The OBR’s economic assumptions To see why the OBR may be a blocker to revitalising public services and securing more investment, it is key to understand how the OBR forecasts the impact of changes in government spending. [...] The question of longevity is especially pertinent given the way the fiscal rules bind in the fifth year of the OBR’s forecast. [...] Therefore, for a policy to have long-term effects under the OBR’s framework it must influence how the OBR measures potential output, as the output gap is always forecast to close at the end of the OBR’s five-year forecast. [...] The OBR underestimated the impact of austerity, and it will likely do it again Now, with an understanding of how the OBR makes its economic forecasts it is important to reflect on one of its biggest misses – underestimating the impact of austerity on the UK economy. [...] At the March 2024 spring statement, when the debt-to-GDP ratio was expected to fall from 93.2% in the fourth year of the forecast to 92.9% in the fifth year, headroom can be calculated as 0.3% of fifth year GDP or £8.9bn.
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Table of Contents
- The UKs Fiscal Targets. 1
- How Rachel Reeves could release billions more for investment in the budget. 1
- Budget No.10 says it will stick with fiscal rules 1
- Cabinet ministers contest chancellors planned cuts to their departments 1
- Doubts grow over Labours VAT plan for private schools. 1
- The OBRs economic assumptions 2
- Treasury reconsidering Labour plan for non-dom tax status. 2
- Labour Weighs U-Turn on Private Equity Tax Increase Times Says 2
- UK executives dump shares on fears of Labour capital gains tax raid. 2
- Inheritance tax increases expected in Budget. 2
- Dynamic scoring of policy measures in OBR forecasts. 2
- Impact of a 1 of GDP increase in category on real GDP 3
- Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 3
- Public investment 3
- 1.00 0.83 0.43 0.23 0.07 0.00 3
- Public services 3
- 0.45 0.42 0.29 0.13 0.04 0.00 3
- Welfare 3
- 0.60 0.57 0.43 0.23 0.07 0.00 3
- Tax 3
- 0.33 0.30 0.23 0.14 0.05 0.00 3
- Source Office for Budget Responsibility Dynamic scoring of policy measures in OBR forecasts November 2023 3
- Are the OBRs multiplier assumptions too low 3
- What fiscal policy is most effective A meta-regression analysis. 3
- The multiplier effects of government expenditures on social protection A multicountry study 4
- Building Back Better How Big Are Green Spending Multipliers 4
- Which multipliers are regime-dependent A meta-regression analysis. 4
- The government spending multiplier at the zero lower bound International evidence from historical data. 4
- Are the OBRs multiplier assumptions too short-term 5
- National Wealth Fund Mobilising Private Investment. 5
- Building Back Better How Big Are Green Spending Multipliers 5
- The multiplier effects of government expenditures on social protection A multicountry study 5
- The macroeconomic effects of social security contributions and benefits. 5
- The Macroeconomic Effects of Public Investment Evidence from Advanced Economies 6
- The Dynamic Effects of Demand and Supply Disturbances. 6
- Hysteresis and Business Cycles. 6
- Hysteresis in Unemployment. 6
- Federal Spending for Flood Adaptions. 6
- Forecasting potential output the supply side of the economy. 6
- Measuring output gap is it worth your time 7
- The cyclical component of the debt brake analysis and a reform proposal. 7
- Is it plausible to assume a negative output gap after five years 7
- From false multipliers to nonsense output gaps. 7
- Forecasting potential output the supply side of the economy. 7
- Austerity in public services lessons from the 2010s. 7
- The economic effects of policy measures. 7
- Reeves pushes for OBR to upgrade growth forecasts amid planning reforms. 7
- The OBR underestimated the impact of austerity and it will likely do it again 8
- Public investment and potential output. 8
- Forecast Evaluation Report. 8
- Growth Forecast Errors and Fiscal Multipliers 8
- Long-term effects of fiscal stimulus and austerity in Europe. 8
- The Permanent Effects of Fiscal Consolidations. 8
- Self-defeating austerity 9
- Fiscal rules in the UK since 1997. 9
- The OBRs forecast performance. 9
- Fixing public services summary. 9
- Forecast Evaluation Report. 9
- The interaction between multiplier assumptions and headroom 10
- Output gap measurement judgement and uncertainty. 10
- What key budget terms mean - fiscal headroom income tax thresholds and much more. 10
- Jeremy Hunt and the fiscal headroom fallacy. 11
- Great expectations in hard times 11
- Source NEF analysis of OBR March 2024 Economic and Fiscal Outlook assuming economic context stays fixed 12
- Note NEF analysis of OBR March 2024 Economic and Fiscal Outlook assuming economic context stays fixed 12
- 98.9 - the debt level implied if all headroom was spent under OBR assumptions. 12
- Conclusion 12
