Commentary: The Missing Link: Modelling Potential Output and Fiscal Rules

Since its establishment in 2010, the OBR, along with most other forecasters, has been consistently
optimistic about the supply side of the economy. This article suggests that the OBR needs to extend its remit to develop a better understanding, over the medium-term, of the impact of fiscal policy on both demand and supply.

Pub. Date
20 November, 2023
Chain with missing link

Main Points

  • While the Office for Budget Responsibility’s (OBR) remit does allow it to judge whether the effects of fiscal (or other economic policies) on potential output are material, such judgements will matter little for the horizon over which it is being asked to assess whether the government will meet its fiscal rules. The absence of such a link is a clear example of short-termism in policy making.
  • A priority for the OBR, if it is to advise Chancellors on more optimal setting of fiscal policy, is to develop a better understanding of the impact of fiscal policy on both demand and supply in the economy, and to publish the impact on both of alternative policy choices.
  • If we can all agree that productivity matters, if only for the tax base and the revenues, then why not refocus the efforts to understanding the impact of public and social investment on productivity by linking, for example, the work of the National Infrastructure Commission to the OBR’s analysis and allow us to make better fiscal choices.