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The OBR’s growth scenarios

The Office of Budget Responsibility’s Economic and Fiscal Outlook, available here, outlines their predictions for a variety of different economic indicators over the medium term. The motion chart above illustrates some key measures describing the evolution of their central estimate of what is going to happen to the UK economy. It also shows three alternative scenarios published alongside the Autumn statement, and two from today’s budget, that show how the path of the economy could differ significantly in coming years. The size of the bubble gives the total public sector net debt under each scenario.

The five alternative scenarios are:

1. Persistent tight credit conditions: This is the OBR’s forecast should events in the Eurozone or domestically worsen, leading to an increase in price and shortage of credit. This would hold back the expansion of productive activity

2. No structural impairment: This scenario assumes that the potential growth rate of the economy was unaffected by the recession, and that it was shorter term deficiencies in demand that caused the crisis to lengthen. This could be considered an optimistic outlook for the medium term

3. Higher structural unemployment: Here the OBR considers the possibility that the economy may have engaged in labour hoarding, and that firms may begin shedding excess workers, leading to a sustained higher level of unemployment.

4. OECD Euro area downside: The OECD published in November their best guess as to what would happen should a disorderly sovereign debt restructuring occur in the euro area. The OBR have extended this analysis for the UK to 2017

5. Temporary oil price spike: There is growing concern that increased political tension in the Gulf region may drive up the cost of oil, which would be a significant shock to inflation and output. Here the OBR consider how this would affect their central forecast.

The variables include:

• Gross Domestic Product (GDP, £million): Obtained by applying the forecast rates provided by the OBR to GDP levels in 2011 from the Office of National Statistics

• Unemployment (%): the unemployment rate, following the ILO definition

• Output Gap (%): the gap between actual GDP and the potential GDP if all available resources (labour and capital) were being used

• CPI inflation (%): This shows the growth rate in the third quarter of each year

• Public sector net borrowing (%): public sector borrowing over each fiscal year, as a percentage of GDP

• Public sector net debt (%): the stock of debt held by the public sector, as a percentage of GDP