The Great Debate UK
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.