No-one predicted that the UK economy would storm ahead quite so much in the second quarter. Initial estimates from the Office for National Statistics suggest the economy grew by 1.1 per cent between April and June compared with the previous quarter – far above the already pretty strong consensus of 0.6 per cent. The surprise came because services was measured to have stormed ahead in May, by 1 per cent.
There is no doubt that this is above-trend growth and it helps to explain the favourable tax revenue, labour market and survey data that have been a feature of the British economy for some time. Construction, business services, finance and government services were the biggest contributors to this growth rate. While government services cannot continue to contribute 0.2 percentage points to growth in future quarters, given the looming cuts, there is no reason to say other sectors will automatically fall back.
For the authorities, this unexpected good news really puts the cat among the pigeons. For the Bank of England, this is evidence the recovery is gathering steam and ultra-loose monetary policy is working. It also helps to explain a little why inflation has been overshooting. It will certainly make it much easier for the Monetary Policy Committee to argue that there is no need to loosen monetary policy in response to the tough Budget. And it will raise expectations of higher interest rates again, if this remarkable quarter of growth continues. Read more
Sir Alan Budd, interim chairman of the Office for Budget Responsibility, was on the money this morning in highlighting what a difficult job his successor faces. He said:
“No one in their right mind would take on a job in which your success is judged by your success in fiscal forecasts”.
The OBR is not alone in this plight. Members of the Monetary Policy Committee take interest rate decisions which are predicated on the Bank of England’s forecasts. But in having a decision as well as a forecast, the MPC is always able to claim that it took the right decision based on the information available at the time, which takes the focus away from its often poor forecasts.
So much for the communication surrounding errors. The origination of forecast errors is more important. And the OBR’s greater, though far from perfect, transparency shows that its Budget forecast hinges on very thin and quite weird stuff. Read more
Top brass in the OECD will be meeting with George Osborne and others tomorrow, to lay out a roadmap to “new growth” in the UK economy.
In United Kingdom: Policies for Sustainable Recovery, recommendations range from regulation to education, and from workers’ health to the green economy. The report recommends continued fiscal consolidation, while protecting areas such as R&D. Choice excerpts from the recommendations include: Read more
It’s been a bad two weeks for the Office for Budget Responsibility and today was the day Sir Alan wanted to repair some of the self-inflicted damage.
Although there was no apology given for tweaking the assumptions underlying the forecasts in the week before the Budget, nor for releasing the OBR’s forecasts for public sector jobs less than an hour before prime minister’s questions, Sir Alan did regret the consequences of his actions and any naivety on the OBR’s part.
The most important action of the OBR today is not in the public theatre of the OBR’s discomfort in front of the Treasury Select Committee, but in the release of the changed assumptions made shortly before the Budget and revealed by the FT. As shown below Read more
As a frame of reference, here are my broad brush predictions for the Budget later today. Some things I am pretty sure about, some I am certain about because they’ve been briefed and others are guesses, hopefully educated guesses.
- Fiscal mandate. George Osborne will commit the new government to eliminate the current structural deficit by the end of the Parliament (2014-15). He will also commit to the burden of public sector debt falling year-on-year by the same point.
- Growth. The Office for Budget Responsibility will cut the growth forecasts it released last week for 2011 and 2012 but raise them later in the Parliament, leaving the level of output in 2014-15 very close to that in last week’s announcement. The assumed medium-term Keynesian multiplier will be zero or negative.
- Public finances. Britain’s deficit will be scheduled to fall below 3 per cent of GDP in 2014-15 and will be close in 2013-14.
- Fiscal consolidation. There are
This morning the Financial Times is running quite a few Budget stories. My favorites are the pieces about the regional effect of spending cuts, which we have simulated (click on the beautiful maps). These show very simply that whether public spending is cut from social security or from government consumption, it will hit growth harder in the North than South and harder in poorer than in richer areas.
George Osborne’s constituency of Tatton in Cheshire suffers the least of any region on one of the comparisons. The chancellor will like that. Others might take a different view.
Some may say that is a description of the bleeding obvious since everyone know that public spending tends to follow need. Of course it is also not a dynamic model, just some very simple calculations, but they are important in showing the first-round effect of cuts. I have not seen anyone else doing this sort of thing. It might even make Nick Clegg, deputy prime minster, stop and pause before describing spending cuts as fair and progressive. The cuts might well be necessary, Read more
The Office for Budget Responsibility has just declared that the UK is not Greece. There are no skeletons in the cupboard. Public borrowing is expected to be rather lower than Alistair Darling forecast in his March Budget because tax revenues have been stronger. The only fiddling apparent in a first look at the forecasts is that the (notoriously uncertain) forecasts for the output gap and trend growth are more modest than the previous government assumed.
Also apparent is that short-term issues affecting revenues are much more important for the public finances than longer-term issues, such as the assumption for trend growth (revised down heavily) and for near-term growth (also revised down).
There is not a good analysis of why the forecasts have changed from the Budget forecasts. Sir Alan Budd said this was because the OBR started from scratch rather than changing all of the assumptions.
But what is most disappointing is that the OBR has completely fudged the issue of fiscal multipliers. “It’s all too complicated,” is the message and Read more