Report

How does the OBR estimate the demand impact of government policies?

This report from UK think tank the Institute for Government explores the role of fiscal multipliers in economic forecasting.

It is important for the government to get as clear an idea as possible of how any measures it announces at fiscal events – budgets and spending reviews – might impact the economy, and to what extent. As the UK’s official forecaster, it is the job of the Office for Budget Responsibility (OBR) to give the government that idea. It does this by producing estimates, published at these fiscal events.

To estimate the potential impact of discretionary fiscal policy on economic growth through demand channels, the OBR applies a set of ‘fiscal multipliers’ to tax and spending numbers, which then affect the economy forecast. It uses different multipliers for three different types of spending: (1) Annually managed expenditure (AME) – demand-led spending, on things like pensions and benefits, where budgets are not fixed in advance. (2) Capital departmental expenditure limits (CDEL) – spending on things that are expected to produce an enduring asset for the public sector, like infrastructure, IT and buildings. (3) Resource departmental expenditure limits (RDEL) – day-to-day spending on things like salaries, medicines and other recurring purchases. (4) In addition to these it has one multiplier for tax.

This short paper looks at how it uses these multipliers to judge the demand effects of different types of tax and spending policies.