POST‐BUDGET ASSESSMENT AND ANALYSIS OF OIL PRICE CHANGES

Abstract

In this Forecast Release we update our February forecast to take account of the Budget and other new information, particularly about oil prices and the exchange rate. This updated forecast is then used as the basis for a set of three simulations in which we explore the consequences of lower oil prices, a fall in the exchange rate and a tightening of fical and monetary policy. The main conclusions are first that the Budget (the contentr of which we broadly anticipated) has not significantly changed our assessment of the short‐term prospects for output and inflation. However, a detailed examination of the Government's revenue and expenditure estimates suggests that fiscal policy in 1983‐4, though broadly in line with the Medium‐Term Financial Strategy, has been loosened compared with 1982‐3 by rather more than appears from the PSBR projections. We ako believe that there is a risk that the PSBR will be significantly higher than officially forecast in 1983‐4.Our simulations show the size of the PSBR overshoot in the event of a further sharp fall in the oil price. I f this were accompanied by a fall in the exchange rate, inflation would quickly be back in double figures. Whether the exchange rate falls or not a lower oil price gives significant output gains. However, if the authorities reacted by tightening fiscal and monetary policy, inflation would be broadly the same as in the Post Budget forecast, but there would still be output gains from the lower oil price.