MPs urge shake-up in Treasury forecasting

The treasury should overhaul its key economic forecasts to restore its reputation after Gordon Brown was forced to downgrade over-optimistic estimates about the performance of the British economy, a powerful committee of MPs said yesterday.

The Commons Treasury Select Committee expressed concern that Mr Brown's forecasts for 2004 were "more optimistic" than those produced by independent analysts.

MPs on the Labour-dominated committee, warned that lower-than expected growth will hit predictions for tax revenue, a conclusion which raises the prospect of a "black-hole" in the public finances.

The committee's report on April's Budget comes after intense criticism of Mr Brown over Treasury forecasts.

The report said: "We recommend that the Treasury should consider commissioning a technical review of its forecasting procedures to reinforce its reputation in the area of economic forecasting, as has usefully been done by the Bank of England."

It said: "The Treasury's forecasts for 2004 are notably more optimistic than those of a wide range of other forecasting bodies. It is important to maintain the credibility of the economic assessment underpinning Treasury forecasts for the public finances."

The committee said it recognised that the Chancellor's 9 April Budget took place during the Iraq war, adding uncertainty to the forecasts for the rest of the year, but expressed concern at Mr Brown's forecasts for a strong recovery in corporation tax revenues, arguing that such a prediction suggested a "far sharper recovery in corporate profitability than is currently envisaged by independent forecasters".

"To be fulfilled, the Treasury's forecasts require not just a sharp rebound in overall economic activity but also a rapid recovery in the prosperity of the City of London. At a time of significant structural change in financial markets and the financial services industry, there is a risk that profitability and tax revenues will not recover as rapidly as the Treasury suggests," the committee said.

MPs also expressed concern at increasing deficits in corporate pension funds, warning they "may pose a threat to recovery".

The report drew immediate attacks from Opposition MPs. Michael Howard, the Shadow Chancellor, said: "The conclusions of the Labour-dominated Treasury Select Committee are damning.

"Already Gordon Brown has twice had to downgrade his forecasts after being less cautious than independent experts. On both occasions he thought he knew better than them, and he was wrong. Now even his own colleagues are raising questions. It would be deeply embarrassing for the Chancellor to have to downgrade his forecasts yet again."

Norman Lamb, a Liberal Democrat member of the Treasury Committee, said: "There is an overwhelming case for an independent review of Treasury forecasting. The Chancellor's latest Budget was greeted with widespread scepticism, especially the forecasting measures."

But the Treasury defended their forecasting. "The Treasury's forecasts are central forecasts based on a rigorous assessment of prospects and risks. Strong economic fundamentals mean that the UK is well-placed to respond positively as the global recovery gathers pace," it said.

The report also condemned the Inland Revenue for the crisis over Tax Credits, declaring it "simply unacceptable" that some families who applied before the January deadline did not receive payments on time.