Budget 2014: OBR caution: output gap pessimism risks being self-fulfilling

Budget 2014: OBR caution: output gap pessimism ri...

Combining economic recovery with patching up the public finances.

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Chancellor maximises political bang for limited buck Wednesday 19th March 2014 Commenting on today’s Budget, Andrew Smith, Chief Economist at KPMG, said:

“The government’s original strategy was to combine economic recovery with repair of the public finances over the current five-year Parliament. The good news is that we are finally getting the recovery; the bad news is that we are only halfway through what has now become a decade-long deficit reduction programme."

“Given this fiscal constraint, the Chancellor has done his best to maximise political bang for his limited buck. In an overall neutral budget “giveaways”, including raising the personal allowance, help for pensioners and savers, boosting tax relief for childcare and extending “help to buy”, are offset by “takeaways” such as further anti-avoidance measures."

“While this year’s economic outlook has been further upgraded and the balance of growth is improving, growth is expected to slow a little in 2015. But in the same way that the OBR over-estimated growth in 2010-12 when the recovery wasn’t happening, is it under-estimating growth now that the recovery is?"

“The OBR remains cautious about the remaining scope for expansion given the rapid decline in unemployment and continuing weak productivity performance. But this “output gap pessimism” risks being self-fulfilling – if there is actually more spare capacity and we don’t use it, we will indeed lose it."

“No-one really knows how much headroom there is and the cost of underestimating productive potential in terms of permanently lost output and jobs, not to mention unnecessary austerity measures, would be unacceptably high. Sensibly, Mr Osborne has again opted to leave any further reparatory measures until after the election – by when it should be clearer whether such a downbeat view of prospects is justified.”


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Sorrelle Cooper, Head of the Press Office

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Chancellor’s Budget 2014


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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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