Yesterday the Bank of England revised their growth forecast downwards. They are not always wrong. Commodity markets had their second sharp sell off in a fortnight, as world investors recognised the impact of tightening money in the emerging markets and looked forward to the ending of the second phase of quantitative easing in the USA.
On cue, we had a debate about the government’s economic and financial plans last night in the Commons. It was one of those events wrapped in cross party agreement. It was to launch the government’s charter for independent assessment of our economic prospects by the Office of Budget Responsibility. These days politians happily sign up to giving things to experts and others to do.
I wish the Office of Budget Responsibility every success in forecasting the economy. Their figures underpin not just the public debate but also government policy to steer the economy and determine the size and role of the public sector. I did , however, point out that just because a body is independent of government does not guarantee it will b e right in its forecasts. We have had a so called independent Bank of England for more than a decade, but we have also had a long period of inflation well above its target and many missed inflation forecasts from this body. The Office of Budget Respoonsibility itself had to revise its growth forecast down in March this year, revising a forecast which was just a few months old.
These two independent official forecasters, the Bank and the OBR, need to get inflation and growth correct as they are crucial to the government’s strategy. If the Bank could get inflation right and the OBR growth, they would help a lot in the two key areas that matter most to the strategy. The government’s whole fiscal strategy, its deficit cutting programme, rests on forecasts of rising and then sustained growth. If the growth disappoints the deficit will be larger and the country will have to borrow even bigger additional sums than the £480 billion pencilled in for the five year period of this Parliament. My advice to the TReasury is not to assume the OBR growth forecast is as low as it could be. The world background is deteriorating for growth. Growth could disappoint again. Controlling spending with a view to an undershoot in the less important and sensitive areas would be a sensible precaution against the possility that revenues will fall short of the OBR estimate.