The Two Armed Economist Strikes – 1st Office for Budget Responsibility Report

It was US President Harry Truman who reportedly said that he was fed-up with economists who told him “one the one hand Mr President…”, followed by “but on the other hand….”. Truman said he wanted a one-armed economist.

My guess is that Conservative Chancellor George Osborne, and his Lib Dem side-kick Danny Alexander, won’t be too unhappy that they seem to have a two-armed economist at the Office for Budget Responsibility (OBR). It’s first report is so full of ‘one the one hand, but on the other’ that far from tying the Chancellor’s options down, a the OBR was supposedly meant to to do, it leaves huge scope for him to pick what he likes about the report and ignore the bits he doesn’t.

So, on the deficit: on the one hand the budget deficit and accumulated debt won’t be as bad by 2014-15 as Labour forecast back in March, but on the other hand the ‘structural’ component (the cyclically adjusted difference between income and expenditure) is marginally worse. Expect Osborne and Alexander to emphasise the latter and ignore the former and go on claiming “it’s worse than we thought” when it clearly isn’t.

Also, on the one hand the reduction in the deficit by more than half by 2014-15 is based on Labour’s spending plans from March and not, on other hand, whatever the Coalitioners are cooking up for the 22nd June “emergency” budget. Again, don’t expect them to say ‘ah well, Labour’s plans were about right then and we’ll go with them’ – no, we’ll be told bigger, deeper and faster cuts are needed (and maybe some tax [VAT] rises).

As to the credibility of the OBR projections – well, who knows? They have been very transparent about how they’ve done it – which seems to boil down to the same as the way the Treasury does it with just some minor tweaks to the assumptions. There’s no evidence of some great methodological or technical innovation in their approach, some some slightly different judgements. It is hard to see why this deserves any greater credibility than the work of the IFS, or NIESR, or ITEM club? Or the Treasury for that matter.

And when it comes to credibility a fundamental problem for all forecasters is just how unstable the global economic outlook is at the moment. In order to make forecasts about economic growth they have had to make assumptions (0r rather borrow Treasury assumptions) about interest rates, equity prices, exchange rates, oil prices, credit conditions, etc etc for nearly 5 years in advance. If I knew what the oil price was going to be in 5 years time I’d be a rich man by then. Even in normal, relatively stable, times these projections are at best well-educated guesses – in the current state of the world economy they aren’t much more than tea-leaf gazing.

And finally, these must be the shortest shelf-life predictions on record – they have all been made without any knowledge about what the ‘Emergency Budget’ on 22nd june will bring, including changes to overall public spending plans up to 2014-15. So after the 22nd these projections will all have to be revised. Still, it’ll keep Whitehall’s latest quango busy I suppose.

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