UK Autumn Statement: much ado about nothing

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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