This box considers the possible effects on the economy of the policy measures announced in this Budget and since the Autumn Statement. Further detail about each Budget measure is set out in the Treasury’s documents. We assess their fiscal implications in Chapter 4 and Annex A.
The Government has very modestly loosened fiscal policy in aggregate in the near term, largely by increasing departmental current spending. To capture the impact on economic growth we have applied the same ‘multipliers’ we have used in previous forecasts. (The shorter the period between a policy’s announcement and its subsequent implementation, the larger the multiplier.) Together, the measures imply small effects on the profile of real GDP growth, adding less than 0.1 percentage points in 2017-18 and subtracting even smaller amounts each year thereafter.
We have adjusted our inflation forecasts for the reduction in the personal injury discount rate to minus 0.75 per cent that was announced by the Ministry of Justice on 27 February. At that time, the Prudential Regulation Authority (PRA) estimated the cost to insurers of this decision at around £2 billion a year, with a wide range of uncertainty around that figure. This estimate may be revised as more information on the effects of the change become available. We have assumed that these costs will be passed on in full and almost immediately to insurance premiums.
In the case of motor insurance premiums, this has a direct and therefore immediate effect on consumer price inflation as they are included in the CPI basket. We also expect increases in employer liability insurance premiums, which are not in the CPI basket but which we assume will over time be passed on to the prices of final goods and services that are.
Together, we estimate that these effects will increase CPI inflation by a little under 0.1 percentage points, but increase RPI inflation by a little over 0.2 percentage points cumulatively by the end of 2017-18. The RPI effect is bigger because motor insurance has a weight four times larger in the RPI than in the CPI. This is because it is measured on a ‘gross’ basis in the RPI (reflecting only the premiums paid) but ‘net’ in the CPI (premiums paid net of amounts paid out).
As well as the uncertainty around the PRA’s central estimate of the cost to insurers, other uncertainties include the pace and extent to which insurers will pass that cost onto customers. Their behaviour may also be influenced by the Government’s simultaneous announcement that it would launch a consultation that “will consider whether there is a better or fairer framework for claimants and defendants” – which implies that the change could be wholly or partially reversed.