Chancellor Gordon Brown leaked the announcement that he was downgrading his forecasts for UK economic growth to coincide with Hurricane Rita and on a Saturday, when the financial markets were closed, in the hope that he could get away with the minimum of adverse publicity. And even now he refuses to accept responsibility for the forecasting failure, attempting to blame the world oil market.
While it is certainly true that high oil prices are likely to mean a weak economy in 2006, the current year’s consumer spending slowdown started just after Christmas and ought to have been staring the Chancellor in the face when he made his forecasts for the March Budget.
Opposition commentators have rushed in to blame him for the slowdown. That is surely unfair. But what he can realistically be blamed for is his failure to forecast that it would happen at a time when none of the 39 independent forecasters monitored by the Treasury predicted growth as high as the centre of the Chancellor’s forecast range, and only three predicted economic growth even as high as the cautious end of his range.
It is true that in recent years Brown’s forecasts for GDP growth have sometimes been right when independent forecasters have been more cautious. But even then, there have been doubts about the statistical revisions that have apparently backed up his forecasts retrospectively. The economic upswing has been well past its sell-by date for some time, and only unsustainable bursts of consumer and government borrowing have allowed it to run on for longer than might reasonably have been predicted.
And in any case the Chancellor’s forecasts for government borrowing, which are hard cash and a lot less easy to fiddle, have proved hugely inaccurate. This is much more important. A Chancellor’s GDP forecast is interesting intellectually but irrelevant – it is the Bank of England’s MPC who deal with the interest rate decisions that influence fluctuations in GDP.
The Chancellor’s job is essentially about taxes and spending. The Chancellor has been turning in woefully overoptimistic forecasts for borrowing on a regular basis every year since 2001. This will be the fifth consecutive year of overoptimistic fiscal forecasts.
Compared with his forecasts for the 2001 Budget, the Chancellor will have borrowed £138 billion more than he had expected by the end of this financial year. He has got away with this because the pensions crisis has forced pension funds to invest heavily in the gilts market, and so there has been an unusually strong market for government paper. This is not the first time the pensions crisis has worked in the government’s favour. It has also enabled the consequences of the slowdown in productivity to be offset by a huge expansion in the number of older people forced to work.
The reason why the Chancellor has got his forecasts wrong has been over-optimism. He has failed to realise that the last five years of economic expansion have been due not to his own skill, but to an unusual combination of lucky circumstances.
The rise of China benefited consumers with cheap manufactured goods before the same factor started to push up oil and commodity prices. The government was able to get away with more spending than it had predicted because of the state of the gilts market, and because the spending boom started from the base of Norman Lamont and Kenneth Clarke’s work in bringing public expenditure under control.
The benefits of the Thatcherite reforms were still coming through in the late 1990s. The worldwide trend to low interest rates helped bring down mortgage rates, causing a consumer boom as people borrowed against their houses. And low interest rates worldwide have allowed UK rates to maintain a premium over rates elsewhere, a factor which has helped keep sterling strong.
But the underlying growth trend in the economy has been much slower than the Chancellor has expected. His over-optimism here has caused him to spend much more than the economy can afford in the longer run. He has only two choices – cut spending growth or raise taxes. If the latter, watch out for a mix of stealth taxes that will be the equivalent of 3p on income tax.
By Douglas McWilliams, chief executive at the Centre for Economics and Business Researc