Performance against the government’s fiscal objectives

A central part of the OBR's remit is to assess whether the government's fiscal policies - tax rises and spending cuts - offer it a better than 50 per cent chance of hitting its medium-term target of eliminating the structural budget deficit.

In the June Budget, the government set itself the task of a "cyclically-adjusted current balance by the end of the rolling, five-year forecast period" which completes in 2015/16. The government also set itself the target of ensuring that net public debt as a percentage of GDP should be falling by 2015/16.

According to its forecast, the OBR sees the current budget balance, currently -5.3 per cent, achieving a surplus of 0.9 per cent by 2015/16. That is, the budget will be in surplus by the end of the current Parliament. In fact, the OBR is suggesting that a surplus will be achieved by as early as 2014/15, a year ahead of the government's schedule for eliminating the structural budget deficit. In other words, there is a better than 50 per cent chance of reaching the target. The surpluses predicted by the OBR in its autumn report are higher than those forecast in June (0.8 per cent for 1015/16), which gives the government a wider margin for error.

In the case of Public Sector Net Debt (PSND), government debt as a proportion of GDP will begin to fall - from 69.7 per cent to 68.8 per cent - between 2013/14 and 2014/15. The June report made a similar prediction but from higher figures: 70.3 per cent to 69.4 per cent. Again, the OBR insisted, the government should have a greater than 50 per cent chance of reaching its goals.

Uncertainties

The OBR conceded that past experience suggests there will be ongoing risks that may compromise the accuracy of its figures and the chances of the government meeting its targets. To illustrate the point, the OBR report included fan charts that offer a graphic representation of the range of possible outcomes that may reasonably be anticipated were someone to make the assumption that the OBR's forecast were to prove as accurate as past Budget predictions.

As far as achieving a budget surplus of GDP of 0.9 per cent by 2015/16, the OBR charts indicated a 70 per cent probability of a surplus in that year. Which is why the OBR report backed the government's chances of hitting its target as more than 50 per cent.

Long term fiscal sustainability

The OBR's terms of reference also require that it examines the longer-term sustainability of fiscal stability (in other words, making sure that the economy does not over-borrow in the future).

For that reason, the OBR looked at possible public sector net debt for a 40-year future period. The OBR concluded that public sector net debt will be sustainable beyond 2016/17 provided that the average interest rate on the debt does not exceed the rate of growth of money by more than the budget surplus is measured as a share of national income.

The OBR also factored in such variables as productivity (calculated as likely to grow at an average of 2 per cent a year); population (net inward migration of an average of 120,000, giving a total population for the UK of 73 million by 2050); and employment (projected to grow by 0.13 per cent per year between 2015 and 2050).

Taking these considerations together, the OBR forecast average annual real growth rates of 2.2 per cent between 2016 and 2050, which can be converted into a nominal GDP expansion rate of almost 4.9 per cent each year. Assuming debt interest charges hold steady and as forecast (stabilising at 4.4 per cent), the OBR predicted that the public finances do indeed look sustainable for a period stretching as far into the future as 2050.

But the OBR report went out of its way to say that such long-term calculations are uncertain (and highly stylised and simplistic) and could be subject to changes in interest rates, variations in the rate at which the UK economy grows, policy changes (pension benefits, the state pension age, increases or decreases in the public sector workforce) and the pressures of demographic changes (an ageing population, for example). The OBR intends to produce a more complete long-term analysis that will be published in the summer of 2011.

Conclusion

In its final summary, the OBR report said that its best judgement was that the government would have a better than 50 per cent chance of meeting its target for the cyclically-adjusted current budget balance by 2015/16; that the same percentage chance applies to rolling back debt as a share of GDP between 2014/15 and 2015/16; and that the pace of economic recovery and interest charged on government debt will have an impact on public finances but that they would not pose a great threat to the government's fiscal aims.

That there is a reasonable chance there will be a budget surplus by 2016 should see public sector net debt on a firm downward trajectory after 2016, the OBR concluded.

The only cloud on the government's horizon, it appears, is that the OBR's concerns over an ageing population, and the amount of extra government expenditure that will demand, could, at some point in the future, unravel the good work.