The Coalition has a forecasting mantra: there are two kinds of economic forecast, an unreliable Treasury one influenced by politicians , and an independent forecast produced by the Office for Budget Responsibility. We know which one we prefer, it is said. Now hold on. There are some misunderstandings here about forecasting and forecasts. First, economic forecasting is an art and not a science. The only difference that matters is which one comes closest to the truth and, as they say, ‘time alone will tell.’ Secondly, the Treasury team helping Sir Alan Budd is composed of the very same people involved in the making of the Treasury’s forecasts and uses the Treasury model. Alan Budd has made it very clear that he applies his own judgements to basically the same data. Thirdly, there is a consensus view in the making that Alan Budd’s conclusions are too optimistic, he is viewing the future though rose-tinted glasses. Pity him. In his original Budget forecast what was he to do? Was it psychologically possible to be anything other than be supportive to the Government? Imagine the difficulties for every one if he had cast serious doubt on the credibility of the Coalition deficit reduction programme. Fourthly, Alan Budd has an advantage over all other forecasters. He can come back to his forecast almost on whim (as he is doing) and tell us that he was right before but the circumstances have changed for the worse: for example, a Eurozone not growing at all, the slowing of world trade and the failure to create sufficient new job in the private sector. In this way he is always right without annoying his political masters. I think that Alan Budd looks a bit dubious about all this. Is he not too long in the tooth, too sensible, too honest to play these games? One thing is absolutely certain we shall all know how good the ‘Government determined’ forecasts turn out to be. It will be Sir Alan Budd’s duty to get nearer the truth and then to tell us all – what a shame it all turned out badly!
Monthly Archives: June 2010
This is a very business Government with a new policy, it would seem, every hour. There are two documents which govern their formation: the Conservative Manifesto and the Coalition agreement. You might think that these documents set out a programme for a full term, with a hope for five years, but at the current rate of consumption, the Government will have fullfilled its mandate by the autumn budget statement. Why the urgency? The thought crosses the mind that this is a programme for one or two years. The shorter period if you are a Tory and the latter if a Lib Dem. If the Coalition is ditched early both parties wish to be in a position to say, ‘Look at what we have achieved, just imagine what we could do given the time.’ The Lib Dems need to say, ‘ We promised you constitutional reform and we gave it to you. We were not responsible for all this pain, guv, we promise you.’ Watch the timing of the Constitutional Bill very closely – it is the best single guide to the date of the next General Election – oh, and, of course, the exchange rate for the Euro!
The sharp division in economic policy between the Budget deficit cutters and the optimisation of economic growth leaves many commentators on the sidelines. Economics is about the taking of risk and it is apparent to all commentators that there are grave risks on both sides of the argument. Is it a case of damned if you do or damned if you don’t? And is it possible to clear away the fog of confusion by posing and answering some questions. Yes, I shall attempt ten of the more obvious.
1. What would have happened to exchange markets and confidence in the British economy in general had there been no Coalition Budget? Nothing, nothing at all. Labour had already acted to reduce the deficit, it is coming down, and there were measures in the pipeline to cut public expenditure and an increase in National Insurance Contributions had been pencilled in.
2. Are you sure about that? No,of course not. There would have remained an element of risk. A prudent incoming Labour Government would probably have had act in some minor way to cut the deficit in 2010/11 and to spell out its intentions in greater detail. It would need to do this because of the rush of the Gadarene swine.
3. Will the Budget measures lower economic growth and increase unemployment? Yes, but Sir Alan Budd thinks that the immediate economic effects would be small. However, in his latest Budget Forecast he does not take into account the additional and substantial public expenditure cuts and tax increases expected later in the year. When these are shoe-horned in the effects will be substantial: possibly more like a growth rate of 1.0-1.5 percent and unemployment greater than 3 million, an increase of 500,000 over current levels.
4. What would this do to Government Budget deficit targets? They would be difficult if not impossible to achieve in the Govenment’s time scale of four years. They would need to be abandoned or modified in some way.
5. Would the economy revive toward the end of the Parliament? This is dark territory. The outcome depends on such considerations as the growth in world trade and in the Eurozone in particular. Probably growth would rise slowly from a low base.
6. So what would be the economic outcome? Probably, the Government will not achieve its planned Budget deficit reduction.
7. When will it be apparent? Summer, 2011.
8. Is there a Plan B? No. As interest rates are low, the only monetary stimulus possible would be further quantitive easing by the Bank of England. This is the weakness of Boy George’s position, and the strength of Alistair Darling’s, and makes the Coalition choice of dramatic cuts riskier than the alternative.
9. So what is most likely to happen? Politics will take over. The Coalition will collapse and there will be another General Election. Pencil in October, 2011.
10. What will happen to the Lib Dems? The Lib Dems will split with one third of the party remaining with the Tories, including Nick Clegg, and the balance under Vince Cable going it alone.
Disagree? Tell me why?
You cannot complain that the new Government is doing too little. Every day, in every possible way, some new initiative is launched. It is as if thirteen years in the political wilderness has created a pent up reservoir of desire to make up for lost time. But not all these ideas have met with universal approbation. Consider the latest from Ian Duncan Smith the new Secretary for Pensions and Work. The scene is a block of run-down Council flats on an East London estate. There is a knock on the door and it is opened by a paunchy, shirtless, bald-headed man in his thirties.
‘What can we do for you?’ he said. ‘I’m Jackson of the TTM unit of Pensions and Work.’ ‘Good for you. You’re wasting your time, mate, I’m too young for a Pension. Thanks for the thought but I’m OK on Benefits, for the time being.’ ‘No, no, no, I represent the Time To Move Section. I’m here to help you on your way. To make something of your life by getting you a job and moving you all to somewhere much nicer. And remember we can cover moderate removal costs and give you £250 for your trouble. Sounds like a good deal to me.You remember we discussed this with you a month ago and now we can get you all on your way.’ Mr Jackson smiled. ‘We wrote to you.’ ‘Brown envelope?’ ‘I expect so.’ ‘I always tear them up – the brown one’s.’ ‘Well, Mr Smith, isn’t it, we have a nice little terraced house for you in Roehampton. Tree lined street. Good local school – and a job in a warehouse paying the Minimum wage.’ ‘That’s no good for me Jacko, I’d lose money on that. All that work for the minimum wage and no little jobs on the side for the wife and me. And another thing, the fare to West Ham must be ruinous. And who for God’s sake gets my house’ ‘Oh, no problem there Mr Smith, we can find another family to do that.’ ‘What does he do for a job then?’ ‘We can’t perform miracles, Mr Smith. We might have to admit defeat there. ‘ ‘Mr Jackson, I don’t want to be rude to you. You seem a nice enough man to me. But are you off your rocker? You expect my family, at short notice, to uproot to a place they do not want to live , for a job I can’t keep, in the middle of nowhere, miles from Upton Park, at a considerable financial loss to my family and then to give my perfectly nice home to some other loafer. You must be a nut.’ Mr Jackson quivered. His voice rose. ‘I’m sorry you take that attitude. There are other things we can do, you know. We can send you to a camp, get you fit, rehabilitate you. We have done that sort of thing before’ ‘Get lost you mucker. or I’ll set the dog on you.’ ‘Think again Smithie…’ The door slammed. Oh well you can’t win them all.
There is an adage in economics that you can take a horse to the trough but you cannot make it drink. Boy George is engaged in such an enterprise. In his latest Budget he proposes to hold back the growth in government spending (a task equivalent to jumping from an Express train at full speed) while sustaining or even growing capital expenditure; and to shift resources from the public to the private sector. He did not dwell long on the contradictions. Put simply: thirty percent of the demand for private sector resources comes from the public sector and each pound of public investment creates a multiple of it in government revenue spending somewhere. Imagine the conversation between a government department and a local authority: ‘Good news ,Jack/Jim/John ,we can go ahead with the new school/ Care Centre/ road scheme you have been campaigning for.’ ‘ Sorry John/Jim/Jack, we have no money. Have you forgotten you have frozen the Council Tax and cut our grant?’ Once when I was the Chairman of a London Borough Finance Committee, I carried out an analysis of the revenue effects of capital spending across Departmental headings. It was very revealing. Wherever the labour content of the service was high (lots of people), captital investment generated big new revenue costs: for example, education and social welfare. Surely, I hear you saying, Boy George and his Treaury advisors know all that stuff. They do, they do. I listened in. ‘Well minister, what do you want to do? ‘Ah, the answer is to shift resources into the private sector: Free Schools and Welfare through charitable organisations which do not pay their staff anything but peanuts. (Who is going to tell Unite about it?). ‘Good wheeze, get Michael Gove on the phone.’ ‘Hold on Minister, where does the money come from to finance an over-expansion of school places and the ongoing revenue costs of them?’ ‘Well, I’m thinking about it. Why don’t you help, isn’t that your role, I’m sure you can think of something?’
Reading Sir Alan Budd’s Budget Report, I was reminded of a hoary old joke about economists. A Chief Executive of one of Britain’s top companies wrote in a job vacancy advertisement, ‘Wanted a one-armed economist.’ Not surprisingly a number of one-armed people applied for the job – some of them, or so it is rumoured, were even economists. One was duly appointed. The grateful applicant asked the obvious question. ‘Could I ask you why you wanted an economist with one arm? ‘Simple’, said his new boss.’ I was sick to death of hearing that on the one hand we could do this and on the other hand that’.
David and Boy George are confident people – some would say over-confident. Sir Alan Budd is their man. Budd occupies an orderly, neat and peaceful world. His report is full of agreeable fan charts. Alan has to predict the chances of the Budget deficit reduction plan achieving its objectives. If you haven’t read it you may be relieved to know that taking everything into account the Government has a fifty percent chance of achieving its goals. Sir Alan has all his lemons in neat rows. They add up. He describes a world where trade and output rise steadily through time, inflation is low, world trade is bouyant, unemployment goes up and then down. However, recently a relative of mine came back from a visit to his doctor. ‘Well’, his family said, ‘what news.’ ‘There is good news and bad news. What do you wish to hear first?’ ‘We can take it, give us the bad news.’ There is a fifty percent chance that I shall have a heart attack in the next five years.’ The relatives were shocked.’For God’s sake, give us the good news.’ ‘There is a fifty percent chance that I won’t.’ Laughter. My advice is that when an economist gives you an important forecast, especially when his reputation and job may depend on its accuracy, look him straight in the eyes. Take the three of them, Dave, Boy George, and Alan, and what do you see? I see anxiety, panic and fear. Sir Alan offers a caveat. He wishes us to know that all his forecasts are subject to considerable uncertainty. What he means is that there is a fair old chance that the whole thing may go pear-shaped.
Since this is my day for stories I offer another. Every air traveller who has clocked up a great many air-miles knows that statistically speaking he is likely to experience something going very wrong – his encounter with death. I have had mine. Unexpectedly a pilot on a transatlantic journey announced to the passengers, ‘You may have heard a thump on the port side of the plane. We have lost the use of an engine. I am telling you this because I am going to put the plane into a steep dive and attempt to restart the engine.’ And then a few minutes later, ‘I’m so sorry to tell you this but the engine did not re-start and the plane has been diverted to another airport. Don’t worry, we practice spoof landings like this in a simulator.’ ‘Good God’, said the American sitting next to me, ‘I don’t want to hear that, I want to know how many times this guy has made an emergency landing on one engine.’ I thought of this when David Cameron told reporters that the American fears that European cuts in budget deficits were coming too soon and were too great were groundless. I looked up a table. Growth in the Eurozone is forecast to grow at an annual rate of 1 percent. Did our Dave realise that statistically speaking such a small number was in the range of statistical error. How about no growth in Britain’s major export market!
So there you are. Dave and George, precious little experience of flying anywhere, but full of confidence that they can – and Alan Budd who has been there – or about – many times and knows that there is a fifty percent chance of a crash. ‘Darling’, I hear you call. ‘Let’s get in the trip to the Seychelles we have promised ourselves while there is time.’ ‘What do you mean when there is still time.’ Well, on the one hand it may turn out like this for us but on the other hand it might not. ‘For heavens sake’, says darling, ‘Let’s pack the bags.’
Do you wonder how Coalition members communicate with each other? It isn’t easy: mobiles can be bugged, emails interfered with and brown envelopes left by accident on corridor benches. The canteen isn’t safe and walks in the open air are not sound proof. The particular meeting I am referring to was held in an empty committee room and, in accordance with Lib Dem practice, a minute was taken. But Simon needed to take the matter a step further and this is what he wrote:
I am very grateful to have opened up a conduit of information exchange with you (no, really, Lib Dems write like this!) Please bring to me anything you wish me to sound out with members and I shall let everyone know that if they have a worry I am there for them and will bring their problems to your attention. I am glad we are to meet weekly – it may become necessary to meet every day! I couldn’t help but think that there was an elephant in the room when we met, a large and very angry beast, and that it was moving quickly towards us. (Frankly, I do not sleep well.) We have had this nasty Budget and members and supporters, judging by my mail, are very angry – and the membership is falling. I must make very, very clear to you that they will not stomach the next batch of remedies: a further attack upon Welfare, savage cuts in public services of up to 30 percent and higher taxes. Let me blunt the Party will not vote for them in the House and you must not assume that they will. What do you do Nick when an elephant lurches toward you? You run. And it is each man for himself. Naturally, as your friend, I do hope that you make it to the corridor and beyond.
Trust me, I’m ….Sorry about this, I could not for a moment remember who I am.
I was educated at an East London Grammar School and the nearest I got to Eton was a school trip to Windsor. Nevertheless, I have observed David Cameron closely for some time and I can imagine his first school report. Here goes:
General. David has made a good start. He is an intelligent and energetic boy who has adapted well to a new school. We think he has a bright future. Academicly David has delivered a good all-round performance. He learns quickly and can master a complex subject. He is eager to embrace new ideas, learns quickly and is fluent in his expressing his own understanding of them. This fluency, and a certain natural ability, can lead David astray. He is over-confident, sometimes slip-shod and often lacks any deep understanding of the issues he wishes to discuss. He must learn to be more patient, and dare I say it, humble and to check all his work carefully before submitting it. Games. David is a good ball player and we hope he will continue to stay fir and enjoy further participation. Behaviour. We have expressed concern about David’s behaviour. He is a noisy boy which some find annoying. David is highly competitive but this can never be an excuse for a bullying attitude. It is reported that he is too quick to assume that rivals are enemies and apt to take his revenge on them by seeking to discredit them in advance of any real competition. We take these behaviour traits seriously. Unless modified they are likely to impede his progress. We shall be contacting you further about this so that we can work together to help David.
Academic A-; Effort B+; Behaviour C-.
Draft (spoof) letter to public service employees from the Coalition Leaders..
Dear Public Servant (00p!) Service Worker
As you may know the Coalition Government has decided to eliminate all public debt and to reduce the National Debt in the term of this Parliament (God willing!!). To do this we need to make big cuts in the public services. Put bluntly there are too many of you and you are paid too much. Over the next year it will be necessary to reduce your numbers drastically, to pay you less in real terms and to reduce public contributions to your pensions. (There is no truth to the rumour that the Government will attract thousands of people from Indonesia to replace you at much lower wages. As you know the Coaltion does not approve of this kind of thing !! This is a joke boss!). Now we in Whitehall do not have a clue on how to do this (sorry, substitute ‘invite your co-operation’). Look around your office. Do you see people doing things they need not do, superfluous tasks, are some people idle (painting their nails, perhaps)? Is every one crucial to the overall efficiency of your Department? Is your Department really necessary at all? We don’t know. Perhaps you do.’ (This is called in the business manuals as Basic Wisdom. Do you wish to use this term?) Put more simply, if there are twenty people in your office, can you suggest five who might be sacked? Give some thought to the costs of sacking. All this is confidential. No one outside the Government will identify you with particulular changes. (Is this not dangerous, sir. Are you not inviting people to rat on their colleagues!)
Some impudent people (shall I mention trade union agitators?) have suggested that people in glass houses should not throw stones. How can we, they say, object to high levels of debt when we have numerous mortgages and private pensions funded by the tax payer and pay tax accountants more than their average annual wage to avoid tax? This is silly stuff. If you cut out bingo, heavy drinking and attendance at soccer matches you could fund your own pension plans. We are certainly not going to give you the names of our tax advisers.
Please take this letter seriously. In your heart you know we are right. We are all in this together. (I think this is a nice touch, sir. Appeal to their better feelings).
I hear a rumble of protest. ‘I thought this chap Charlie was a revisionist of the Danny Blanchflower school and if so what is he going on about.’ Well, I am, but I could on this occasion be wrong. To err is human, after all. What I mean is just supposing that the Coalition succeeds in its central task of eliminating the budget deficit and structural black hole in the course of a Parliament, that employment having dipped recovers and people begin to enjoy a real increase in their disposable income. Alan Budd has suggested that this is a real possibility. Mrs Thatcher managed it after all, so why not Boy George? It is popularly supposed that the Falklands War saved Mrs Thatcher but the facts show otherwise: Tory popularity was recovering in the polls before the war. When would we know whether George was succeeding? In a year’s time, I guess it should be obvious one way or the other. At this moment – assuming success- it would be tempting for our Dave to dish Cleggie. Why should the Tories go along with electoral reform when it had become clear to all that they could win a majority under the first past the post system? And what should Labour’s strategy be, assuming that although quite, quite mad, Boy George had been vindicated. I shall return to this thought.