WIREDGOV

The Office for Budget Responsibility (OBR) expect the headline GDP figure for the final quarter of this year to show a modest contraction. However, underlying growth is likely to be stronger than this; the picture remains one of very slow growth. The OBR do not predict growth above potential - a necessary condition for a sustained recovery - until 2014. The OBR's forecast revision bring them broadly in line with NIESR's forecast for 2012-14, although our forecast is slightly less optimistic thereafter; we expect the economy to expand by 2.3 per cent per annum in 2016 and 2017, while the OBR expect 2.7 and 2.8 per cent.

The shortfall in growth this year has been judged by the OBR to be largely cyclical – the estimate of the degree of spare capacity in the economy has been increased. Going forward, the OBR now expect the negative output gap to have narrowed to only 1.5 per cent in 2018, rather than being closed in 2017. This is of fundamental importance as the projection of the output gap is required to derive a forecast for the cyclically adjusted current budget balance (the primary target of the Fiscal Mandate). It reflects a judgemental approach on the part of the OBR, rather than sticking to their previous methodology of using mechanical estimates based on surveys. Although this change is welcome - NIESR's view, in common with other external analysts, is that the output gap is significantly higher than the OBR estimates - it highlights the sensitivity of the OBR's forecasts for the structural deficit to the method used for estimating the output gap. Indeed, if the OBR had stuck to its previous methodology, then meeting the primary target of the Fiscal Mandate would have likely required yet more fiscal consolidation.

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