The Missing Link: Modelling Potential Output at the OBR - National Institute of Economic and Social Research

It is therefore of some interest to gauge the magnitude of the impact of the effect, if any, since the OBR was established in 2010. [...] That the OBR's forecast also has a shorter run objective as it provides the basis for the Chancellor's judgement as to what fiscal impulse is appropriate at a fiscal event given the expected path for the economy and the public finances, as well as the risks around them, is important but, in my view, secondary to medium- and longer-term issues. [...] The borrowing target is for government borrowing to not exceed 3% of GDP by the fifth year of the forecast period.”6 The Target Because the OBR's short-term forecasts are also inputs into the Chancellor’s fiscal decision making, the OBR may need to form a judgement on current spare capacity, as that is one element in deciding how much room to grow there is up to the medium term forecast horizon. [...] To that extent the revision down of capacity or potential growth by the MPC in February is instrumental.7 The Bank revised down its estimate of potential supply growth in the medium term to around 0.7% pa down from 2.7% pa in the Long Expansion of 1992-2007. [...] In its absence, if we can all agree that productivity matters, if only for the tax base and the revenues, then why not refocus the efforts to understanding the impact of public and social investment on productivity by linking, for example, the work of the National Infrastructure Commission to the OBR’s analysis and allow us to make better fiscal choices? It seems plausible that the short run biase.