Understanding and Confronting Uncertainty: Revisions to UK Government Expenditure Plans

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Understanding and Confronting Uncertainty: Revisions to UK Government Expenditure Plans

Research Seminar

Tuesday 27 November 2018, 16:30 — 17:30

Research Seminar

Presented by  Jagjit Chadha, National Institute of Economic and Social Research

Venue: Office for National Statistics, 1 Drummond Gate, London, SW1V 2QQ

We develop a simple model to motivate fiscal stabilisation policy, in the presence of economic and control uncertainty. We then examine a real-time database of economic variables and forecasts shows to demonstrate the extent to which our understanding of current and future state of the economy is subject to significant changes over time. And that these changes are, at least in part, linked to data revisions. We go on to show that multi-year government spending plans are also significantly revised over successive fiscal events. We illustrate the risk for any given government expenditure plan by constructing measures of historical expenditure revisions. I show how it would be possible to construct a model-based stress of these expenditure paths. We also show that the most significant factor in explaining public expenditure revisions are changes to the expected path of GDP growth. We illustrate one way to model the components of public expenditure and are thus able to remark on the extent to which expenditure is warranted. Finally an interpretation of the expenditure paths announced in the Budget based on our analysis is presented.

Jagjit Chadha   is Director of the National Institute of Economic and Social Research.  His research has concentrated on macroeconomic policy making under uncertainty.  His papers can be accessed at: https://econpapers.repec.org/RAS/pch64.htm