Ben Chu: The impossible job of an economic forecaster
"I don't know why you're laughing, it's a serious matter," snapped the Conservative MP David Ruffley at Robert Chote in yesterday's Treasury Select Committee hearing. But the chairman of the Office for Budget Responsibility would be advised to retain his sunny disposition because there is unlikely to be much for the Government's official fiscal watchdog-cum-economic forecaster to smile about over the next 12 months.
Last week the OBR downgraded its growth forecasts for the fourth time since it was established in June 2010. And even the present OBR growth forecast – for an 0.7 per cent expansion of GDP in 2012 – is based on the assumption that Europe's leaders will "struggle through" the present crisis and stabilise the continent's panicking bond markets. Despite the Franco-German agreement on EU treaty change this week, that still looks like an optimistic assumption. More growth downgrades from the OBR next year could fatally undermine its reputation as a forecaster.
But the real nightmare for the OBR lies not in growth forecasts, but in estimates of the "output gap". This is calculation that economists make to work out the size of the "structural deficit", or the proportion of national borrowing that will not disappear naturally when the economy picks up and tax revenues return to normal. If the output gap is large, the structural deficit is small. And if the output gap is small, the structural deficit is large.
The most significant news from last week was the OBR's downgrade of its estimate of the UK output gap. Because George Osborne has given himself a "fiscal mandate" to eliminate the structural deficit over five years, the Chancellor was compelled to pencil in still more spending cuts in order to meet his mandate. The OBR's output gap estimate led directly to a pledge for more austerity. And output gap estimates tend to be even more dodgy than growth forecasts.
The economist Roger Bootle suggested to the Treasury Select Committee on Monday that the Chancellor might dispense with the services of the OBR if the forecaster rules next year that the structural deficit has risen again and that still more fiscal tightening is needed. That would certainly be grotesquely unfair on Mr Chote and his OBR colleagues.
The fiscal mandate, with its strict five-year horizon and specific preoccupation with the structural deficit, was chosen by the Government, not the OBR. Mr Chote is merely doing what he was asked to do by Mr Osborne in making economic forecasts. And forecasts are inherently likely to be wrong because the future is so uncertain.
So Mr Chote should keep laughing: it's either that or tears.
Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Weather bomb in pictures: Storms cuts power for tens of thousands – and snow is on the way
Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
Russell Brand was rendered speechless on Question Time by this man
Fury at Airbus after it hints the super-jumbo may be mothballed
Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
Shock poll shows voters believe Ukip is to the left of the Tories
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
New era of cheap oil 'will destroy green revolution'
Ukip founder Alan Sked and Nigel Farage 'begged Enoch Powell to stand as a candidate'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
iJobs Money & Business
£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...
£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...
$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager In...
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...