Monday 14 June 2010

OBR: The Truth hurts...a little

Well, today is the day the Government has been looking forward too only slightly less than the budget. The new Office for Budgetary Responsibility has published its report. A nice piece of pointing the shotgun at your own feet and pulling the trigger.

Well, first up the OBR is copying the Bank of England in using fan charts. This is a way of making it seem that your predictions are never wrong. Two lines with a nice spread in between. The BOE use this to show inflation is within their guidelines when plainly they have been wrong for some months; now the OBR joins in this charade. They would be useless company down the bookie.

However, the central prediction (page 13) is that the economy is likely only to grow at around 2.8% for the next 3 years. Below Alistair Darling's heroic 3% growth forecasts, but I say politically so. Not enough to really dent the public finances and yet a little to show Labour were wrong - a perfect political fudge. However, not much approaching the truth there and an ignorance of the fact that with GDP growth below inflation there seems to be a continuing diminution of the Country's wealth in real terms for the whole Parliament.

Page 16 has an output gap too, I am yet to understand what this is. Many people have tried to explain it too me, but in reality it is a bogus economic concept. There is not real way of knowing if there is slack int he economy or not. The inflation rate and money supply creation rate will give you the answer eventually.

The final page says it all, Government spending is to fall considerably, whilst Private Investment takes up the slack to produce good GDP growth, along with house prices and exports. Quite a bet, better than pouring more Government money in forever, but somehow this set of predictions does not sit well with the world we live in.


Old BE said...

Cash growth of 2.8% or real growth? Surely as a new institution the OBR should be producing conservative estimates rather than "oh yeah the economy is going to start booming tomorrow" ones?

The government would surely do well to act cautiously and also take into account properly independent forecasts, say from City analysts?

HMG now needs a period where the public finances come in better than expected rather than worse than hoped for.

roym said...

how much credence should one give to the OBR? after all isnt the BoE supposed to be independent as well? no one believes them much!
also, now that these jobs have been hived off from the treasury, will there be half a dozen mandarins joining the JSA queues?

Budgie said...

Oh dear. I know you were a Tory supporter at the election, CU, but this all looks like politics as usual.

What have we got so far?
- 5 year parliaments which reduces our voting frequency;
- 55% to over-ride the 5 year parliament which will evolve to 55% to defeat a government (and what will the next government call for - 60%?);
- attempts to nobble the 1922 Committee;
- economic figure fiddling (as you say above);
- being suckered in to more Afghan war;
- scrapping the restoration of powers from the EU (after scrapping the Lisbon referendum promise);
- refusal to look at leaving the EU even though this would wipe out more than half our deficit (remember the Tories who said vote Cameron he is the only realistic eurosceptic?);
- Spelman's GM magic foregone conclusion;
- Huhne's government-knows-best fantastical windmills fetish is similar to how old Benn was transfixed by Brtish Leyland.

The Tories/LibDems are not a sufficient change from the old Labour ways, and we will suffer as a result. Only the truth and not old politics will work.

CityUnslicker said...

BE - Sadly the City Economists don't have a great track record either on GDP - they are often too pessimistic. it is not called the dismal science for nothing.

ROYM - well, today's announcement proves your point. I think long term this is a good thing though. No more Labour government's going mad (of course they will scrap this when they next get in).

Budgie - Not sure you are right on Afghanisatan - the plan is to leave quick sharp. Re the old politics, you are quite right, but with an LD coalition many of the guns are spiked. re the 55% this is all flam, don't fall for The Line. Who wants a Government that can fall at any moment - no one, certainly not the voters 1/3rd of whom think coming out once every 5 years is too much of an effort.

by ommission you will note I agree with most of your points.

Andrew B said...

I like fan charts because they are vague and portray the inaccuracy of the prediction.

Basically no-one can predict the future reliably and accurately.

After all, if they made a prediction and turned out to be right, we would ask why they did not do exactly
what was needed to solve the problem and no more.

The tory/libs out there are basically fine-tuning the parameters of the real economy using the BOE model that is at best a good geuss.

Every government is using roughly the same underlying assumptions. They are all doing roughly the same things

Our mistake is to assume that

(i) they really know what they are doing better than the last lot

(ii) they have radically different solutions

(ii) something different and better will happen as a result of a different group in charge

It strikes me that the difference between the bankers and the government is that the bankers cannot get voted out (unless you hold shares).

Budgie said...

CU said: ".. certainly not the voters 1/3rd of whom think coming out once every 5 years is too much of an effort."

My experience canvassing is that the majority who do not vote are not apathetic, but angry.

AndrewB said: "Our mistake is to assume that they really know what they are doing better than the last lot."

Well, the 'last lot' ie Labour, thought that getting into debt was a good idea. Fortunately 'this lot' don't.

AndrewB said: "It strikes me that the difference between the bankers and the government is that the bankers cannot get voted out .."

No, the difference is that when bankers break the law they are sacked or go to prison, where politicians get away scot-free. Compare G. Brown who destroyed immensely more value than ever F. Goodwin did.

Btw is there some arcane socialist rule that says Labour sycophants have to be called BoysnameB?

Nick Drew said...

@ AndrewB
Basically no-one can predict the future reliably and accurately

spot on

"the only function of economic forecasting is to make astrology look respectable" (J.K.Galbraith)

"forecasting is not a respectable human activity and not worthwhile beyond the shortest of periods" (Peter Drucker)

"... the price of copper and the rate of interest years hence ... about these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know!" (Keynes)

CityReactionary said...

Yes, predicting the future is tough:

"An end to boom and bust" - G. Brown

Andrew B said...


Well, getting more into debt might be the right thing to do now (no, I do not really think this) - the thing is that you don't really know or find out for a number of years.
We bought stuff (I am not sure what) with the borrowed money. The question is
(i) will that investment gain us more than it cost
(ii) could you make better use of the money somewhere else

I suspect

(i) no
(ii) yes

But but do not know for sure, and am happy to be wrong as that was my money they spent.