OBR

Chris Giles

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

Chris Giles

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

Chris Giles

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

Chris Giles

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

Robin Harding

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.

 Read more

Chris Giles

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

Chris Giles

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

Chris Giles

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

Chris Giles

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

Chris Giles

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