The government's Economic and Fiscal Strategy Report (EFSR), published on 11 June, set out its fiscal strategy and its overall spending plans for the years ahead. Strategically, the government stressed the distinction between current and capital spending and committed itself to borrowing no more than what is necessary to finance capital investment over the economic cycle. It also committed itself to maintaining debt at prudent levels, thereby limiting the amount that it is prepared to spend on capital items.

We devote the bulk of this fiscal report to an alternative analysis of government expenditure, arguing that the distinction between consumption and capital investment, which the government is keen to make on the expenditure side, should also be made on the revenue side. It is possible to distinguish taxes paid out of consumption from those paid out of saving and thus to calculate the extent to which the government adds to consumption or saving in the economy as a whole. From a macroeconomic perspective this is much more important than whether the government achieves any particular target values for the public sector net cash requirement (the old PSBR). One might also question whether there is any merit in the ‘golden rule’ that public borrowing should not exceed public net investment over the cycle if public borrowing is kept down through the imposition of taxes which are paid mainly out of saving. Logically the government ought to be more concerned about its impact on the level of saving in the economy as a whole than about whether it follows the golden rule. However we begin by providing our independent assessment of the budget situation from the conventional perspective.