Poorcasts. We all know about the Office for Budget Responsibility’s failure at forecasting the economic squalls of the last Parliament – but, for those who want a reminder of the specifics, I’ve produced the graph above. It shows the growth forecasts made for each year between 2010 and now, and how far they diverted from the actual outcome. So, to take a particularly unflattering example: at the time of the June Budget in 2010, the OBR reckoned that the economy would grow by 2.8 per cent in 2012. It actually grew by 0.7 per cent.
Because the OBR has to. With that track record, why does the OBR bother making growth forecasts in the first place, particularly when there are plenty of others to go around? The answer is simply that it has to. In order to deliver the fiscal forecasts that are expected of them – most notably, for the government’s levels of borrowing – they need to have their own sense of the wider economy. The one depends on the other. This, of course, explains why the OBR’s early borrowing forecasts were so wrong too. They overestimated the strength of the economy, which meant that they overestimated the scale of the Exchequer’s tax revenues, which meant that they overestimated the pace of deficit reduction. Expectations were dashed.
Self-awareness. This is something that the OBR is acutely aware of. In a revealing appearance before the Treasury Select Committee in 2012 – written up by my former colleague Jonathan Jones – the organisation’s boss quipped, “we’ve done quite a good job at demonstrating the limitations of economic forecasting.” His wider point was that we shouldn’t privilege the OBR’s economic forecasts above anyone else’s. Uncertainty is part of the package. This attitude is certainly reflected in the Economic and Fiscal Outlook documents that are released alongside Budgets. They increasingly emphasise their own limitations.
What actually matters. This ought to be remembered when the latest Economic and Fiscal Outlook is published tomorrow, in a way that it wasn’t during the last Parliament. Commentators, including myself, were too quick to treat the OBR’s original forecasts as a “ha, ha, gotcha!” joke at Osborne’s expense. (Even if the Chancellor didn’t exactly help himself by basing his entire fiscal plan on those forecasts.) What matters more is whether enough (or too much) is being done to reduce the deficit; less how it all compares to the dim predictions of five years ago.
The moving baseline. But even if we persist in judging Osborne by the OBR’s old forecasts, there’s reason to suspect that those of 2010 will soon be irrelevant. Not only is this new Parliament a sort of clean slate in itself, but the 2010 Budget didn’t include any forecasts for the years we are entering now. The Autumn Statement of 2011 was the first to make a growth prediction for 2016. The Autumn Statement of 2012 has the first for 2017… and so on. As time moves forward, so does the baseline.