OBR admits overly optimistic forecasts — raising chance of a downgrade
The Office for Budget Responsibility said that it had overestimated growth by an average of 0.3 percentage points over two-year periods and 0.7 points over five years. It also said that it had been too pessimistic about its immediate one-year projection by 0.4 percentage points.
The forecaster said that it would review how it assessed the potential effects of government policies such as planning reforms, along with the effect of trade.
It raises the prospect that the forecaster will downgrade the economic forecasts before the autumn budget, increasing the likelihood that Reeves will have to raise taxes to balance the books.
The chancellor has left herself with £9.9 billion of fiscal headroom, effectively spare money, before the budget.
The government's succession of policy reversals, on winter fuel payments and welfare, threaten to wipe out more than £6 billion of her headroom. A downgrade in the economic forecasts would effectively push the public finances into the red.
Estimates from experts suggest that a 0.2 per cent reduction in output would cost Reeves as much as £12 billion.
• How accurate are OBR forecasts? It has been wrong before
The OBR said: 'We will take stock of the lessons that we have learnt from our approach to capturing the impact of government policy measures on our forecast for potential output.'
The watchdog said that it would also review how it costs supply-side measures such as housing plans and trade.
'We will also review our experience to date in estimating the supply-side effects of policy,' an evaluation report by the OBR said.
In March, the OBR said reforms to the planning system would increase GDP by 0.2 per cent by 2030. The report added: 'We intend to refine how we construct … our housing supply forecast, in light of the large increase in housing supply that we expect to occur in response to the government's planning reforms.'
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