The government consumption deflator measures the implied price of government services. International comparisons show that different methodologies for deriving the government consumption deflator affect the extent to which nominal changes are interpreted as driven by changes in prices as opposed to volumes. This box outlined how these methodologies affected government consumption compared to pre-recession averages for six leading industrial countries.
In our 2012 Forecast Evaluation Report, we noted that nominal GDP had held up closer to our June 2010 forecast than real GDP, helping to explain why our fiscal forecasts out to 2011-12 had remained broadly on track. This box in our 2013 Forecast Evaluation Report discussed how this assessment changed in light of revisions to GDP data. While nominal GDP now appeared to be weaker than forecast, the relatively tax-rich components - such as nominal consumption and wages and salaries - held up relatively well.
In the two years before our December 2012 forecast, real government consumption held up more than we had expected, with reductions in nominal government consumption affecting prices to a greater extent than we forecast. This box set out how these outturns would have been affected by the way the Office for National Statistics measures real government consumption, a large part of which is based on 'direct' measures of government activity.
In recent years, the government consumption deflator had been weaker than we expected. This box set out our assumption that the weakness of the government consumption deflator was likely to persist over the forecast period. The box also reviewed the outlook for the household consumption deflator and explained our assumption that this would be broadly equal to CPI inflation in the long run. Taken together with our assumptions for other deflators, these assumptions implied a medium-term GDP deflator growth assumption of 2 per cent, revised down from a previous assumption of 2.5 per cent