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Insight paper

How does the OBR estimate the demand impact of government policies?

The role of fiscal multipliers in economic forecasting.

High street
Policies aimed at boosting demand in the economy can lead to, for example, the public spending more of their money.

Government policies can have an impact on the level of economic output by affecting either demand, or supply, or both. This short insight looks at how the Office for Budget Responsibility estimates this in its forecasts

It is important for the government to get as clear an idea as possible of how any measures it announces at fiscal events – budgets and spending reviews – might impact the economy, and to what extent. As the UK’s official forecaster, it is the job of the Office for Budget Responsibility (OBR) to give the government that idea. It does this by producing estimates, published at these fiscal events. 

To estimate the potential impact of discretionary fiscal policy on economic growth through demand channels, the OBR applies a set of ‘fiscal multipliers’ to tax and spending numbers, which then affect the economy forecast. It uses different multipliers for three different types of spending: 

  • Annually managed expenditure (AME) – demand-led spending, on things like pensions and benefits, where budgets are not fixed in advance. 
  • Capital departmental expenditure limits (CDEL) – spending on things that are expected to produce an enduring asset for the public sector, like infrastructure, IT and buildings. 
  • Resource departmental expenditure limits (RDEL) – day-to-day spending on things like salaries, medicines and other recurring purchases. 
  • In addition to these it has one multiplier for tax

This short paper looks at how it uses these multipliers to judge the demand effects of different types of tax and spending policies.

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