Office of Budget forecasts – wrong, wrong, wrong. Will today’s be right?

 

          Today we are told the OBR will produce far worse forecast figures for growth and borrowing.  That will come as no surprise to readers of this blog. I have argued for the last four years, from the Economic Policy Review onwards, that the trend rate of growth of the UK is now around 1.5%, not the 2.35% official forecasts assume. I am sticking with my forecast of 7.5% growth for this Parliament. Expect OBR to come down closer to this from their 13% plus forecast.

           That’s why I have assumed £520 billion of extra borrowing this Parliament, compared to the £451 billion June 2010 official forecast, and the £485 bn revised forecast in March 2011.  What today will confirm is that the official  June 2010 forecast, their Autumn 2010 forecast and their March 2011 forecast were all wrong, by their own admission. Today’s is likely to be closer to the truth because it will be more pessimistic.

             The problem that poses for the government relates to the structural deficit. The government has promised to eliminate this. It has said it will not eliminate the cyclical deficit, the bit that rises and falls according to growth, unless and until there is enough growth. If the OBR now thinks the trend growth, the reliable growth over a period of years, is lower, the structural deficit must be higher. They will probably say less of the borrowing each year will automatically disappear as the economy picks up. That makes the task tougher.

           I doubt there will be many interviewers asking why the OBR got it so wrong for so long. If some of us without their  resources for forecasting could see the post credit crunch world with a looming Euro crisis would mean  slower growth,  why couldn’t they with all their money and advantages?

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39 Comments

  1. Pete the Bike
    Posted November 29, 2011 at 8:05 am | Permalink

    We’ve got more debt than most of the EU and have a government that is totally failing to meet it’s targets in deficit reduction.
    How long until the markets turn on the UK?
    Who will bail us out?

    • norman
      Posted November 29, 2011 at 8:25 am | Permalink

      Me and you, via the Bank of England, by decreasing the inherent value of our savings / equity / pensions. They’ve already snaffled up 25% of the government debt and talk the last few days is of increasing this to 40% in the near future, so-called monetising the debt. To add insult to injury we then receive under half the rate of inflation in interest, interest that we are also paying for via taxes.

      Government has relegated us to no more than milch cows feeding the leviathan.

      You can only print money for so long before your assets start to become worthless, or people start to twig to what is happening, but we’re still a good bit away from that so carry on printing will be the message over this Parliament.

  2. lifelogic
    Posted November 29, 2011 at 8:06 am | Permalink

    Why on earth then are their policies so anti business and anti growth and so feather bedding of the over large (by a factor of about two) state sector?

    • lifelogic
      Posted November 29, 2011 at 8:30 am | Permalink

      I see the government can still afford £37,000 for the speaker John Bercow to spend on his portrait and coat of arms – complete with ladder, rainbow and pink triangles.

      It carries the highly dubious message “all are equal”. I assume there was no room for the rest “but some are more equal than others” or “but not many have my colossal speaker’s pension or can get the taxpayer to pay £37,000 for this nonsense”

      • lifelogic
        Posted November 29, 2011 at 8:56 am | Permalink

        The Speaker’s pension pot, due to his relatively young age, seems to be likely to be about £2M.

        I assume this sort of excess is unlikely to assist with the current state sector pension negotiations and the strikes tomorrow.

      • sm
        Posted November 29, 2011 at 9:51 am | Permalink

        A picture is worth a thousand words.
        It just shows complete detachment from society. Don’t they realise what a continuing 10% of GDP deficit is! The money simply is not available for this.

        • lifelogic
          Posted November 29, 2011 at 2:11 pm | Permalink

          The money is available to them just not available to sound businesses that wish to expand and create jobs.

      • BobE
        Posted November 29, 2011 at 4:23 pm | Permalink

        Its a bit sad really. Little man syndrome.

    • uanime5
      Posted November 29, 2011 at 3:43 pm | Permalink

      Could it be because they belong to the state sector?

  3. Matt
    Posted November 29, 2011 at 8:33 am | Permalink

    Has George O moved the goal posts with respect to the target reduction in deficit? Until a few weeks ago I had never heard the deficit described as “structural” and “cyclical”.

    Reply: No, it’s always been like that

    • zorro
      Posted November 29, 2011 at 9:35 am | Permalink

      If he’s not careful, he’ll morph into Gordon Brown, and this ‘cyclical’ borrowing will be his ‘golden rule’ on borrowing! I tell a lie he is partially morphing anyway with the extended QE and the government subsidised investment/borrowing to reinflate the housing market and kick start the economy. Cameron has of course been a Blair clone for years…..

      Zorro

      • zorro
        Posted November 29, 2011 at 11:43 pm | Permalink

        Spooky, no sooner do I mention George Osborne morphing into Gordon Brown than Newsnight opens with a picture of George Osborne morphing into Gordon Brown!!…..It must be just a coincidence…..

        Mystic zorro

  4. Robert K
    Posted November 29, 2011 at 8:43 am | Permalink

    And still the lefties demand stimulus from the government – i.e. print more money, soak the “rich” and let tomorrow’s generation pick up the tab.
    Just get out the way and let the private sector get on with it. I can cope with austerity; I can’t cope with a bunch of sanctimonious socialists like Balls lecturing everyone who will listen on how to escape a catastrohpe that they created.

    • uanime5
      Posted November 29, 2011 at 3:45 pm | Permalink

      Some socialists want the rich to have higher taxes, rather than the Government to print more money. Some socialists go even further and say that the rich should actually have to pay their taxes.

    • Joe James B
      Posted November 29, 2011 at 9:06 pm | Permalink

      Well said.

  5. A.Sedgwick
    Posted November 29, 2011 at 8:53 am | Permalink

    I am sticking to my total growth forecast of 5% for a full term Parliament, not that I think the country cannot grow but because the Government does not know what it is doing. Lower, fewer, fairer, simpler, streamlined taxes and regulations, the latter not legally feasible whilst in the EU. An example of real growth potential is in the manufacture of the small day to day things we use, most of which are imported. I believe the risk capital is already within the country and available from overseas but the opportunities for real return at reasonable risk are not. What we are seeing is the reverse with successful people moving offshore.

    • nicol sinclair
      Posted November 29, 2011 at 3:15 pm | Permalink

      A flat rate tax is what is really needed provided anyone has the balls to fight Balls.

  6. oldtimer
    Posted November 29, 2011 at 9:02 am | Permalink

    In significant respects the coalition has got its economic forecasts and priorities very wrong. This is not just down to external influences but also to its own policies. These appear to result from a particular, and arrogant, mindset that UK policy can control the climate by taxing everyone into penury and solve Africa`s problems with aid money we have not got. My expectation is that the measures to be announced today will be mere crumbs from Leviathan`s table that will not turn the situation around. Unless and until there is a fundamental change in attitudes about these issues and a focus on changes needed to promote business activity then the UK will continue to decline.

  7. JimF
    Posted November 29, 2011 at 9:18 am | Permalink

    Very peculiar tactics.
    The more obvious route would have been for the Government and the OBR to have been overly pessimistic at the beginning of this Parliament then to claim success with better and better figures. I think this is what most incoming CEO s and their (independent) consultants do.
    The only obvious answer as to why this wasn’t done was to keep the gravy train running for just a wee bit longer, for the Kinnock clan and all the luvvies to carry on.
    We need a stronger hand on the tiller here.

    • A different Simon
      Posted November 29, 2011 at 11:33 am | Permalink

      Under promise , over deliver .

      They also failed to lay the blame for everything plus the kitchen sink at the feet of the outgoing incumbents as is frequently wrongly done in the private sector .

      The frightening thing is they probably thought they WERE under promising !

  8. Steve Cox
    Posted November 29, 2011 at 9:21 am | Permalink

    Why do they get their forecasts so wrong? Simple, really, they’re playing politics, the same reason that the Bank of England has got its inflation forecasts so pathetically wrong for years on end now. The forecasts they have made to date have suited their political masters (they are only independent in name, not in practice) which is why they can get away with being so consistently wrong. Eventually, though, their credibility starts to wear thin, which is presumably why the latest forecasts look more realistic (though with all the money printing going on I’m not at all convinced that the Bank’s forecast of rapidly slowing inflation in 2012 is to be believed).

    • lifelogic
      Posted November 29, 2011 at 12:37 pm | Permalink

      Indeed, I agree fully – anything that feels the need to have the word “Independent” in its name is almost certainly not. If it were the word would not be needed.

  9. Mazz
    Posted November 29, 2011 at 9:29 am | Permalink

    Usually when Government Departments come up with figures, I think, as a rule of thumb, if it sounds good, halve it; if it sounds bad, double it.

  10. Gary
    Posted November 29, 2011 at 9:29 am | Permalink

    Let’s play the speculation game. I speculate that they will all be wrong. Why ? Because in this world of credit binges to solve credit binges, hot money spinning from one country to the next, interest rates gyrating wildly,politicians issuing new directives almost daily like something out of Don Quixote, anyone who makes an accurate prediction, other than one of collapse, is just plug lucky.

    This is exactly why we need an effective gold standard. Interest rates become stable, currency exchange rates are fixed, growth is low but steady, credit booms are constrained. The speculation orgy stops. Investors look instead for long term value and growth in companies in the Graham Dodd vein. Business can plan, politicians are reined in, banks revert to conservative, careful lenders and custodians. Of course, politicians and bankers don’t like that, so on we blunder toward collapse.

  11. Electro-Kevin
    Posted November 29, 2011 at 9:41 am | Permalink

    “If some of us without their access to resources for forecasting could see the post credit crunch world with a looking Euro crisis would see slower growth why couldn’t they with all their money and advantages?”

    Never mind the ‘post credit crunch world’ – I’d been predicting the credit crunch years before it happened.

    “Just where is all this money coming from ? This level of borrowing can’t go on forever surely ?”

    It was all pretty obvious wasn’t it ?

  12. Duyfken
    Posted November 29, 2011 at 9:42 am | Permalink

    I also wonder about the reason for the OBR’s wrong forecasts. Is it that Mr Chote, Ms Barker and the others are not such expert financial gurus as they have previously been made out to be, or is there some other force weighting the predictions away from reality? Can we we be assured as to their impartiality even were it the case that the OBR is not as independent of political poversight as is made out to be?

  13. Brian Tomkinson
    Posted November 29, 2011 at 9:48 am | Permalink

    Nothing we shall hear today will surprise readers of this blog. The fact that our host languishes on the backbenches, his talents wasted at a time of economic crisis tells its own story. No doubt Cameron and Osborne can blame the OBR, the LibDems, the eurozone but they cannot shirk their responsibilities. They are in charge and they have failed to make the best use of their 18 months in office. In fact, both front benches are devoid of the talent and leadership to tackle this problem. Is it any wonder that businesses have no confidence to invest?

  14. Damien
    Posted November 29, 2011 at 10:03 am | Permalink

    JR; The last sentence needs some corrections.

  15. Mike Chaffin
    Posted November 29, 2011 at 10:48 am | Permalink

    Reading the various views on the causes of the great Depression of the 30’s and the depression of the century before that it is rather sobering, and depressing, to note that economists simply cannot agree even given historical data.

    John, in your opinion is the BOE printing money in order to keep our borrowing costs down or in order to hedge against deflation?

    Given our debt levels and the Eurozone crisis deflation would be truly catastrophic.

    Reply: I see it as a device to keep government rates down. There is no danger at the moment of falling prices egnerally – we still have an inflation problem. There is a demand problem, because people and in due course the government have to wean themselves off debt.

  16. David
    Posted November 29, 2011 at 10:54 am | Permalink

    John, could I suggest that your set up the ‘Real Office for Budget Responsibility’ and create forecasts etc in the format they do – and publish them a week before the OBR. Then let’s track who is closer to the truth over the next 5 years.

    As you point if you (and many others) can make better forecasts without access to all their material and materiel, then…………………………..

    What do you think?

    Reply: I have published my forecasts in advance. I do not have the time to produce a full Red Book.

  17. GJ Wyatt
    Posted November 29, 2011 at 11:09 am | Permalink

    The OBR seems to have concluded that the level of potential output is lower than they had previously assumed. This belated realisation implies that the potential for inflation is greater than they had assumed. Whether that will rein in the BoE’s willingness to pursue Quantitative Easing will be instructive to us observers.

    Your own take on this is that the rate of growth of potential output (“trend growth”) is lower than the OBR have assumed. But that is debatable since it determined mainly by technological and structural change in the economy and the rate of growth of the labour force, and these medium or longer term factors are difficult to assess ex ante. When commentators incessantly refer to “growth” what they mean is “recovery from recession”, nothing to do with growth in the capacity of the economy.

  18. Gary
    Posted November 29, 2011 at 11:11 am | Permalink

    The bottom line is , that if these civil servants were so good at market speculation they would be making a fortune for themselves in their own private hedge fund. All they are doing every day is confirming that you CANNOT second guess the market and plan an economy more efficiently than the market can over the long term.

    All the great financial speculators will tell you that if they are right about their speculations more than 60% of the time , they are damned good and very rare and are on a winning streak. The way the speculators make money is to cut their losses when they are wrong, that way they can make money even if they are only correct less than 50% of the time. Govts are not nimble enough to do this , don’t have their own money at stake, and are thinking about the next election only. It cannot and does not work.

  19. Denis Cooper
    Posted November 29, 2011 at 12:06 pm | Permalink

    It’s going to be touch and go whether the UK government emerges from this debacle with its bonds still rated AAA.

    The coalition’s plans to reduce public spending and cut the budget deficit were hardly ambitious in the first place, and some slippage would be expected, but that’s on top of the lost year during which the Labour government deliberately carried on with its over-spending in the run-up to the general election.

    We’ve only got through the past 32 months because the Bank of England obliged the Treasury by rigging the gilts market, effectively allowing the government to borrow newly created money from the Bank.

    First to the tune of £198 billion under Labour, and now an additional £36 billion just over the past 7 weeks:

    http://www.bankofengland.co.uk/markets/apf/results.htm

    Typically three lots of previously issued gilts bought back by the Bank each week, £1.7 billion each time, = £5.1 billion a week or over £20 billion a month, which if continued beyond the present £75 billion limit would be over £240 billion a year.

    Before anybody gloats about the yields on gilts dropping marginally below those on German government bonds they should remember that at the moment the UK government is making no net demands on investors, overall, with the Bank buying up previously issued gilts faster than the Treasury’s Debt Management Office is selling new gilts.

  20. Michael Read
    Posted November 29, 2011 at 1:35 pm | Permalink

    I’ve just watched the chancellor’s speech. You were right but not right enough.

    Borrowing is higher than even you assumed. Lawks.

  21. Quietzaple
    Posted November 29, 2011 at 1:57 pm | Permalink

    None of what amount to Tory supporting “commentators,” “editors” Nd “economic correspondents” will point out that UK growth has been cut by Osborne’s 2.5% VAT hike, which also hoisted inflation to squeeze Britons towards a hiatus of strikes.

    Nor will any point out that the crisis is one of growth: if Greece’s economy was growing at 7% instead of contracting at 7% they would merely be the butt of stupid Tory jokes about probity.

    The Conservatives lyingly ran Britain down for years and now they cannot switch confidence in our economy back on. Osborne, whose sole claim to fame was once editing Isis, may deserve poetic justice: Britons do not deserve to share the consequences with him.

  22. Simon 123
    Posted November 29, 2011 at 1:58 pm | Permalink

    I worry that most of the UK media and political class thinks we have a divine right to year on year growth when most western economies, including the US are struggling to achieve it. What is so special about the UK which allows it to buck the trend?

    John, in one of your posts about the Eurozone can you prognosticate about what might happen if it implodes. Will there be a sovereign debt crisis and a banking crisis at the same time and how will this play out? Do we need to lay in extra supplies of food and keep cash under the bed just in case the UK banks have to switch off their ATMs.

  23. john w
    Posted November 29, 2011 at 7:43 pm | Permalink

    John,i dont understand why George does not take enough notice of what you say.If the plan goes wrong,i hope you get his job.

  24. Mark
    Posted November 30, 2011 at 2:24 am | Permalink

    It seems as though you underestimated. The total for PSNB is £563.1bn according to the OBR (Table 2.25). The actual measures announced will have almost zero effect overall (Table 4.5).

    There are still some heroic assumptions kicking around – such as growth of business investment averaging 10% p.a. for the next five years (do they use an accelerator-multiplier model?) , inflation falling to 2% despite the current round of QE, and gently rising numbers in employment (Table 3.1). Not to mention a massive property boom in 2013 and onwards (Table 4.3).

    It’s Table 4.8 that shows where the real damage to the forecasts is. Much lower tax revenues: some £114.8bn less over the period from 2010-11 to 2015-16. The big damage is in

    CT – down £39.8bn, with North Sea tax now expected to be £14.5bn lower and no shale gas to offset.

    Income tax – down £36.2bn, with this year’s forecast dropped by £2.1bn, which is surely still optimistic at £2.3bn higher than last year despite being £1.4bn or 1.7% lower over April-October (including £0.4bn less in October itself according to HMRC). Is this a recognition of the damage of 50% rates?

    VAT – down £18.3bn on lower spending forecasts

    Fuel Duty – down £6.7bn only partly due to reduced rates, but also due to forecast lower sales

    Bizarrely, the forecast for CGT receipts has been raised, despite lowered forecasts for asset prices ranging from stock markets through property. With the CGT regime being so unfavourable and the move to make it so having been well telegraphed, the expectation should surely be for much lower revenues next January when it is collected.

    Allowing for projected gilt redemptions of £49bn in 2011-12, £52.9bn in 2012-13, £51.7bn in 2013-14, £60bn in 2014-15, the total gilt sales remit or required funding is £640bn by April 2015 (and £836bn two years later). On present trends, the aim will be to print it all and not try to sell any in the marketplace. I’m not sure that ruse will hold up to scrutiny: we’d have around £1 trillion of debt overhanging the market unsold, allowing for the £200bn of Brown’s QE.

  25. Posted November 30, 2011 at 11:42 am | Permalink

    These forecasts come with a built in qualifier that they onkly applly if the Euro mess will be cleared up. The odds must be against them ever having to be compared with the real world.

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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