Leading article: The dangers of economic forecasts

Share
Related Topics

The report from the new Office for Budget Responsibility (OBR) is a double-edged sword for the coalition Government. Sir Alan Budd and his team have lowered the official borrowing forecasts for the next year (from 11.1 per cent of output to 10.5 per cent) because tax revenues are coming in somewhat above expectations. But the OBR has also downgraded medium-term annual growth forecasts (from 3.25 per cent to 2.6 per cent) and issued a higher estimate of the size of the structural deficit (up from 7.3 per cent of output to 8 per cent).

The lower borrowing forecast contradicts David Cameron's hysterical assertion last week that things are "even worse than we thought" in the public finances. To that extent the former Chancellor, Alistair Darling, is indeed owed an apology. But the lower growth forecasts and the increase in the size of the structural deficit make the case for slightly more extensive retrenchment since they imply that less revenue will return automatically. The fiscal gap that needs to be closed by spending cuts and tax rises by 2015 according to the OBR is around £10bn more.

Yet how seriously should all this be taken? The OBR's growth forecasts are now closer to private sector consensus estimates (although still somewhat higher). That is probably a more sensible assumption for the Government to work on in formulating its financial plans. But it is important to remember that those private sector estimates themselves are highly uncertain. And no economist, not even the respected Sir Alan, can be entirely sure about the size of the structural deficit, a highly uncertain economic construct.

Britain is one of the most open economies in the world. And with most consumers still heavily indebted, our recovery will be highly dependent on our ability to increase our exports. The present problems in the eurozone – by far our biggest single trading partner – make any firm predictions about the path of UK growth highly unwise. The Prime Minister and the Chancellor, George Osborne, often imply that public sector borrowing is holding back private sector growth and that there will be an upsurge in domestic business confidence and investment when the fiscal retrenchment begins. But there is simply no evidence to support that view. Indeed, what little information we have points to the opposite. A new survey by the accountancy firm BDO shows that business confidence has fallen dramatically since the coalition Government announced £6.2bn of spending cuts this financial year.

These OBR estimates do not change the bigger picture for the Government. Public borrowing needs to come down in the coming years. The UK clearly cannot continue borrowing 11 per cent of our output for the indefinite future. And next week's Budget needs to lay out a clear and credible plan for reducing the deficit. The alternative is the risk of an investor run on British sovereign debt which would push up borrowing costs throughout the economy at the very worst possible time. The Deputy Prime Minister, Nick Clegg, was right to argue yesterday that there is nothing "progressive" about allowing public spending to run out of control.

But there needs to be an understanding by the Government that the pace of cutting must be based on the strength of the recovery. If output is more robust than predicted, more can, and should, be done sooner. But if it is weak, or if we experience a double-dip recession, there needs to be a contingency plan to boost demand. What Britain certainly does not need – and what the Chancellor must avoid in next week's Budget – is an approach to dealing with the deficit based on ideology or misplaced confidence in inherently fallible economic forecasts.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Female Support Workers / Carers - From £8.00 per hour

£8 - £12 per hour: Recruitment Genius: To assist a young family with the care ...

Recruitment Genius: Customer Service Executive

£20000 per annum: Recruitment Genius: A Customer Service Executive is required...

Argyll Scott International: Commercial Finance Manager

£55000 - £70000 per annum: Argyll Scott International: My client, a world lead...

Argyll Scott International: Commercial Finance Manager

Negotiable: Argyll Scott International: My client, a world leading services pr...

Day In a Page

Read Next
Police officers attempt to stop illegal migrants from jumping onto trucks headed for Britain in the northeastern French port of Calais on October 29, 2014  

Tighter security in Calais won’t solve the problem

Nigel Morris
 

Football needs its Martin Luther moment, and soon

Boyd Tonkin
US immigration: President Obama ready to press ahead with long-promised plan to overhaul 'broken system' - but will it get past a Republican-controlled Congress?

Immigration: Obama's final frontier

The President is ready to press ahead with the long-promised plan to overhaul America's 'broken system' - but will it get past a Republican-controlled Congress?
Bill Cosby rape allegations explained: Why are these allegations coming out now? Why didn’t these women come forward earlier? And why has nobody taken legal action?

Bill Cosby rape allegations explained

Why are these allegations coming out now? Why has nobody taken legal action? And what happens next for the man once thought of as 'America's Dad'
Four years of excruciating seizures caused by the 1cm tapeworm found burrowing through a man's brain

You know that headache you’ve got?

Four years of excruciating seizures caused by the 1cm tapeworm found burrowing through a man's brain
Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?

Scoot commute

Travelling to work by scooter is faster than walking and less sweaty than cycling, so why aren’t we all doing it?
Paul Robeson: The story of how an American icon was driven to death to be told in film

The Paul Robeson story

How an American icon was driven to death to be told in film
10 best satellite navigation systems

Never get lost again: 10 best satellite navigation systems

Keep your vehicle going in the right direction with a clever device
Paul Scholes column: England must learn to keep possession and dictate games before they are exposed by the likes of Germany and Brazil

Paul Scholes column

England must learn to keep possession and dictate games before they are exposed by the likes of Germany and Brazil
Michael Dawson: I’ll thank Spurs after we win says defender as he prepares to return with Hull

Michael Dawson: I’ll thank Spurs after we win

Hull defender faces his struggling former club on Sunday ready to show what they are missing. But he says he will always be grateful to Tottenham
Frank Warren column: Dr Wu has big plans for the professionals yet he should stick to the amateur game

Frank Warren column

Dr Wu has big plans for the professionals yet he should stick to the amateur game
Synagogue attack: Fear unites both sides of Jerusalem as minister warns restoring quiet could take 'months'

Terror unites Jerusalem after synagogue attack

Rising violence and increased police patrols have left residents of all faiths looking over their shoulders
Medecins sans Frontieres: The Ebola crisis has them in the headlines, but their work goes far beyond West Africa

'How do you carry on? You have to...'

The Ebola crisis has Medecins sans Frontieres in the headlines, but their work goes far beyond West Africa
Isis extends its deadly reach with suicide bombing in Kurdish capital

Isis extends its deadly reach with suicide bombing in Kurdish capital

Residents in what was Iraq’s safest city fear an increase in jihadist attacks, reports Patrick Cockburn
Underwater photography competition winners 2014 - in pictures

'Mysterious and inviting' shot of diver wins photography competition

Stunning image of cenote in Mexico takes top prize
Sir John Major: Negative West End portrayals of politicians put people off voting

Sir John Major hits out at theatres

Negative West End portrayals of politicians put people off voting
Kicking Barbie's butt: How the growth of 3D printing enabled me to make an army of custom-made figurines

Kicking Barbie's butt

How the growth of 3D printing enabled toy-designer to make an army of custom-made figurines