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The dangerous fiction of the "fiscal black hole": how arbitrary targets and uncertain forecasts are driving a return to austerity

The dangerous fiction of the "fiscal black hole": how arbitrary targets and uncertain forecasts are driving a return to austerity

Calvert Jump, Robert ORCID: 0000-0002-2967-512X and Michell, Jo (2022) The dangerous fiction of the "fiscal black hole": how arbitrary targets and uncertain forecasts are driving a return to austerity. Report. Progressive Economy Forum (PEF), London.

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Executive Summary
Media reporting of the economy and choices facing the new Prime Minister and Chancellor has focused on a supposed ‘black hole’ in the public finances, typically given as being around £50bn in five years’ time. This has been presented as an urgent priority for government to fix, and both the Chancellor and Prime Minister have stressed that a return to austerity and spending cuts is now needed. Yet this fiscal ‘hole’ is the product of forecasts produced by economic models and the government’s own fiscal rules. Its size depends on how much we think the economy will grow, what interest rate the government must pay on its borrowing, and the target for the size of the government’s debt relative to the size of the whole economy (the ‘debt to GDP ratio’). This means that the so-called fiscal ‘hole’ is not an objective statement of economic fact in the same way that, for example, estimates of current inflation and wage rises are. It is dangerously misleading to present it as if it was. Forecasts from economic models are highly uncertain, but this uncertainty is not being reported properly. The rate of future economic growth, the level of future interest rates, and the nature of the fiscal target will dramatically alter the size of the so-called fiscal ‘hole’. Using the Office for Budget Responsibility’s own forecasts, we show that estimates of the fiscal ‘hole’ are highly sensitive to small changes in future growth rates or interest rates. Remarkably, using these forecasts, a ‘black hole’ as large as £50bn could be eliminated simply by reverting to the official measure of public debt used 18 months ago, and even £14bn of extra spending would not bring it back. Specifically, the government used to target the public sector net debt including the Bank of England but changed this to the public sector net debt excluding the Bank of England at the beginning of this year. This small change has a huge impact on whether the government’s target is hit – far bigger than any actual policy changes. Including the Bank of England in the government’s target, for instance, means that the targeted measure of debt would be forecast to fall by around £64bn in five years’ time – easily more than the so-called ‘black hole’, and more than the current round of cuts and tax rises being trailed in advance of the Autumn statement. Pushing spending cuts to chase a target that is highly uncertain and affected by factors over which the government has very limited control is bad economic policy, made at high cost with limited chance of success. Any fiscal difficulties that the government currently faces have little to do with control of departmental spending, investment, or taxation. Instead, they are based on arbitrary targets, and contingent on projected borrowing costs and growth rates which are both subject to significant levels of uncertainty. It makes no sense to pre-empt any potential increases in borrowing costs with a return to austerity. We do not know what the cost of government borrowing will be. We do not know what nominal GDP will be. We do, however, know all too well what the cost of austerity would be. A rational policy response at this point in time would be a cautious, ‘wait and see’ approach. Spending should not be cut, while taxes on higher earnings and income from wealth could reasonably be increased to cover any further increases in borrowing costs if they occur. For an interactive tool to explore these options, see

Item Type: Monograph (Report)
Uncontrolled Keywords: austerity; fiscal black hole; public finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HF Commerce > HF5601 Accounting
Faculty / School / Research Centre / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA)
Related URLs:
Last Modified: 26 Jan 2023 16:59

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