When the incoming coalition Government established the Office for Budget Responsibility back in 2010, there were many in the UK economic cosmos who breathed a sigh of relief.
Time and time again in the preceding years, the Treasury missed its economic and fiscal forecasts; Gordon Brown repeatedly borrowed more than he had promised. The hope was that the independent OBR would at least be more reliable than the in-house forecasts of yore.
Sadly, they were wrong. When it comes to forecasts of economic growth, the OBR’s record is already considerably worse than the previous 20 years’ worth of in-house Treasury forecasts. In its annual examination of its record, the OBR conceded today that its year-ahead forecasts delivered at the time of the June 2010 Budget were off by 1.4% – higher than the average 1.3% forecasting error suffered by internal Treasury forecasts since 1990.
Now, in the OBR’s defence, the past couple of years have been fiendishly difficult to predict – in part because of the chaos of the financial and then euro crisis, in part because it’s still not entirely clear whether the official data can be entirely relied on. Moreover, you’d be a mug to assume anyone is able to predict the future – as Sir Mervyn King often says, no-one has a crystal ball. And at least the OBR is transparent about why it’s been missing its forecasts by so much – which in theory should count more than any enhanced forecasting acumen.
As the OBR’s head, Robert Chote, said today: “We produce forecasts on the basis of our best possible judgement, not infected by political wishful thinking.”
However, the question remains: why the OBR was so dramatically wrong? After all, back in 2010 it predicted that the UK economy would grow by 5.7% between then and mid-2012. In the event, it grew by 0.9%.
And, to compound the mystery, its fiscal forecasts (covering how much the Government would borrow) were pretty much bang-on.
Some – including the International Monetary Fund in its latest World Economic Outlook report – have claimed that this is because the impact of the spending cuts has been far greater than previously thought.
The OBR said that while this is a possibility, the more likely explanation is that: 1. for the first half of its forecast, inflation was higher than expected, which in turn ate into household incomes and caused that squeeze we’ve talked about so much. And 2. For the second half of its forecast, trade collapsed, largely due to the euro crisis (we are still disproportionately reliant on trade with the EU).
However, Mr Chote also acknowledged that so far this year (2012/13), the borrowing figures look a lot worse than expected, and, in what might be seen as a signal that the OBR will have to revise up those projections considerably in the Autumn Statement next month, he added that some of the dent in corporation tax receipts may well persevere for the rest of the year.
A final warning is necessary, however: when in decades to come we return to look at these economic forecasts, we may well have to revise our opinions once again. For even the official data are prone to large and frequent revisions even years after their release.
For instance, back in the early 1990s, the official figures indicated that there was a full-scale double dip recession: those original GDP figures, published at the time, are the light and dark grey lines in this chart. But as you can see from the yellow and orange lines, subsequent revisions of the data rewrote history considerably: the recession turned out to be shallower than originally thought, and that double dip disappeared.
That could well happen this time around. However, unfortunately for George Osborne, based on the 1990s precedent, it may take around a decade for those revisions to take place.
This article is also available on the Sky News website.