OBR: Osborne’s Budget Wrecker
The OBR’s latest forecasts show they have given up hope of an eventual return to robust growth in nominal GDP. The reason is two-fold: partly a downgrade to expected real GDP growth, and partly a downgrade to the deflator forecast:
3.98. Nominal GDP growth is weaker throughout the forecast than in March, reflecting both weaker real GDP growth and the downward adjustment to the growth of the GDP deflator. These changes to the forecast reduce the level of nominal GDP in 2016 by 5.1 per cent relative to our March forecast.27 Of this, 3.2 percentage points is accounted for by the downward adjustment to our forecast for real GDP growth, with the remainder due to lower GDP deflator growth.
Failure to hit the government’s fiscal target of falling debt/GDP by 2015 can be attributed to this change. It both reduces the level of that ratio’s denominator (nominal GDP) in 2015, and the expected growth rate of nominal GDP in any given year, and hence lower tax revenues and higher debt, ceteris paribus.
This is no way to run a country. If the Bank of England is instructed to target the path of nominal GDP, the OBR could hold that fixed in their forecasts (rather than CPI inflation as they do now), as they should.