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Budget 2005 Home Page Half-Year Economic & Fiscal Update 2005

3   Risks and Scenarios

Summary

  • The Half Year Update forecasts reflect a number of judgements about how the economy is likely to develop. If actual events evolve differently from these judgements, the economy could take an alternative path to that of our central forecast, with consequential impacts on the fiscal outlook.
  • The central forecast presented in the Economic and Tax Outlook chapter shows an economy that is expected to continue slowing over the next two years before rebounding in the year to March 2008. Whether the economy develops as forecasts depends on how different factors evolve. This chapter explores what is likely to happen to economic and fiscal outcomes if some of the factors evolve differently.
Figure 3.1 - Real GDP
Figure 3.1 - Real GDP.
Source: The Treasury
  • Although we place greatest weight on the economy evolving in a manner consistent with the central forecast presented in the Economic and Tax Outlook chapter, we present two scenarios in the second part of this chapter which illustrate alternative paths. These are just two of a number of possible outcomes and therefore do not fully illustrate the full range of possible outcomes.
  • The first scenario shows the evolution of the economy in the event that there is a more rapid depreciation of the exchange rate. This scenario results in a period of higher economic growth than outlined in the central forecast and permanently raises nominal GDP, improving the fiscal position. The second scenario illustrates generalised weakness where households reduce spending relative to the central forecast and exports are also weaker. It shows a temporary reduction in real GDP but permanently lower nominal GDP, which results in a deterioration of the fiscal position.

Introduction

The central forecast, as set out in the Economic and Tax Outlook chapter, reflects the balancing of upside and downside risks facing the economy to arrive at our best assessment of the way the economy is likely to develop. This requires a number of key judgements about how the various forces affecting the economy will evolve. If actual events differ from these judgements, the economy may deviate from the central forecast. The first part of this chapter, Economic Risks, outlines some of the risks around the economic outlook. There are both upside and downside risks – some domestically and some internationally oriented.

The second part of this chapter, Economic Scenarios, presents in more detail two scenarios that could develop.

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