THE MISSING LINK: MODELLING POTENTIAL OUTPUT AT THE OFFICE FOR BUDGET RESPONSIBILITY

Abstract

I outline the missing link in macroeconomic analysis of fiscal policy. While the Office for Budget Responsibility’s (OBR) remit does allow it to judge whether the effects of fiscal (or other economic policies) on potential output are material, such judgements will matter little for the horizon over which it is being asked to assess whether the government will meet its fiscal rules. Even if there is a material permanent increase in public investment, for example, as in the 2020 March Budget with a commitment to step from 2% of GDP to 3% of GDP, it takes a quite some time before it cumulates to a sufficient impact on the stock of public capital and on potential output to make a significant difference to the fiscal denominator. But it surely will.