It's widely agreed that the Phillips curve is flat, that low unemployment is not stoking up wage inflation - though perhaps this has been true for longer than thought. This poses the question: what are the policy implications of this?

Simon says there's a danger of the Bank raising interest rates too soon - because looking at unemployment and the output gap points to a risk of inflation which isn't in fact there.

But I suspect it also has implications for fiscal policy.

I'm thinking here of the concept of the structural budget deficit. This is an estimate of how much the government would borrow if the output gap were zero. Conventional wisdom says that the bigger is this structural deficit, the more likely we are to need to tighten fiscal policy. One reason for this is that if the output gap is zero the economy is unlikely to grow quickly, so we can't rely upon growth to narrow the deficit. Also, at a zero output gap interest rates might need to rise soon to prevent inflation rising, which would raise borrowing costs. Tighter fiscal policy would both obviate the need for much higher rates, and would make debt more sustainable if borrowing costs do rise.

This matters because the OBR believes that the deficit now is largely structural. Its latest Economic and Fiscal Outlook says:

With little sign of either spare capacity or overheating in the economy, we judge that the structural deficit (which excludes the effects of the economic cycle) is close to the headline deficit at 2.6 per cent of GDP. (Par 1.21)

But what if the output gap tells us nothing about future growth or inflation? (It doesn't matter whether this is because the concept has always been wrong or because the link between "full employment" and inflation has changed). The need for a fiscal tightening then diminishes. If inflation doesn't rise, government borrowing costs needn't rise. And the economy is as likely to continue growing as it ever was, thus perhaps generating tax revenues.

The idea of a structural budget deficit makes sense to the extent that it's sensible to think of inflation being caused by a negative output gap and its correlate full employment. If, however, the output gap and unemployment rate are uninformative for future growth or inflation, then the idea of a structural budget deficit doesn't mean much. It should not then be used to justify fiscal tightening.

Of course, there might be other justifications - though I suspect these are weak at the zero bound and when real gilt yields are negative. All I'm saying is that if we're throwing away the idea of the output gap, and if the Phillips curve stays flat, then we should also chuck out the notion of a structural deficit.