Latest data on government net borrowing and net debt.
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.
What it means to meet the targets
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 national debt must be falling, relative to the size of the economy, by the third year of the forecast period (2024/25 at the time of the Spring Statement)
- The current budget must be balanced – the Government must be spending no more on day-to-day services than it collects in taxes and other revenue – also by the third year of the forecast.
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’s uncertainty model
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.
Outcomes in the OBR’s forecasting model
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:
- More than half of the dots fall on the left-hand side of the chart, which indicates there is a higher than 50% chance that the first fiscal target will be met.
- More than half of the dots fall in the top half of the chart, so there is a higher than 50% chance that the second target will be met.
- However, less than half of the dots are in the top left quarter of the chart – so there is a less than 50% chance that both targets will be met at the same time. Indeed, the OBR says there is only a 46% chance that this will happen.
Consequences for public spending
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.
- The UK’s fiscal targets, House of Commons Library
- The Office for Budget Responsibility, House of Commons Library
- Spring Statement 2022: A summary, House of Commons Library
- Working paper No.17: Evaluating forecast uncertainty with stochastic simulations (PDF), Office for Budget Responsibility
About the author: Philip Brien is a researcher at the House of Commons Library, specialising in public spending.
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