Doom-mongers Sunak and Hunt should be wary of faulty economic forecasts

Britain's Prime Minister Rishi Sunak, centre, alongside Britain's Chancellor of the Exchequer Jeremy Hunt, centre right, at Number 10 Downing Street. AFP

Either this is a classic public relations exercise or the UK really is in for something horrible come this week’s budget.

If it’s the former, even by the standards of PR, the “two chancellors”, Rishi Sunak and Jeremy Hunt, appear to be indulging in major forewarning and softening up. The traditional move is to signal bad stuff to come, then when it’s announced the detail does not appear that harsh. Cue sighs of relief all round, even some smiles and the generation of positive headlines.

In less regulated times, the corporate spin doctor would suggest to the weekend media a figure for redundancies or branch closures, say. Then, on the Monday morning, when the official bulletin to the Stock Exchange dropped, the number would be less and the accompanying quotes not so doom-laden. Play your cards right and you could even get the shares to rise as a result.

Something similar might be occurring with Sunak and Hunt. The Prime Minister and former Chancellor and the current Chancellor have both gone out of their way to indicate that a tough period awaits, “difficult decisions” have been taken and Britain is facing a cavernous divide in its public finances.

So gloomy have been the predictions of what is to be unveiled, and the reasons for doing it, that you must suspect the chasm is huge. Indeed, they will look rather silly if it turns out not to be the case.

What’s troubling, however, is the total reliance on forecasting by the Office for Budget Responsibility or OBR. Such is the mythical status attached to this organisation and its calculations that we’re led to assume they must always be correct, when, in fact, they can often be wrong, and by a significant margin.

It was the absence of OBR back-up that did for Liz Truss and her Chancellor, Kwasi Kwarteng. The markets demanded the opinion of the OBR and there was none — they’d gone ahead without consulting the independent body. Now Sunak and Hunt are working closely with the OBR, co-operating fully with their unelected number-crunchers, bringing them into the government’s thinking.

But it’s possible to go back, to revisit and to compare OBR forecasts with what really happened — and they don’t make for pretty reading. The average size of an OBR forecast error concerning the budget deficit for a “current year” is 0.5 per cent of GDP, 1 per cent of GDP for “one year ahead” and 1.8 per cent of GDP for “two years ahead”.

In terms of the present GDP, that would be equivalent to £11bn, £21.5bn and £38.6bn, respectively. In other words, huge numbers — and significant too, when there is talk of a £50bn black hole in the public finances.

These are averages, don’t forget. Since the OBR’s creation in 2010, in three out of 23 cases the in-year forecast error was 0.75 per cent or larger, of GDP. In seven out of 21 cases the one year ahead forecast error was more than 0.75 per cent of GDP.

And in eight out of 20 cases, the two years ahead forecast error was more than 0.75 per cent of GDP. Even taking out the two worst forecasts owing to the unexpected downturn caused by the sudden arrival of a pandemic, that would leave six of 18 — one third — of the two years ahead forecasts over the last decade out by more than 0.75 per cent of GDP.

Small wonder that the economist, Dr Gerard Lyons, says: “We should be mindful of using such forecasts to force through austerity or tax hikes.”

Sunak and Hunt, therefore, find themselves applying measures that may plunge the country into recession, based on the conclusions of an arbiter which is itself frequently mistaken.

They are entitled to reflect ruefully that it wasn’t meant to be like this: the OBR was established by George Osborne, when he became Chancellor, to bring some credence to official forecasting, which for years had been subjected to manipulation by a Labour administration and its long-time financial controller, Gordon Brown.

The problem, though, is that in terms of status and reputation the OBR has become too successful and mighty

Osborne’s motives were honourable, although there was also political trickery at play on his part. The OBR and its objectivity gave him the authority he needed to not only drive though spending cuts but also conform to the Tory ideal of reducing the size of the state. And, come the election, it was a counter to Labour and their spending plans — the Tories were able to repeatedly call for Labour’s intentions to be authenticated by the OBR.

The problem, though, is that in terms of status and reputation the OBR has become too successful and mighty. Its rise coincided with a downturn among the public in their regard for politicians — almost as if a policy was not a policy until it received the OBR’s nod.

It wasn’t just the media and British people who grabbed at the notion of a politically neutral watchdog (the OBR’s growing importance came as its chief was Sir Robert Chote, himself a former journalist and press-smart). The international markets, too, came to want and to rely upon the word of the OBR.

So vital has the office become that it’s a moot point as to who is even running the country’s funding. If the OBR decrees taxes must rise and spending must reduce to keep government borrowing under check, then that is what must occur — to go against the finding or to not involve the OBR at all, which is what Truss and Kwarteng did, risks disaster.

Sunak and Hunt will present the budget as theirs, but in fact it’s the OBR that is dictating the contents. That would be fine if it was always right, but sadly and critically as far as this week’s budget and its likely tough steps are concerned, it’s not.