The OBR’s most crucial judgment was around the size of the UK’s output gap. This is important, because the larger the gap, the greater the potential for faster future economic growth.
In the end, the OBR decided to go with a relatively large gap (ignoring recent evidence), which allowed for high growth rates of about 2¾ per cent in 2016 and 2017. This, in turn, allowed for government borrowing to narrow quite considerably. This faster growth emerges through high business and housing investment, both growing by about 10 per cent a year from 2015 onwards. Also kicking in is rising household consumption, up by 2½ to 3 per cent in 2015 and 2016. Notably, an improving trade balance has little impact in these later years.
How plausible is all this? My view is, not particularly. The OBR’s output gap guesstimate is on the high side compared with other forecasters and notably higher than that estimated by the OECD. Equally, its short-term growth estimates to 2014 are also higher than the OECD’s.
Furthermore, the OECD has a couple of negative downside scenarios that would considerably worsen the situation. While the OBR also sets out some more pessimistic alternative scenarios, there is a feeling that it is suffering from Stockholm syndrome, empathising too strongly perhaps with the views of those it works closely with at the Treasury. Certainly, if it continues to look on the optimistic side, as opposed to a more “prudent” view of future economic and fiscal prospects, questions will begin to be raised about its true degree of independence.
How important is it that the UK government is managing, just, to keep within its fiscal mandate target of returning to a cyclically-adjusted surplus on its current budget within five years? Not very. Some flexibility in such measures is wise, but it’s beginning to look like a very elastic target and therefore of increasingly dubious worth.
Where does this leave the prospects for future government spending? Still uncertain is my judgment. No-one really knows what is going to happen in the global economy, and so the pace of any economic pick-up remains uncertain. Overall, we continue to inch our way forward with little light to guide us.
• John McLaren is with the Centre for Public Policy for Regions.