29th November 2011
The Chancellor and the Office for Budget Responsibility (OBR) have, in effect, traded assumptions. The OBR has cut its guess about future potential output, implying that a larger proportion of the current deficit is structural. The Chancellor has retaliated by assuming that he will be able to cut public spending by 0.9% a year in real terms in 2015-16 and 2016-17, thereby putting the structural budget position back on track. The various measures announced in the Statement, while possibly of merit, are too small to have a major impact on the economic and fiscal outlook.
It should be stressed that the OBR's negative reassessment of the fiscal position is not a response to worse-than-expected recent performance. Indeed, its forecast for the cyclically-adjusted current budget deficit in 2011-12 has been cut slightly since the Budget – from 4.6% to 4.5% of GDP – despite a lowered estimate of potential output. The worse medium-term position, instead, reflects a reduced assumption for future potential growth. This downgrade may or may not be warranted but it is troubling that the fiscal framework pivots on a concept subject to huge empirical uncertainty.
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