Public Finances: Key Economic Indicators
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How does the Office for Budget Responsibility's forecasts work, and what does this mean for spending policy in the next few years?
In March’s Spring Statement, the Chancellor said his tests for judging the performance of the Government’s financial policies – the so-called “fiscal targets” – were on track to be met by 2024/25. This was based on forecasts from the independent Office for Budget Responsibility (OBR).
However, the OBR’s calculations can be difficult to understand. This Insight looks at how the OBR’s forecasts work, and what that might mean for spending policy in the next few years.
Under the terms of the Charter for Budget Responsibility, the OBR has to judge whether the Government has a greater than 50% chance of meeting its fiscal targets under its current policies. Two of these targets are:
The OBR concluded in its March 2022 Economic and fiscal outlook that each of these targets was more likely to be met than not in 2024/25. However, just because the OBR thinks that each individual target is on course to be met, that doesn’t necessarily mean it thinks both targets will be met together.
The OBR creates its central forecast – that is, the single outcome it considers most likely – using its own judgements and current Government policies.
Since October 2021, it has also shown the level of its uncertainty in that forecast, using a method called stochastic simulation. This factors in several possible “shocks” to the economy, drawn from its own historical record of how its forecasts have actually performed. It then simulates several thousand possible outcomes to see what effect these shocks might have.
Each of the grey dots on the chart in the video below represents one of the 10,000 outcomes simulated by the OBR for its March 2022 forecast – the video randomly highlights 1,000 of these in red to illustrate some of the possible scenarios that could happen. The axes of this chart represent the two fiscal targets mentioned above (national debt falling and a balanced budget); any dot that falls in the top left quarter of the chart represents an outcome where both fiscal targets were met.
Source: Office for Budget Responsibility, Economic and fiscal outlook: March 2022, 23 March 2022, chart 4.5
The main things to notice from this are:
For the most part, these two fiscal targets are intended only to guide the Government’s spending policy. However, there is one area where they are likely to have a more significant effect. The Government said if these two particular targets are met, it will return to spending 0.7% of gross national income on overseas aid.
In the Spring Statement, the Government said it would determine at the 2022 Autumn Budget whether to return to spending 0.7% on aid in 2023/24. This is possible because the OBR’s most recent forecasts indicate that each test will be met in that year. However, as the forecasts above show, there is considerable uncertainty in this judgment, and the OBR thinks it’s more likely than not that at least one test will not be met even by 2024/25.
About the author: Philip Brien is a researcher at the House of Commons Library, specialising in public spending.
Image: Rishi Sunak MP, Chancellor of the Exchequer Credit: ©UK Parliament/Jessica Taylor
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