In doing the usual due diligence on the Bank of England’s pictorial forecasts – blowing up the images on screen, getting out a ruler, measuring the YoY growth rates, estimating the skew that represents a risk-adjusted forecast and shoving all the results into a pre-prepared spreasdsheet – you can produced this horrible chart of successive Bank of England growth forecasts.
All it really shows, in the grand scheme of things, is that the Bank’s growth forecasts were pretty good before the crisis and spectacularly awful more recently.
If you strip out a lot of irrelevant information, you get the following, which I think is pretty amazing. Read more
I am currently engaged in an entertaining tussle with the Office for Budget Responsibility, the newish and independent fiscal watchdog. I am sure our disagreement will be resolved quickly. I have no reason to doubt the independence of the OBR staff, nor their stated desire for transparency. But at the moment they are being surprisingly secretive over the most important judgment in their forecast.
The OBR’s remit is to determine whether the government has a greater than evens chance of meeting its binding fiscal goal to balance the structural current budget deficit by 2015-16. Regular readers of this blog will know that I am boringly consistent in thinking this goal is useless because it relies upon splitting the forecast for borrowing into structural and cyclical components, a task which is so difficult as to make it not worth bothering.
But we live in a world where a public body – the OBR – has been given this difficult task and so its judgments need to be scrutinised. Your taxes and the level of public spending literally depends on the OBR’s assessment. Read more
In a speech titled “MPC in the dock” this morning, Spencer Dale, Bank of England’s chief economist, provides both the best defence of the Bank of England’s monetary policy stance I have read in a long time and a much more coherent explanation of recent poor UK economic performance than the Office for Budget Responsibility in yesterday’s Budget.
The title shows the pressure the Bank finds itself in and Dale’s embrace of humility rather than the usual hubris is welcome. When Bank officials – and the governor in particular – take a leaf out of their chief economist’s book and stop saying they have nothing to learn and they have been entirely consistent, people will be much more willing to listen to their argument.
Mr Dale was clear that inflation was set in the UK and not imported, as many MPC members have recently suggested. He was honest that he probably would have voted for different monetary policy had he had better information about the coming price shocks rather than taking the absurd stance the governor took that of course he would not have done anything differently. He pointed out where the MPC was learning from its mistakes, particularly on the issue of import price pass through.
To summarise the speech Mr Dale posed four clear questions. Read more
It’s now quite late on Budget day and my fingers are hurting. I have probably moved far too far into cynical mode, but here is a fun fact.
Q1: Who was it who made his name in 2005 criticising Gordon Brown’s decision to lengthen the definition of economic cycle to make the public finance figures add up?
A: It was Robert Chote, then director of the Institute for Fiscal Studies, who memorably said it was “less of a cycle than a stretch limo”. Read more
I am sure George Osborne’s second Budget will soon be forgotten. The public will not thank him much for avoiding the scheduled rise in petrol duties – being hit by a bullet is more noticeable than dodging one. And the growth agenda – laudable though it is in its intentions – is hardly new for British chancellors.
In the minutes after an admirably clear speech from the chancellor without last year’s duplicitous use of numbers, the striking thing about the newish and independent Office for Budget Responsibility is the number of times it has taken the approach – “We hear what you are saying, but forget it”.
- Growth: The OBR had the opportunity to endorse the “plan for growth” by raising its estimate of the long-term potential growth rate of the economy. It said forget it:
“We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011″.
- Growth forecasts: The OBR downgrades
I’ve now had a few hours to digest the Inflation Report. As our news story says, the report confirmed market expectations of a series of rate rises starting in the second quarter. Of course, Mervyn King, the governor, did not say the Bank would raise rates. No one sensible ever expected him to – that would violate the Bank’s sensible rule of never deciding monetary policy until the meeting in question.
What you can say, as we did in this morning’s paper, is that the latest inflation forecasts are consistent with interest rate rises and inconsistent with interest rates staying on hold. The Bank has therefore verified the market expectations of rate rises, although not quite some of the more wild predictions yesterday that the MPC was just wanting a March rate rise to come as a surprise.
Lessons learnt from past forecasting errors
I asked the governor what lessons the Bank had learnt from its bad inflation forecasts since 2005. The answer could be paraphrased as, “stuff happens”. Mr King has learnt that inflation out-turns “can be explained by energy and commodity prices”. This is about as close to saying, “I’ve learnt nothing”, as is possible. I genuinely hope that is not true. Read more
The Institute for Fiscal Studies, along with Barclays, are currently presenting their annual fiscal forecasts and Budget judgement. Most of the central headlines are comforting to the government. The economists think that on the basis of the official economic forecasts, the public finances are broadly on track – the hole in the public finances will be closed by 2015 or so.
The concern is that all the risks seem to be on the downside relative to official forecasts.
There are good reasons to worry that the economy might be hit harder from austerity than the Office for Budget Responsibility thinks, such as the difficulty the Bank of England will have in offsetting tight fiscal policy with loose monetary policy. Consumers are being hit hard from high import prices squeezing incomes. UK investment rarely bounces back sharply from recessions. And export performance has been disappointing and we don’t really know why. Read more
We are beginning to see a flurry of concern at the Bank of England about high UK inflation. The annual rise in the consumer price index in November was 3.3 per cent, well above the 2 per cent target and higher than City expectations. The Monetary Policy Committee would have had sight of this figure last Thursday when it kept monetary policy on hold. Even so, there does appear to be a rising level of concern in Threadneedle Street about inflation.
We know from votes and speeches that Andrew Sentance is worried about the credibility of the Bank of England’s monetary policy when inflation is persistently far from target. He is not sounding such a lone voice these days, however. Charlie Bean’s speech yesterday was notable for the increased concern over inflation and Spencer Dale noted earlier this month that the Bank “might not appear to have done a very good job recently” in hitting the inflation target.
As the chart shows, the MPC collective forecast also shows a reasonable risk of inflation exceeding 4 per cent in the year ahead. Read more
Giving evidence to the Treasury Select Committee this morning, George Osborne claimed the UK economy was back on track.
He added that it was pretty clear to him that the previous Labour government had overstated trend growth for much of its time in office and there had been a big “boom” in the economy for much of the decade.
Warming to this theme, the chancellor referred the Committee to his favourite chart of the June Budget, which shows what the output gap would have looked like if a more modest figure – and what Mr Osborne said was “more realistic” estimate for trend growth – had been assumed by the previous government. Read more
These are the clearly audible words spoken by Michael Fallon, member of the Treasury Select Committee, to Andrew Tyrie, the Committee chairman at the end of the evidence given by Robert Chote, new chairman of the Office for Budget Responsibility.
Why did Mr Fallon MP call for the return of the Treasury’s chief economic adviser rather than the shiny new representative of the independent OBR?
Briefly, because Mr Chote irritated the Committee by playing with a dead straight bat, avoiding questions and talking round issues. The Committee was upset that the OBR had not performed sensitivity tests on not-so-extreme scenarios such as large exchange rate fluctuations following a crisis in the eurozone and that the scenarios tested by the Office were pretty benign.
The result was much as with Martin Weale’s appointment to the Monetary Policy Committee Read more
There is inevitably a focus on forecast revisions when any official body produces new predictions about the future. Today the Office for Budget Responsibility, Britain’s new fiscal watchdog, raised the 2010 growth forecast to 1.8 per cent and dropped the 2011 forecast from 2.3 per cent to 2.1 per cent, as the FT reported in recent days.
Robert Chote, the OBR’s new chair, also gave his endorsement to the deficit reduction plan, saying the government had a greater than 50:50 chance of wiping out the hole in the public finances within five years. All of this was incredibly easy to predict.
The interesting decisions taken by the OBR were on its estimate of the fiscal multiplier and its view of the degree of spare capacity in the economy. The first matters because it determines the official view of the effect of budget consolidation on growth. The latter matters because the degree of spare capacity determines the OBR’s view of the size of the hole in the public finances, but has the annoying problem of being impossible to measure. On these two issues, Mr Chote is gung-ho on the multipliers, but displays wise caution on sounding too certain about spare capacity. Read more
Today’s public finances figures show net borrowing roughly on track to reach the Budget forecast for the deficit in 2010-11, as the chart shows.
This should be good news as persistent slippage on the public finances has stopped and the very early evidence shows the consolidation is roughly on track.
But because of the dotty way the Treasury and Office for Budget Responsibility have looked at the public finances in the past, this is not good enough. In fact, on plausible assumptions, we need another £5bn of tax rises or spending cuts a year to meet the fiscal mandate of eliminating the current “structural” budget deficit within five years.
Why is good news actually bad in the weird world of government forecasting?
In a nutshell because Read more
At today’s Monetary Policy Committee meeting, Andrew Sentance goes head-to-head with Adam Posen in a bid to sway the mushy middle of the Bank of England’s MPC to his point of view. Like most analysts, the betting is that neither will succeed and the Bank will leave policy unchanged with interest rates at 0.5 per cent and a stock of £200bn of assets purchased under the programme of quantitative easing.
As a paid-up member of the mushy crowd, I share Mr Posen’s theoretical concern that deficient demand will have permanent effects, but also Mr Sentance’s observation that the evidence for these worries is lacking.
So, following Robin’s good practice and the wise words of Fed chairman Ben Bernanke from January, I wondered whether the use of a simple rule of thumb – a Taylor Rule – could help guide us where UK interest rates should be going.
The short answer is no. Read more
On Monday, the IMF cannot contain its enthusiasm the UK’s harsh austerity plans. On Thursday it releases research warning fiscal consolidation “will hurt” and “are likely to be more painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them”.
The IMF finds that, “fiscal consolidation equal to 1 percent of GDP typically reduces real GDP by about 0.5 percent after two years”. Does the IMF left hand talk to its right hand?
Sadly for journalists, the answer is “yes”. Both IMF documents hype-up their conclusions to give the appearance of deep contradiction. They are, in fact, consistent.
How so? Read more
Chris has an excellent post about optimists and pessimists on the UK economy and how you tell the difference.
As Chris puts it:
The Treasury, the IMF, the Office for Budget Responsibility and most in the Bank of England are the pessimists. They believe one of the two following possibilities: either that lots of capacity was lost permanently in the recession, or that the economy was fundamentally unsustainable before the downturn, as shown in this graph. I understand the IMF’s latest estimate is that the output gap is only 3 per cent.
The reporting of the International Monetary Fund’s assessment of the British economy and the important speech by Adam Posen has given the impression that the Fund is optimistic about UK prospects while Mr Posen is pessimistic. That is the inevitable consequence of news reports focus on downside risks to policy (the IMF gushed while Posen fretted). In fact, the reverse is true.
The argument, once again, hinges on the assessment of the UK’s potential for growth.
- The Treasury, the IMF, the Office for Budget Responsibility and most in the Bank of England are the pessimists. They believe one of the two following possibilities: either that lots of capacity was lost permanently in the recession, or that the economy was fundamentally unsustainable before the downturn, as shown in this graph. I understand the IMF’s latest estimate is that the output gap is only 3 per cent.
- Mr Posen and Ed Balls, shadow schools secretary, are optimistic. They believe that output is fundamentally below potential and significant spare capacity exists, at least for now. That means growth can and should be higher.
What follows from this distinction?
Everything. In monetary policy, Read more
The IMF tends to be a bit sniffy about countries’ economic policies in its annual report on countries’ economies. That often helps finance ministries in domestic political battles to do the right thing.
But with the new government adopting Fund-friendly fiscal policy, the Bank of England insisting it is ready to act either way on monetary policy and a strengthening of financial policies on the way, the Fund has been reduced to a schoolkid’s crush in its latest assessment of the UK economy. I understand from the Treasury that the chancellor is pleased.
Here are some highlights. On the immediate economic outlook:
“This progressive strengthening of private and external demand should underpin a moderate-paced recovery, even as the public sector retrenches.”
Even though the IMF said Read more
On this blog, I have repeatedly noted with dismay how badly Britain is afflicted by structural deficits disease – the mistaken belief that you can measure the underlying budget deficit.
Various economists have sympathised with my campaign, but argued that governments need to set fiscal policy and to do so ministers need an estimate of the ‘size of the hole in the public finances’ or ‘the deficit which would remain once the economy got back to normal’.
Some Treasury officials have said that without a target path for the structural deficit, it would be impossible to follow a consolidation plan and have room for automatic stabilisers to work in the event that the economy is derailed.
Apart from the many other problems I have noted with these arguments, a new drawback of the Treasury’s position occurred to me this week. It is that the Treasury’s June Emergency Budget does not give one estimate of the hole in the public finances, but three. And they are not consistent. Take your pick, the hole is either £116bn, £128bn or £160bn. Read more
No surprise. It’s Robert Chote for the OBR. Subject to confirmation by the Treasury Select Committee, he will start as office for Budget Responsibility chair almost immediately.
Obviously on the agenda will be hiring the two other members of the Budget Responsibility Committee, setting up the OBR in new premises, negotiating its budget with the Treasury, recruiting staff and producing the autumn economic forecast towards the end of the year.
The new OBR chair has to restore confidence in the institution by demonstrating immediate independence from government. This must be a primary task of his confirmation hearing at the Treasury Select Committee next week.
The chancellor has certainly removed most doubts about the independence of the selection with the choice of Mr Chote, who has led the Institute for Fiscal Studies for the past eight years. The organisation has independence in its DNA and following criticism of Labour’s fiscal tricks, it recently demolished the Conservative’s silly claim to have delivered a progressive Budget.
But authority is more difficult. Read more
There were some very good presentations at the Monetary Policy Forum, organised by Fathom Consulting this morning, all of which highlighted what a difficult job the Bank of England’s Monetary Policy Committee has at the moment. Cogent arguments can be made both for loosening and tightening monetary policy.
Charles Goodhart, former Bank chief economist, MPC member and general guru, said that were he on the MPC now, he would wish he could do a Rip Van Winkle, go to sleep until 2012, and wake up once some of the uncertainty over the recovery is removed. Why? “Because the next year and a bit will be fairly horrific”.
The reason things look so difficult for monetary policy is that the outlook for the inflation-growth trade-off has worsened. When Fathom plug the latest data through their replica of the Bank of England’s main economic model they first find that the Bank seems to be seriously over-optimistic on growth as their chart shows.
Now, neither Fathom nor anyone else can accurately replicate the MPC forecasts because the published versions rest on judgments by the Committee members as much as the model’s outputs. But the argument put forward Read more