Forecasting a better future

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UK fiscal forecasting currently relies on rigid fiscal multiplier assumptions that constrain effective government policy. Fiscal multipliers, which measure the impact of government spending on gross domestic product (GDP), are central to economic forecasting but are applied too narrowly, limiting the perceived benefits of public investment. This is particularly so in areas essential for long-term growth like public services, green infrastructure, and social equity. This static, one-size-fits-all approach restricts the scope for targeted government intervention, reinforcing a cycle of low investment and low growth while undervaluing policies that address critical structural issues such as climate change, inequality, and economic resilience. The result is a forecasting model that inherently favours fiscal restraint, discouraging investment that could foster a more sustainable and equitable economy.

In this report, we present a brief assessment of the Office for Budget Responsibility’s (OBR) analysis of the 2024 Autumn Statement, where significant public investment was projected to yield only a 0.15% GDP growth by 2029 – 30. Despite the government’s planned 2.1% GDP increase in spending, the OBR’s assumptions – based on narrow multiplier applications and limited long-term impact – predicted minimal economic gains, emphasising crowding-out effects over potential productivity and demand-side benefits. This conservative approach devalues public spending’s potential, limiting the perceived returns on investment even in sectors with high multipliers, such as green technology or social infrastructure. By embedding low multiplier effects in its analysis, the current model prioritises short-term fiscal targets over the longer-term economic and social gains that targeted government spending could achieve.

To address these limitations, the report proposes a new ​“bucket approach” to fiscal multipliers, providing a more flexible and context-sensitive model. This method, inspired by International Monetary Fund (IMF) practices, categorises policies based on specific characteristics rather than applying blanket multipliers. Policies are assessed on factors known to influence multiplier effects, including the likelihood of stimulating consumption among those with high marginal propensities to spend, creating demand in industries with significant domestic supply chains, and generating immediate economic activity through direct government expenditure rather than tax cuts. This approach also accounts for policies that could encourage private investment, expand or improve the productive capacity of the economy, and reduce barriers to productivity growth.

Based on these characteristics, policies are grouped into multiplier ​“buckets” that correspond to estimated ranges, with adjustments for economic context. For example, high-scoring policies are allocated higher multiplier ranges to reflect the broader, more enduring impacts they are expected to generate. By contrast, policies with lower scores fall into lower multiplier ranges, capturing their limited potential to stimulate the economy. This scoring system captures the varied economic impacts of different types of government spending and allows for a dynamic approach to multipliers, where adjustments can be made based on how current economic conditions are judged, such as the size of the output gap or changes in monetary policy stance. In periods of economic slack, for instance, multiplier effects can be scaled up to reflect the greater potential for government spending to drive growth.

This approach increases transparency by clarifying the basis for each policy’s multiplier and ultimately enables more informed public debate. By allowing adjustments to multiplier ranges based on policy characteristics and economic context, we minimise the risk of misrepresenting impacts, reducing reliance on outdated averages that may not capture present realities.

More up-to-date multiplier assumptions will invariably create greater fiscal space, enabling more extensive public investment in vital areas, from public services to green transition initiatives, even within restrictive fiscal rules. Furthermore, this flexibility could encourage replacing fixed fiscal rules with a more holistic system of fiscal referees whose judgments could usefully discern if the economic effects needed for a policy package to avoid debt sustainability risks were realistic. Moving beyond rigid multipliers, the bucket approach helps align fiscal planning with broader social and environmental goals and acts as a tool to better manage uncertainty, something that a mission-led government needs to consider more seriously.

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