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
With all the furore over the OBR’s tweaked Budget forecasts, scrutiny of the Bank of England’s fallible forecasts has been more limited than usual. So David (Danny) Blanchflower, former Monetary Policy Committee member and scourge of Mervyn King, Bank governor, has just tried to redress the balance.
Writing for Bloomberg Businessweek today, he says, “it is time to reveal a dirty little insider’s secret”.
“During my time on the Bank of England’s Monetary Policy Committee, which makes quarterly economic prognoses, Governor Mervyn King controlled the hiring and firing of the forecast team, who did his bidding. They had to produce a result that was consistent with King’s views, or else they would be history. A patchwork of arbitrary fixes and prejudices frequently drive forecasts, which for the uninitiated are hard to see.
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
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