Can we trust the Autumn Statement?
The Autumn budget is one of two scheduled statements the Chancellor gives each year to inform the public about tax and spend plans and provide the latest growth forecasts. These budget statements are useful not only for the public, but also for investors in our debt, rating agencies and global businesses. Hence they are a big deal, and it is important that they are accurate.
However, the latest statement delivered by George Osborne didn’t quite ring true. Let’s look at growth forecasts first. The Office for Budget Responsibility (OBR), who creates this forecast, revised down 2012 GDP for the second time to -0.1% from the original forecast of 0.8%. So rather than grow at a modest, but positive, rate the economy is now expected to contract this year. If you invested in the UK partly based on this data, you could be forgiven for being rather cheesed off that your investment had yet to bear fruit.
Looking at its historical forecasts, the OBR’s record at accuracy is fairly patchy. Back in November 2011 the OBR expected the headline measure of GDP to “remain broadly flat until the second half” of 2012. In contrast the economy shrank 0.3% in Q1 and a further 0.4% in Q2. The OBR also expected the economy to fire up in 2013 and grow by 2.1% back in 2011; however, its latest forecast has been slashed in half to a sluggish 1% for next year.
These significant revisions lead to a couple of conclusions: 1) the OBR either has a dodgy forecasting model or 2) it is relying on a hope and a prayer that the economy will perform as well as it expects. The financial markets barely reacted to the budget statement when it was released on December 5th; after all, there is a good chance that these growth forecasts will be revised so their usefulness is limited.
It’s not only GDP that is worrying. The government has pledged its credibility on bringing public sector spending into a more sustainable path and reducing our huge budget deficit. This was Osborne and Cameron’s election pledge and it is one of the reasons that people voted for them. However, in the ten quarters that the coalition has been in power, government spending has only fallen twice. This suggests that far from austerity Britain, the government’s coffers remain open.
The most dubious claim by the Chancellor in this statement was that public sector spending would fall by 1% next year and 2% in 2014. The fact he is back-loading spending cuts is strange, especially when he plans to double the amount of cuts a year before the next general election. You don’t need to be a spin doctor to know that public sector spending cuts are an unlikely election winner. Presuming that the Conservatives want to stay in power, this suggests these spending cuts may also end up being “revised” sometime in the future.
To be fair to the Chancellor, he may be hoping that growth will strengthen, pushing up tax receipts so that the spending cuts won’t be necessary. However, the growth picture is not pretty and the forecasts included in the Autumn Statement still seem a little disingenuous.
The trouble with forecasts is that they are malleable. If a forecaster gets something wrong they haven’t lied, they just made a mistake. But when the UK’s economy remains in such a precarious state, the public needs to hope that the latest forecasts from the OBR and the Treasury are more on the button.
Image — Britain’s Chancellor of the Exchequer George Osborne delivers his autumn budget in parliament in London December 5, 2012. REUTERS/UK Parliament