By Bob Hills and Ryland Thomas of the Bank’s Structural Economic Analysis Division and Tony Yates of the Bank’s Monetary Assessment and Strategy Division.
When assessing the outlook for inflation, the growth of real GDP is commonly used as an indicator of changes in current demand pressures. But as GDP includes the output of the government sector, this approach can in some circumstances be misleading. Government output is not necessarily an informative guide to the impact of government spending on the balance of demand and supply pressures in the marketed sector of the economy. Instead, it may be more informative to consider the quantity of resources that the government absorbs - that is, how much private sector output it buys and how much labour it hires - rather than the quantity of output it produces.
The impact of government spending on demand pressure