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.
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.
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.
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”.
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.
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.
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.
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.
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