the path described in Chapter B. In the interests of caution, the fiscal projections continue to be based on a deliberately prudent and cautious assumption of trend output growth that is ¹/₄ percentage point lower than the Government's neutral view. Thus, the projections are now based on trend output growth of 2¹/₂ per cent a year;
• there are no tax changes beyond those already announced in or before this Budget and the indexation of rates and allowances. Consistent with the Code for Fiscal Stability, the forecast does not take account of measures which cannot be costed accurately in advance of consultation, including the intention to abolish Royalty on North Sea oil;
• forecasts for individual Annually Managed Expenditure (AME) programmes through to 2003-04 have been reviewed and further additions made for new spending measures in AME announced in this Budget. Following usual practice, the Government has decided to reset the AME margin to £1 billion in 2002-03 and £2 billion in 2003-04;
• beyond 2003-04, current expenditure in AME, excluding measures introduced in the Pre-Budget Report and in this Budget, which are projected separately, is projected to grow at 1³/₄ per cent a year in real terms, in line with recent trends;
• firm overall spending plans for the 2002 Spending Review from 2003-04 to 2005-06 are set out in Chapter 6 in paragraph 6.33. Decisions on departmental spending allocations will be announced in the 2002 Spending Review;
• prior to spending plans being set in the 2004 Spending Review, the fiscal projections assume DEL growth after 2005-06 of 2.5 per cent in real terms, in line with the assumption on economic growth used for the public finances, supplemented by an addition to allow for the 5 year health settlement of the difference between planned health growth and health's long term average growth, 3.6 per cent. This delivers DEL growth of 3.8 per cent in 2006-07. Other spending in AME is forecast to grow at 1.75 per cent in real terms in line with its long-term trend after 2005-06; and
• within these aggregates, net investment is forecast to increase from 2.0 per cent over the 2002 Spending Review period of 2.1 per cent in 2006-07 towards an assumption of 2.25 per cent of GDP in 2007-08, remaining consistent with the sustainable investment rule.

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A full explanation of the firm DEL spending limits for resource and capital expenditure within which the 2002 Spending Review will be completed is provided in Chapter 6. Details of tax changes and other Budget policy decisions are set out in Chapter A.

C23 The key assumptions underlying the fiscal projections are audited by the NAO. For this Budget, the NAO have reviewed the Government's revised trend growth assumptions. The NAO have also audited the assumption on UK claimant unemployment under the three-year rolling review process. The reviews concluded that both the new trend output growth and unemployment assumptions remain reasonable and cautious.

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FISCAL AGGREGATES

C24 Tables C4 and C5 provide further detail on the projections of the current and capital budgets. As in the Pre-Budget Report, the tables show the current surplus and net borrowing both including and excluding Windfall Tax and associated spending (WTAS). WTAS now has much less impact and, unless otherwise stated, all projections now cover all public expenditure. Latest estimates of associated spending are given in Table 4.1.

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1 These figures are estimates in 2001-02.

2 Windfall Tax receipts and associated spending.

3 General government net borrowing on an ESA95 basis.

4 General government gross debt.

C25 The current budget surplus is equal to public sector receipts minus public sector current expenditure and depreciation. As explained in paragraph C6, the current budget is projected to be in surplus in each year of the projection period, showing that the Government remains firmly on track to meet the golden rule throughout.

C26 Underlying the projections of the current budget surplus are steady rises in the ratio of public sector receipts and current expenditure to GDP, largely reflecting measures announced in this Budget.

C27 Table C4 also shows public sector net investment more than doubling from £12 billion in 2001-02 to £27 billion in 2006-07 as a result of the Government's aim to improve public infrastructure. These increases are sustainable and fully consistent with the Government's long-term approach and the fiscal rules, since net debt is being held at a stable and prudent level at around 31 per cent of GDP, well under 40 per cent of GDP, as shown in Table C5.

1 Windfall Tax receipts and associated spending.

2 General government net borrowing on an ESA95 basis.

3 General government gross debt.

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C28 Table C6 provides an analysis of the changes to the projections of the main fiscal aggregates since Budget 2001 and the Pre-Budget Report.

C29 The short term downward revisions to current budget surpluses and the corresponding increases in net borrowing between Budget 2001 and the Pre-Budget Report were mainly due to revised forecasts of public sector receipts, largely driven by lower financial company profits and changes to GDP. The fiscal aggregates were then projected to move back towards their Budget 2001 levels as the economy moved back to trend.

C30 The tax measures announced in this Budget, together with the stronger economic forecast and other forecasting changes, mean that receipts are now projected to be higher than in the Pre-Budget Report. The impact of the¹/₄ point increase in the trend output growth assumption cumulates over the projection period, increasing the projected level of receipts by £5 billion in the final year.

C31 The Government's Budget decisions, combined with forecasting changes, result in a fiscal stance over the next two years that is at least as tight as projected in the Pre-Budget Report. Borrowing is slightly higher in the medium term as a result of planned increases in investment.

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Note: Figures may not sum due to rounding.

1 The 2000-01 figures were estimates in Budget 2001; the 2001-02 figures were projections in Budget 2001 and PBR 2001.

2 The assumptions for public spending in 2006-07 are set out in paragraph C22.

RECEIPTS

C32 Table C7 gives detailed projections of receipts to 2002-03. Changes in the receipts projections since Budget 2001 and the Pre-Budget Report are shown in Table C8. Projections of receipts as a percentage of GDP to 2006-07 are shown in Table C9. Table C10 sets out the projections of the tax-GDP ratio.

C33 The introduction of the Working Tax Credit and Child Tax Credit has been accompanied by a review of the classification of all personal tax credits. This has affected the definition of the net taxes and social security contributions measure, which is the basis for the tax-GDP ratio. The change is described in more detail in Box C2.

C34 Table C8 shows that relative to Budget 2001, receipts are estimated to have been around £71/2 billion lower in 2001-02, and are projected to be lower by around £9 billion in 2002-03. The downward revisions to receipts at the time of the Pre-Budget Report were largely due to falls in oil prices, equity prices and financial company profits.

C35 Latest estimates for receipts in 2001-02 show a downward revision of £1/2 billion since the Pre-Budget Report. This relates mainly to lower than expected corporation tax and social security contributions. These falls are expected to be temporary, for the reasons discussed below, and was partly offset by higher than expected outturns for income tax.

C36 Net taxes and social security contributions are estimated to have risen by 2³/₄ per cent in 2001-02, considerably lower than the increase in money GDP. As a result the tax-GDP ratio fell from 37.7 per cent in 2000-01 to 37.0 per cent. The classification change has little effect on this fall, as it has much the same effect on both 2000-01 and 2001-02.

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1 National Accounts measure gross of enhanced and payable tax credits.

2 Personal tax credits scored as negative tax under OECD rules, plus enhanced and payable company tax credits (zero in 2000-01, £50 million in 2001-02 and £350 million in 2002-03).

3 Includes district council rates in Northern Ireland paid by business.

4 Includes money paid into the National Lottery Distribution Fund.

5 Includes VAT and 'traditional own resources' contributions to EC budget. Refer to Box C2 for further details. Cash basis.

6 Tax credits scored as expenditure in the National Accounts but negative tax in net taxes and social security contributions.

7 Includes gross operating surplus and rent; net of oil royalties.

8 Consists of North Sea corporation tax (before ACT set-off), petroleum revenue tax and royalties.

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1 National Accounts measure gross of enhanced and payable tax credits.

2 Personal tax credits scored as negative tax under OECD rules, plus enhanced and payable company tax credits (zero in 2000-01, £50 million in 2001-02 and £350 million in 2002-03); Budget 2001 and PBR 2001 estimates have been revised accordingly.

3 Capital gains tax and inheritance tax.

4 Fuel, alcohol and tobacco duties.

5 Includes council tax and money paid into the National Lottery Distribution Fund, as well as other central government taxes.

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1 National Accounts measure gross of enhanced and payable tax credits.

2 Personal tax credits scored as negative tax under OECD rules, plus enhanced and payable company tax credits (zero in 2000-01, £50 million in 2001-02 and £350 million in 2002-03).

3 The Working Families' Tax Credit will be replaced in 2003 by a new system of tax credits.

4 Includes oil royalties, petroleum revenue tax and North Sea corporation tax.

5 Fuel, alcohol and tobacco duties.

6 Includes council tax and money paid into the National Lottery Distribution Fund, as well as other central government taxes.

7 Includes VAT and 'own resources' contributions to EC budget. Cash basis. Refer to Box C2 for further details.

8 Tax credits scored as expenditure in the National Accounts but negative tax in net taxes and social security contributions.

9 Accruals basis.

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C37 The tax-GDP ratio falls further to 36.7 per cent in 2002-03, before increasing to 37.6 per cent in 2003-04. This increase is mainly the result of measures effective from 2003-04 onwards and the economy returning to trend. There are further modest increases in the
tax-GDP ratio over subsequent years, as was the case in the Pre-Budget Report. Factors contributing to this include fiscal drag, a continued expectation that financial company profits and bonuses will recover as was anticipated in the Pre-Budget Report, and a yield from tax measures which is anticipated to increase slightly from year to year.

C38 Table C10 shows the changes to the tax-GDP ratio since Budget 2001 and the Pre-Budget Report. The changes in 2001-02 partly reflect revisions to GDP and lower outturn receipts. In subsequent years the changes largely reflect Budget 2002 decisions on tax.

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1 Cash basis; refer to box C2 for further details.

2 The 2000-01 figures were estimates in Budget 2001.

3 Previous Budget and Pre-Budget Report projections have been revised so that they are consistent with the new classification of tax credits (see Box C2).

Income tax

C39 Provisional outturn estimates suggest income tax receipts in 2001-02 were £110 billion, around £¹/₂ billion more than projected in the Pre-Budget Report. This mainly reflects stronger than expected PAYE. Although tax on bonus payments does seem to have been lower than in the corresponding months of 2000-01, the reduction was not as large as anticipated in the Pre-Budget Report.

C40 Receipts in 2002-03 are projected to be about £1¹/₂billion higher than in the Pre-Budget Report, because of the higher 2001-02 outturn, higher wages and salaries growth, upward revisions to National Accounts components affecting future self assessment tax receipts, and slightly higher market expectations for interest rates, which lead to higher tax on savings income.

C41 In later years there are larger increases compared with the Pre-Budget Report, mainly as a result of higher income growth, arising from the changed assumption on trend output growth, and Budget measures.

Non-North Sea corporation tax

C42 Non-North Sea corporation tax in 2001-02 was around £³/₄ billion below the Pre-Budget Report projection, over half of which reflected stronger than expected repayments. This outturn leads to lower projections for 2002-03 and 2003-04. The projections for all years incorporate a revised profile of payments and repayments derived from the data now available on the quarterly instalment system that was introduced for large companies in 1999. This shows that companies, on average, pay more in their instalments and balancing payments than required by their self-assessments, and subsequently claim repayments. This revised profile indicates that repayments will be higher than projected in the Pre-Budget Report, but has a neutral impact on overall corporation tax receipts in the later years of the forecast. Further changes reflect the revision to the trend output growth assumption, and Budget measures. The projection for financial company profits is broadly consistent with independent forecasts for financial companies profits, where these are available.

North Sea revenues

C43 Under the terms of the assumption as audited by the NAO, the oil price used in these projections is based on the average of independent forecasts if this is lower than recent levels. Otherwise recent levels are used. The latest available average of independent forecasts for 2002 is $21.6, which is slightly above the average oil price in Q1 2002 of $21.5. The latter has therefore been used as the base price for these projections. As a result of this cautious assumption prices are around $1¹/₂ lower than assumed in the Pre-Budget Report throughout the forecast period.

C44 North Sea revenues in 2001-02 were slightly lower than projected in the Pre-Budget Report, mainly reflecting the weakness of oil prices at the end of 2001. The effects of lower oil prices over the forecast period are more than offset by upward revisions to the oil production projections and Budget measures, and projected revenues are higher than in the Pre-Budget Report from 2004-05 onwards.

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Capital taxes

C45 The Budget forecast for capital gains tax is little changed from the Pre-Budget Report, with effects of the modest decrease in equity prices offset by higher property prices. Inheritance tax receipts in 2001-02 were slightly lower than projected in the Pre-Budget Report. This shortfall has been projected forward, but is more than offset by the effects of higher property prices by 2003-04.

Stamp duty

C46 Stamp duty in 2001-02 was slightly lower than projected in the Pre-Budget Report, but 2002-03 receipts are expected to be around £1/2 billion higher because of recent property market turnover and price levels. Receipts in 2003-04 are much the same level as in the Pre-Budget Report, as the modest fall in the equity price projection is offset by a higher property price projection. In later years receipts are up to £1 billion higher, partly because the higher forecast for property prices more than offsets the lower equity price projection, and partly because of Budget measures.

Tax credits

C47 The classification changes described in Box C2 reduce the level of tax credit payments scoring as negative tax and this change explains almost all of the changes since published Budget 2001 and the Pre-Budget Report estimates. These classification changes are offset by equal and opposite changes in other receipts and accounting adjustments.

Social security contributions

C48 Provisional cash receipts of social security contributions in 2001-02 were £1 billion lower than projected in the Pre-Budget Report. About a third of this shortfall reflects higher rebates that are usually paid a year in arrears in respect of people contracted out of SERPS. The 2001-02 shortfall is projected forward but recent information suggests that growth in these rebates is now likely to be lower than expected in the Pre-Budget Report and the combined effect of these changes leads to higher net receipts in later years of the forecast. In addition, higher wages and salaries growth arising from the changed trend output growth assumption also leads to higher receipts, but the largest effect from 2003-04 onwards reflects the Budget measures.

VAT

C49 VAT receipts in 2001-02 were £61.1 billion, around £0.3 billion below the Pre-Budget Report forecast. The forecast of VAT revenues in 2002-03 and all future years continues to be governed by the NAO audited assumption that, after allowing for the effects of VAT measures, the ratio of VAT receipts to consumer spending declines gradually, by 0.05 percentage points a year. The shortfall in 2001-02 will therefore automatically depress receipts in future years. However, the Budget forecast of higher consumers' expenditure growth in the short term combined with the VAT anti-avoidance measures described in Chapter A mean that VAT receipts are expected to be slightly higher than their Pre-Budget Report levels in 2002-03, 2003-04, and 2004-05, before returning towards their Pre-Budget Report levels as household spending growth moderates to more sustainable rates.

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Excise duties

C50 Excise duties in 2001-02 were slightly lower than forecast in the Pre-Budget Report. This is mainly because the later than usual date of the Budget means that the additional receipts associated with the forestalling of road fuel duties will now be received in April 2002 rather than March 2002. This timing issue decreases receipts in 2001-02 by around £0.2 billion with an offsetting increase in 2002-03. The introduction of the oils fraud strategy described in Chapter A and the increase in demand resulting from the lower oil price forecast means that hydrocarbon oil receipts in future years are then expected to be higher than their Pre-Budget Report levels.

C51 Alcohol and tobacco duties in 2001-02 were broadly in line with their Pre-Budget Report forecasts. Receipts in future years are expected to be slightly higher, almost entirely as a result of Budget measures. The ratio of excise duties to GDP is expected to decline over the forecast period, reflecting the fact that the consumption of products subject to excise duties grows by less than real GDP.

PUBLIC EXPENDITURE

C52 Table C11 shows projections for public expenditure through to 2003-04, the last year covered by the 2000 Spending Review. The projections cover the whole public sector using the aggregate Total Managed Expenditure (TME). TME is split into Departmental Expenditure Limits (DEL), firm three year limits for departments' programme spending, and Annually Managed Expenditure (AME), spending that is not easily subject to firm multi-year limits.

C53 Table C12 shows changes in DEL, AME and TME since the Pre-Budget Report. It is provisionally estimated that the DEL total for 2001-02 will be underspent by £0.7 billion. A further addition of £4 billion has been made to DEL in 2003-04, which includes £2.4 billion for the NHS. The remaining £1.6 billion includes provisions for the government's personal social services. The remainder will be allocated in the 2002 Spending Review. Table C14 shows DEL in terms of resource and capital budgets. These have been updated since the Pre-Budget Report to reflect transfers between departments and programmes, additions, and allocations from central funds. The allowance for shortfall of £2 billion, in line with Budget 2001, represents a cautious estimate of likely further underspend beneath departmental estimates.

C54 Forecasts of individual AME programmes were reviewed in the Pre-Budget Report and have been reviewed again for this Budget. In addition, and following usual practice, the Government has decided to reset the AME margin to £1 billion in 2002-03 and £2 billion in 2003-04. Further additions have also been made for new spending measures in AME announced at this Budget. These add approximately £³/₄ billion to AME in 2002-03 and £3¹/₂ billion in 2003-04.

C55 The main economic assumptions underpinning the AME projections are set out in Box C1 and in Table C3. In particular, it is assumed that UK claimant unemployment will increase slightly, in line with the average of independent forecasts, from its recent level of 0.95 million (the average of the three months ending in March 2002) to 1.00 million in 2003-04.

C56 Excluding new measures and the effect of re-setting the margin, the main changes to AME projections since the Pre-Budget Report are lower forecasts for social security benefit expenditure and public sector pensions, and higher forecasts for locally financed expenditure. Reductions in the social security forecasts are mainly due to the lower assumption for unemployment, which reduces the social security forecast by just over £¹/₂ billion by 2003-04, together with further reductions to reflect lower than expected outturn expenditure in 2001-02. In 2002-03 these reductions are partially offset by extra expenditure resulting from the increase of child allowances in Income Support and Jobseekers' Allowance of £3.50 a week announced in this Budget. In 2003-04 these allowances are drawn together with other support for children in the new Child Tax Credit and this reduces forecast social security expenditure by a further £0.4 billion. Forecasts of locally financed expenditure are higher than in the Pre-Budget Report due to higher assumptions for future council tax settlements. These reflect recent outturn data on actual settlements.

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1 Including non-cash items.

2 Net payments to EC Institutions exclude the UK's contribution to the cost of EC aid to non-Member States (which is attributed to the aid programme).

The trended forecast for 2001-02 is £3.1 billion.

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C57 Other changes to the AME projections include the lower forecasts for the Export Credits Guarantee Department ECGD, particularly in 2003-04, as a result of new assumptions about the amount of business likely to be available for refinancing. ECGD's refinancing of loans, which it has guaranteed, does not score in TME, which follows National Accounts definitions and excludes financial transactions. These changes are offset within the accounting adjustments and therefore do not affect total AME. Forecasts of debt interest payments are not significantly different from those in the Pre-Budget Report. Changes reflect a combination of lower payments due to lower borrowing in 2001-02, offset by the effect of higher interest rates and, in 2003-04, higher accrued uplift on index linked gilts due to a slightly higher forecast for the RPI.

C58 Details of the main accounting adjustments, which comprise those items within TME but outside DEL and AME main programmes are shown in Table C13. Of these adjustments VAT refunded on general government expenditure is higher than forecast at the Pre-Budget Report. These changes are however offset by equivalent changes to receipts. Forecasts for tax credits are significantly higher in 2003-04 as a result of the introduction of the new tax credits.

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1 Including non-cash items.

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1 Personal tax credits include expenditure on the Working Families' Tax Credit, the Disabled Person's Tax Credit and that bit of the Working Tax Credit and Child Tax Credit scoring as expenditure in the National Accounts. Further information on the classification of personal tax credits is given in Box C2.

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