Assumptions–Central Forecast

Abstract

We continue to make our best guesses about likely policy developments rather than assuming ‘unchanged’ policies. In the central forecast we assume that the broad thrust of policy is unchanged, i.e. we have made the technical assumption that the present government is returned in the next General Election. But, because an election must be held within the next 15 months, we also consider the medium‐term prospects under alternative economic policies. (For details see p. 19.) In the central forecast. e herefore. we assume that policy will continue to be guided‐though not completely determined‐by an extended Medium‐ Term Financial Strategy (MTFS). For 1983‐4 the MTFS requires the PSBR to be 23/4% per cent of GDP at market prices. Given official inflation and output forecasts, the Chancellor is therefore aiming for a 1983‐4 PSBR of £8bn (Autumn Statement, p. 13). In the central forecast. however, we have assumed that the Budget of 15 March will give greater weight to the political objectives of cutting income tax and maintaining the attack on inflation, even if this implies slippage from the MTFS targets. Specifcally we have assumed that the standard rate of income tax will be cut by lp. that personal tax allowances will be raised by 12 per cent and that indirect taxes will be raised by only half the amount required for full revalorisation. This amounts to a total tax giveaway (compared with unchangedpolicy) of £1 1/2 and results in a PSBR of just over £9bn. 3.1 per cent of GDPat market prices.