Anyone who has read my posts regularly will know that I am not a huge fan of calculations of the structural deficit. I have accused people who put too much weight on the numbers to be suffering from “structural deficits disease“. I have criticised the establishment of the Office for Budget Responsibility on the grounds that it would one day get into a fight with government on the (unknowable) amount of spare capacity in the economy. I have noted how weird the OBR’s initial forecast was once you looked beyond the headlines.

I would prefer to consign calculations of structural deficits to a dustbin. Unfortunately, this cannot be done because the coalition decided to place the current structural budget deficit at the heart of its fiscal policy. It  promised to eliminate this deficit during this Parliament. The promise is actually a bit more complicated than that, but as far as the public were told, the deficit that mattered would be gone by the time they next came to vote.

Five interesting things arise from the Financial Times analysis of structural deficits this morning, which show the likely structural deficit to be significantly worse because the OBR’s estimate of spare capacity looks too high.  If the OBR were to revise spare capacity down to levels that seem more plausible now, it would have to revise down growth rates into the medium term (and revise up deficits) because the scope for catch-up growth is much lower.

Here are my five new thoughts on the matter.

1. Are the calculations nuts? Read more