Reacting to the first Fiscal Risks Report, published by the Office for Budget Responsibility this morning, NIESR Head of UK Macroeconomic Forecasting Amit Kara said:
“The outlook for government debt is inherently uncertain. The Office for Budget Responsibility (OBR) has published its first ‘Fiscal Risks’ report today where it identifies risks that can potentially derail the outlook for medium term government finances and its projections on debt sustainability. This clear-eyed and comprehensive quantification of such risks by the OBR is welcomed by NIESR.
The Report is timely for a number of reasons. At the Institute we are particularly concerned about the following issues:
The Report makes clear that government debt interest payments are four times more sensitive to a change in interest rates and more than two times more sensitive to changes in RPI inflation. It’s worth bearing in mind that a sharp shift in inflation expectations that, for instance, drives wages upwards could force the Monetary Policy Committee to raise the policy rate or to unwind the stock of government debt abruptly and that in turn could have a magnified and correlated impact on the fiscal outlook, especially against a backdrop of high government and household indebtedness.
The Report also analyses the risk to the fiscal outlook from financial crisis, but more crucially it also makes clear that the financial sector is an important source of tax revenue at a time when the tax base is under pressure. Depending on a small group of tax payers inherently exposes tax receipts to volatility, especially when risks are interconnected. This is particularly relevant for the regulator when setting financial sector regulation and for the government when negotiating the terms of Brexit.”
He concluded: “Many of the risks discussed in the Report are correlated. The Institute’s NiGEM model is well placed to assess the likely evolution of government debt against a backdrop of such correlated risks and the chart below shows the uncertainty around our forecast for government debt (as a percentage of GDP) based on the entire constellation of historical shocks”.
Notes for editors:
The OBR report can be found here
For further information and to arrange interviews, please contact the NIESR Press Office:Luca Pieri on 020 7654 1931 / l.pieri [at] niesr.ac.uk
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