Box sets » Scenarios
A key uncertainty around the long-run impact of the Budget's plans for higher public investment is the extent to which the public capital stock is a complement to (or substitute for) business investment. This Box provided scenarios in which the future business capital stock was higher or lower than we had assumed in our central forecast. We showed these scenarios' impacts on potential output in 50 years' time and the implications they had for different measures of the internal rate of return on investment.
The outlook for inflation was highly uncertain at the time of our March 2023 forecast: the UK was experiencing the largest inflation shock since the 1980s, and the first significant shock in the era of independent inflation-targeting central banks. In this box, we reviewed the ways we have presented uncertainty in our successive EFOs, in particular our use of fan charts and scenarios.
The Bank of England's Asset Purchase Facility (APF) conducts the Bank's operations for quantitative easing and tightening. In this box we updated our estimate of the lifetime direct costs of the APF and scenario analysis looked at the impact of changes in interest rates on this lifetime cost.
Following the upwards revision to our migration forecast, this box explored the implications of higher migration on our central forecasts for tax revenues, spending and borrowing. We also drew on alternative scenarios for migration to illustrate how uncertainty in the migration forecast translates into the fiscal forecast.
Inflation risks intensified after we closed our pre-measures forecast for the October 2021 Budget. This box showed two stylised scenarios embodying higher and more persistent inflation than in our central forecast to highlight the uncertainty surrounding the outlook. In one scenario inflation was driven mainly by pressures in the product market, and the other mainly pressures in the labour market, which had different implications for wages and consumption.
The level and nature of inflation has consequences for the public finances. This box explored the fiscal consequences of the sharp rise in inflation since our March 2021 forecast and examined the fiscal effects of the two scenarios described in Box 2.6 in our October 2021 EFO one where inflation is driven mainly by pressures in the product market, and the other mainly pressures in the labour market. The box concluded the labour market inflation scenario was significantly more beneficial for the public finances.