Government support tempers recession before consolidation stabilises public debt
Over £100 billion of additional fiscal support over the next two years cushions the blow of higher energy prices – but the economy still falls into recession and living standards fall 7 per cent over two years, wiping out eight years’ growth. Over the medium term, around £40 billion in tax rises and spending cuts – in roughly equal measure – offsets higher debt interest and welfare costs and gets debt falling as a share of GDP. But at 99 per cent of GDP at the forecast horizon, debt is roughly £400 billion higher than forecast in March and interest costs close to historic highs.
The full forecast timetable for this EFO has been as follows:
• On 29 July, with the agreement of the Treasury, we began the process leading up to this latest
forecast. This enabled us to provide an up-to-date (Round 1) pre-policy-measures forecast for
the new Chancellor (Kwasi Kwarteng) on his arrival in office on 6 September. Among other
things, this reflected the rise in interest rates and inflation since our previous forecast in March
and estimates of the effect of the May cost-of-living package.
We also confirmed that we
would be able to provide an updated forecast alongside any fiscal event in September,
including the impact of any new policy announcements.
Economic and fiscal outlook
• On 7 September, the Treasury informed us that the Chancellor would not be commissioning a
forecast to accompany the Growth Plan fiscal statement that was delivered on 23 September.
In that statement, the Chancellor stated his intention to commission a forecast from us “by the
end of this calendar year”.
• On 26 September, the Chancellor requested that we prepare a forecast to be published
alongside his Medium-Term Fiscal Plan (MTFP) on 23 November.
• On 30 September, we met with Prime Minister Liz Truss and Chancellor Kwarteng to discuss
our draft forecast and the latest economic and fiscal outlook.
• On 3 October the Chancellor announced his decision to reverse the abolition of the 45p
additional rate of income tax that had been included in the Growth Plan.
• On 7 October, in response to a request from the Treasury for an expedited forecast that
included the direct and indirect effects of government policy up to and including the Growth
Plan, we sent the Chancellor an updated (Round 2) forecast. This economy forecast was based
on financial market prices averaged over 23 and 26 September and focused on the key
variables required to ‘ready-reckon’ the fiscal forecast quickly, while the individual tax and
spending models that we usually use to produce our forecast were being run by departments.
• On 10 October, the Chancellor announced that the date of the MTFP would be brought
forward to 31 October. The BRC also met the Chancellor on that day to discuss our Round 2
forecast. On 13 October, given the heightened interest in the forecast process, and in line with
a recommendation from our non-executive members, we published a timetable for the
remaining stages of the forecast process up to its planned publication on 31 October.
• Alongside the production of the Round 2 forecast we produced a fully updated economy
forecast consistent with the Growth Plan and commissioned updated forecasts from
departments. This provided the main opportunity to scrutinise our detailed bottom-up forecasts
for individual tax and spending lines, which was much more limited than usual due to
successive changes in the forecast timetable that led to greater reliance on our own ready reckoning approaches rather than full departmental model runs.
• On 17 October, we met with the new Chancellor (Jeremy Hunt) to discuss the latest economic
and fiscal outlook, the same day that he announced a reversal of the majority of the tax cuts
that had been announced in the Growth Plan.
• On 18 October, we sent the Chancellor an updated fiscal forecast (Round 3) reflecting these
latest government policy reversals, while working through the implications for our economy
forecast for the subsequent round.
• On 25 October, we sent the Chancellor our first full post-measures forecast (Round 4) based
on a draft set of new MTFP policy measures provided to us. The economy forecast was based
on financial market prices averaged over the 10 working days to 12 October. The fiscal
Economic and fiscal outlook 2
forecast was based on that period for all but interest rates, which instead were based on the
four working days to 20 October to capture the falls that followed the Growth Plan reversals.
• On 26 October, the Chancellor announced that the forecast date would be pushed back to 17
November and that it would be an Autumn Statement. We published a revised forecast
timetable for a 17 November forecast on 4 November.
• On 4 November, we sent the Chancellor the next iteration of our forecast (Round 5). This
included an updated economy forecast based on financial market prices averaged over the
three working days from 24 to 26 October. This is the final window for financial market prices
in our economy forecast. The updated fiscal forecast incorporated bottom-up modelling from
departments in key areas based on Round 4 economic determinants and in-house ready reckoning of the consequences of the changes in determinants between Rounds 4 and 5. No
changes to the planned policy package were included in this round, so it largely reflects the
fiscal consequences of further falls in market interest rates relative to the previous round.
• On 5 November the Treasury provided, as agreed, the final package of policy measures that
we had deemed via earlier engagement would cause movements in the economy forecast.
• On 10 November, we sent a near-final economy and fiscal forecast (Round 6) to the
Chancellor taking account of all measures notified to us by that point. The economy forecast
was updated to account for the impact of major policy measures only, with financial market
determinants and other pre-measures judgements fixed. The fiscal forecast was once again
ready-reckoned using these updated economic determinants. For the fiscal forecast, we also
extended the window for financial market prices to the average over the 10 working days from
24 October to 4 November.
Our final economy and fiscal forecasts are therefore conditioned
on slightly different market prices (both of which start on the day that Prime Minister Rishi
Sunak was declared the winner of the Conservative Party leadership election). But we judge
that, in the circumstances, the benefit of using the most up-to-date set of financial market
prices for each forecast outweighs the cost of the slight inconsistency it introduces between
them.
• On 12 November, all final policy decisions were provided by the Treasury, including
confirmation of the new fiscal rules.
• On 13 November, our final forecast (Round 7) was completed and sent to the Chancellor.
• On 16 November, the Chancellor met with the OBR Chair to discuss the final forecast.
Throughout this process, we also scrutinised the costing of all tax and spending measures
announced since the Spring Statement in March, including several that were subsequently dropped.
As usual, the BRC requested further information and/or changes to most of the draft costings
produced by departments. All announced policies were certified.
The energy price guarantee policy that we incorporated into our economy forecast is slightly
different to the final policy decision.
The Government informed us of the final policy after the
3 Economic and fiscal outlook
deadline for including it in the final economy forecast. Incorporating the final policy would have had
a small impact on our inflation forecast.
The Treasury made a written request, as provided for in the Memorandum of Understanding (MoU)
between us, that we provide the Chancellor and an agreed list of his special advisers and officials a
near-final draft of the EFO on 11 November. This allowed the Treasury to prepare the Chancellor’s
statement.
We then provided 24 hours pre-release access to the final EFO on 16 November.
We have been provided with all the information and analysis that we requested and have come
under no pressure from Ministers, advisers or officials to change any of our conclusions. A full log of
our substantive contact with Ministers, their offices and special advisers can be found on our
website, including the list of special advisers and officials that received the near-final draft of the
EFO on 11 November. Our non-executive members, Sir Christopher Kelly and Bronwyn Curtis OBE,
provide additional assurance over our engagement with the Treasury and other departments. Since
November 2015 that has included reviewing any correspondence that OBR staff feel might breach
the MoU requirement that it be confined to factual comments or that could be construed as doing
so. That review takes place as soon as practicable after each EFO.
Any concerns our non-executive
members have will be raised with the Treasury’s Permanent Secretary or the Treasury Select
Committee, if they deem that appropriate.
The extended, yet fast-paced, seven-round forecast process described above was, of course,
necessitated by domestic political and global economic developments. We felt it was appropriate to
be ready to publish a forecast alongside any fiscal policy statement should it be requested at short
notice. But this continual state of readiness has consequences both for the forecast itself, and for
other work and publications that we are required to publish each year.
The forecast process
spanned 16 weeks, but in that time we had only two windows during which we were able to use
departments’ detailed models fully. We have invested considerable time and resource in improving
our in-house ready-reckoning approach and believe it to be sufficiently robust to meet our statutory
duties. But using full models (and associated analysts’ expertise) is clearly preferable and allows us
to scrutinise and report diagnostics that provide a better basis for our judgements. It would therefore
be desirable to see a return to the full ten-week forecast process envisaged in the MoU as this
summer’s exceptional political circumstances pass. This would improve the confidence that the
public and policymakers can have in the robustness of the forecast that underpins the Government’s
policy choices. That said, the uncertainty associated with external factors that surrounds our central
forecast, such as prospects for energy prices or interest rates, far exceeds the scale of any errors or
inconsistencies that are likely to result from the unusual forecast process.
Richard Hughes
Professor David Miles CBE
Andy King
The Budget Responsibility Committee
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