91�ȱ�

On Tuesday we had: The case for Mr Osborne's austerity.
Yesterday we had: The case against Mr Osborne's austerity
It ended with the sentence: So much for the case against austerity. Tomorrow: how to decide which side you are on.

I've been waiting with baited breath. Where is the blog? Please, I want to know how to decide.

Steph,
So if Chote will be using the same dodgy models for his forecast, we can expect him to under-estimate tax revenue and over-estimate the structural deficit, as these two things seem to be linked - maybe I'm wrong.

Charlie

Perhaps the important thing is the 'flavour' that Chote is likely to bring to the interpretation of the figures and policies. Given his background with the IMF and IFS we may expect it to at least be influenced towards the present government policies.

This looks like getting the awkward squad inside the tent pi$$ing out...Pray Stephanie, please could we have an assessment of Chote's past record and his economic/political slant. Is he a quarterback for the Chicago school or does he hold a torch for JMK? Presumably somewhere in between. Granted Chote's think tank was supposed to be independent, but show me an entirely independent economist and I will not believe you!

Is this a more subtle means of the government escaping responsibility for managing the economy than the BoE given independence to set interest rates by the last administration?

What will be the terms of reference he will be operating under and what model of the economy. How will a balance be struck between long and short term effects of policy? There could be a lot fun to be had at the expense of Osborne.

Stephanie

Many congratulations to Robert Chote, assuming that he passes the parliamentary hearing alright. So, who will take over at the IFS now? How will the IFS maintain the high profile position, established by Andrew Dilnot and Robert, with a new high profile OBR on the block?

I agree that it will be important that the OBR and Robert, as its public persona does not do a metaphorical transformation. The OBR forecasting could turn from the (lighting) rod for Mr Osborne's back, into a stick, which government uses to beat the Director with, when the numbers become tricky or uncomfortable for the Chancellor.

Let's hope Robert has broad shoulders.

Is the OBR just a smokescreen to make us think budget control is still within the UK when in fact the EU Economic and Monetary Affairs Commission will be doing the budget approvals from next April?

The problem with the failes tri[artite system has not been tackled. The same fools are still running it. The same fools that did not see the crash comming and should have done so because many people told them that the crash was inevitable and the reason for the crash. So now we have a four part joke! But still no action!

The chancellor is responsible. He must act alone. He cannot delegate.

The rules that govern what is and what is not inflation are wrong. If they hadn't been the crash would not have happened. Yet the rule have not been changed. We still see Mervyn King pretending to manage the whole of money when he can't and he doesn't. This is still a disaster. He is still a disaster. What is it about the twits that they seem unable to recognise the problem of private debt that they caused. They were warned in good time.

Fire Mervyn King and his cronies as they knew, were in-charge and did not prevent the bubble that led to the the inevitable crash and still they are not taking the critically vital remedial action. He is personally responsible for the collapse of British Society (Big or otherwise). He is personally responsible for houses in London still costing 12 times average incomes. He is personally responsible for the age for first time buyers being 52 for men and 59 for women. There are no excuses he MUST go!

Oh look, today the OECD has revised down the UKs growth in GDP this year! Will this force the OBR to revise down its forecast perhaps?

It was an easy choice to make but not an easy choice to take for Robert Chote.

In my own opinion he is only one of a few who has given me confidence over the whole of this crisis that he is in tune with the real facts and figures even though he has had to be ever so tactful in his media interviews.

What we need and I presume this will be part of his job description are real facts and figures and a realistic and understandable interpretation of what they really mean.

The very best of luck to him.

#1 Radiofour

You have been very attentive. I remember thinking that it would be ambitious when Stephanie wrote yesterday that a synopsis of the two opposing views of Mr Osborne's austerity budget would be produced today.

Stephanie

I agree with radiofour, it would be interesting to see how far the government has got with its planned cuts; perhaps a totting up of the savings proposed to the media already. There have been a series of announcements over the summer about public sector cuts: e.g. Audit Commission's abolition, Regional Development Agencies, et al.

The cuts announced before the election varied from £1 to £1.5bn, to 10% of current year budget to £75bn annually for Lord Forsyth in his review.

Has there been any more news or detail on Mr Osborne's 8 point plan for the economy - other than the BoE's preexisting 2% inflation target? The danger is that the government gets so tied up in negotiations over cuts and austerity that the need to stimulate the real economy gets completely overlooked.

Any thoughts on today's balance of trade numbers, too? Not much good if we are to export our way to growth and recovery. I have just reminded myself that point 2 of Mr Osborne's 8 point plan was: "Increase exports....etc".

Mr Osborne tried hard on his recent visit to India. So far his lobbying has not resulted in Vodafone being excused the £1.6bn tax bill requested by the Indian government for its take over of Hutchison Essar. It is not clear if the £4.3bn Vodafone has booked for the sale of its stake in China Telecom has been included in these figures or will appear in the next quarter. It is also not clear how either of these actions will increase the UK's share of exports and trade in these growing markets; of telecommunications at least.

According to today's figures the UK's overall Balance of Payments deficit has deteriorated to £4.9bn, with a negative £8.7bn from goods, though services were in surplus. UK exports have reduced by 12% since 2006, excluding oil and erratics. There was a 0.9% drop in July including chemicals and oil. German exports by contrast have increased by 18.7% between July 2009 and a year later. Asian markets have been the source of this growth in demand for German goods and services.

"we know for sure that most of his forecasts will turn out to be wrong".


Too right. That's the trouble with all this macroeconomic analysis. Quite apart from not seeing the trees for the wood it really is a classic pseudo-science - all those numbers, statistics, graphs and equations are meaningless because it isn't a natural science with natural laws that allow precise prediction. You can predict total eclipses hundreds of years ahead. You can predict the next high tide at Falmouth. You can predict the load bearing properties of a bridge and that certain structures with a jet engine will fly but you can't predict economic growth, levels of unemployment, the rate of inflation, import and export growth and decline or what I'm going to buy on my next shopping trip to Sainsbury's. Up to the present the figures just describe what has happened and from the present forward they are just guesses : usually dubious extrapolations of what has gone before that serve largely as hypotheticals for politicians to squabble over. They're arguing about the size and shape of an unknown future forest when what really matters is the individual trees of the present...Or to put it another way-instead of worrying about hypothetical futures they need to focus on the messy, unpredictable nature of human economic activity now and decide what is the best way to deal with immediate problems. Which raises the question of what then is the point of the OBR if it is destined to produce erroneous forecasts?

A question: The OBR forms its opinion drawing on computer models created by the Treasury. These models are flawed, but better than nothing. But does the OBR consider data from other sources as well? And if so, how far does other information effect the assessment?

This is nothing more than weak politicians unwilling to take responsibility for decisions and setting up some group who they can point to and say "it wasn't me." We will increase government to decide how to decrease government....we will run away from leadership in times of trouble. Any wonder why the world is in the shape it is in....big business and banking appointed politicians who have no idea what to do when not dealing with issues outside the interests of their patrons.

@radiofour: 'baited breath' ? Surely 'bated', meaning that you are waiting with 'anxiously held' breath? No worms or cubes of bread involved.

I know, I should care less than I do...

Wonderful. Another London based establishment economist appointed to a Govt job.

You just don't know how much those of us in Scotland really appreciate this. Someone else that probably hasn't had a real job, won't understand industry and who's contribution to the economy can't be measured because it's zero.

Just for once why can't Govt appoint someone that will make a difference, won't mind annoying people and will say it like it is.

This comment was removed because the moderators found it broke the house rules. Explain.

I tend to agree with #10 virtualsilverlady

Chote has looked impressive on tv over past year......especially on NN

So Wee Scamp decries having a London based economist.

Well, we could have a Scottish one such as Alex Salmond, a former economic adviser to the Royal Bank of Scotland, or one of the many other former RBS senior folk whose track record in financial management is out there for all to see. What a pity the Scots postponed their referendum on independence. They could then have appointed their own financial adviser, assuming they won the vote of course.

Lightening rod is a good term to use where Chote is concerned.
He's tough; he's critical, and he may be exactly what The Coalition Government needs heading the OBR (Office for Budget Responsibility). The office will be "the" office for assessing the effectiveness of the government’s cuts.
Robert Chote is Head of the Institute for Fiscal Studies and if you recall it was this agency that gutted the governments’ claims to be carrying out “progressive” cuts.
I'm guessing that The Coalition Government selected Chote because he did gut the government's claims to be carrying out "progressive" cuts - as in "Keep your friends close, but your enemies closer".
Mr Chote has been known to seriously criticize chancellors: for that reason alone he becomes (in my book) a politically astute selection. He will be the first full-time head of the OBR.
George Osborne must convince the media as well as the public that the OBR will be independent; he must appoint someone who is
- a tough as nails,
- sharp as a tack and
- as blunt as a hammer.
This would be my description of Chote.
The OBR has been widely attacked for lacking transparency and appearing too close to The Coalition Government. So I'm rather surprised that Mr. Osborne chose Mr. Chote, even though I believe he is the best choice.
Mr Chote has established his reputation for analysis of Treasury policy, He did this even when he was a journalist in the 1990s. Remember his stint with Financial Times’ economics' editor.

Stephanie, I must confess that I too have been side-tracked from your pro/con austerity series with Experian's methodology doc posted by the Beeb - Resilience ratings for various areas to the forthcoming slash and burn budget. St.Albans here we come. JfromH should Experian also be sacked? They were the one's who rated all the credit card users and businesses so that they could indulge in their fantasies. You and I know that the deficit only governs how much further we go in hock.
I would like to see some Brown coloured credit cards that are rubber-stamped by Experian. That'll do nicely.

Evening Stephanie,
may I ask why we need an OBR at all?
They have no mandate, no powers, and seem to me to be just an expensive Quango.
Mervin King of the BOE found out that although he has some responsibilities devolved to him by that nice Mr Brown, when it came to executive decisions, the Chancellor could override his advice and INSTRUCT him to take a different course of action (political expediency and all that).
This panel of experts (the OBR) simply combine all of the treasury models and modify their projections. It reminds me of the Met Office when they introduced their new super computers, they ran the climate model using huge volumes of input data and then referred the resulting maps that the computer had plotted to a senior Met office forecaster.
He took one look at the forecast and said nah that's not how the weather pattern will develop in real life and promptly modified the forecast.
Having spent many hundreds of millions on this new computer and all the work that went into getting it to work, the Met Office were a little disappointed but decided to go with the manual version and not to tell the public what a waste of money on computer modelling their efforts had been.
It strikes me that there are parallels here with the OBR.
Just another example of Government waste of money on unelected and unaccountable (to Parliament) Quangos.
Sack them all and think again.

Two people saw the problem coming. Kenneth Clarke and Vince Cable. Who gets to decide what we do economically? George Osbourne. Terry Wogan at least has a banking qualification. But Mr Osbourne does have an ideological stance - no income tax rises. SO macho - if only it didn't affect so many of us powerless people.

Let's look at the record of forecasting:

1. Virtually no serious forecasting organisation predicted the credit crisis.

2. The debt crisis in the southern eurozone economies was also not predicted - it was only when Greece revealed they had been fixing the stats that the true scale of the problem was revealed.

3. Whilst Brown's government took enormous stick for its spending and borrowing record, short term forcecasting said there would be rising borrowing and falling GDP - the truth is that the opposite happened last Qtr. with employment, tax revenues and spending singificantly outperforming predictions.

4. The OBR is forecasting a large increase in private sector employment, substantial investment in UK productive capacity and exports to rise by a third in this Parliament.

5. Leaked Treasury forecasts are for 1.2M public sector job loses from the cuts - there is no information on the private sector impact.

What can we deduce from this? Firstly that we are in both a better position than the forecasters said - and that our prospects are probably dramatically worse than they predict.

The nub of the issue for the quality of its work and the legitimacy of the OBR lies in its growth forecast - who really believes that taking £1 Tn of aggregate demand out of the economy will result in +2m NET ADDITIONAL jobs in the private sector?

The CBI in Scotland went on the record in few few days ago on SKY saying the private sector couldn't even replace the lost public sector jobs, let alone create additional ones - yet the OBR still claims there will be millions of new jobs?

What about investment? The banks are being blamed for not lending - there may be some truth in this, but the reality is that there are not the investment projects out there likely to produce a return that justifies the lending risk - all the figures show investment falling, not rising - so why is the OBR predicting a huge rise?

Trade - the OBR claims our exports will rise by a third over the Parliament - who in their right mind would believe this? Our trade deficit is rising, not falling, our major export markets - EU & US - are in recession and not likely to buy more off us in the current market conditions.

I know that the OBR references other forecasters to justify their figures, but these forecasters have been wildy out in the past.

I would propose the OBR adopts a simple "traffic light" approach to its analysis, breaking the forecast down into key areas:

RED - danger - government policy is heading for major problems.
AMBER - serious issues to address - point up the problems.
GREEN - policy is likely to achieve its objectives.

On that basis, I'd say the following status is a correct report:

Borrowing - AMBER - risk of tax take falling and welfare costs rising

Growth - RED - all the trends are negative

Employment - AMBER - major job loses in the public sector are now inevitable (1.2m) and ramping steeply now not over 5 years, the impact on the private sector is unquantified - when they are revealed to be as dramatic as predcited, the status should be changed to RED.

Inflation - AMBER - QE, devaluation and falling confidence risk stagflation - rising prices from imports combined with falling incomes in real terms.

Housing - AMBER - risk to the housing market of meltdown - see OECD 40%- prediction - plus av. age of first time buyer is 35.

Pensions - AMBER - the value of funds is falling - fund deficits are huge and there is a risk of widespread fund failure - people simply not investing enough.

Exchange rate - AMBER - UK PLC has no support from outside as does the eurozone - a sharp loss in confidence will lead to a massive run on the pound that cannot be stopped.

Public Spending - GREEN - there is no lack of resolve to cut public spending and the government is going further and faster in thsi regard than any government since the war.

Trade - AMBER - despite a significant devaluation we have not expanded our exports and our imports remain high. An important element in longterm trends is the historical role of the City in generating invisible exports and the longterm decline in manufacturing in the UK. David Cameron is right in saying we need to shrink our depence on the City and rebuild manufacturing industry - no credible plan has been offered to do this - marginal tax incentives will not achieve this change and the abolitiion of the Regional Development Agencies could leave a vaccuum that will allow other countries to win inward investment the UK badly needs.

This would produce an average of AMBER overall - reflecting the level of risk being taken, the backdrop of global trade and growth, plus the serious doubt that the private sector will deliver anything like the predicted growth and employment performance.

OVER TO YOU, MR CHOAT!

24. At 01:35am on 10 Sep 2010, richard bunning wrote:
Let's look at the record of forecasting:

1. Virtually no serious forecasting organisation predicted the credit crisis.
---------------------------------------------------------------------
Sort of true. Very true. But ...
Various organisations were drawing attention to 'problems' in their particular field and had no brief to say that adjacent organisations' announcements would, with their own, amount to the cause of the credit crunch.

24. At 01:35am on 10 Sep 2010, richard bunning wrote:
Let's look at the record of forecasting:

2. The debt crisis in the southern eurozone economies was also not predicted - it was only when Greece revealed they had been fixing the stats that the true scale of the problem was revealed.
---------------------------------------------------------------------
Oh yes it was! But it was a long time ago, when the Euro was first brought into the public arena, before it was a currency.

24. At 01:35am on 10 Sep 2010, richard bunning wrote:
Let's look at the record of forecasting:


3. Whilst Brown's government took enormous stick for its spending and borrowing record, short term forcecasting said there would be rising borrowing and falling GDP - the truth is that the opposite happened last Qtr. with employment, tax revenues and spending singificantly outperforming predictions.
-----------------------------------------------------------------------
Fair - ish observation, BUT: the numbers aren't concrete when announced. Remember how last year's figures were adjusted recently? Secondly, don't forget seasonal variations. Thirdly, a Q can be part of a trend but on its own means little; while bills for all sort of things - goods, tax, services, should be paid within thirty days in the usual course of life, it doesn't happen like that in the real world.

24. At 01:35am on 10 Sep 2010, richard bunning wrote:

The nub of the issue for the quality of its work and the legitimacy of the OBR lies in its growth forecast - who really believes that taking £1 Tn of aggregate demand out of the economy will result in +2m NET ADDITIONAL jobs in the private sector?
------------------------------------------------------------------------
Are you saying that for ever and a day? The OBR's quality and legitimacy, surely, will be just as much if it makes a shrinkage forecast. You seem to be suggesting it is only valid if it brings good news.

Having made these posts, I hope you do not think I am attacking you or the post, Richard. It is just great to have a thoughtful post with positive suggestions on the Beeb Blogs to make some of us think hard and discuss. Thanks.

re #24
Really quite like the overall suggestion. Very helpful.

A long but worthwhile read from Bill Mitchell today that is releveant to Stephanie's recent posts.

#24 richard bunning

Much of your commentary has merit and provides a succinct analysis of the current economic situation. There is one point upon which I would like to beg to differ.

It is a self-interested myth propagated in some quarters that nobody predicted the credit crunch, crash and recession. Certain politicians did; e.g. Vince Cable and the Governor of the Bank of England provided warnings about the level of indebtedness in the UK.

The Bank of England, which has its own econometric models of the UK economy and makes, produces and publishes its own forecasts is probably one of the most respected in the business. Forecasts appear monthly in its Inflation Report and other publications. "Fan Charts" describe the level of statistical probability for predicting the outcomes of various economic variables. The further into the future one looks, the greater the degree of uncertainty.

Mr King is extremely unlikely to have used any econometric models at his disposal as a basis upon which to provide his warnings about the levels of lending by certain financial institutions and consumer indebtedness; these models just would not have provided this detailed insight. The models are not equipped for this, nor designed to do so. They are at the macro level, whereas the data to support the warnings was at a different level. His warnings are more likely to have been based upon a review of money supply and in particular the balance sheets of financial institutions, as well as his basic knowledge that the economy always runs according to cycles; expansion followed by contraction, ad infinitum.

Very few people have ever successfully predicted exactly when a crash, credit crunch or recession will start. The precise causes "the straw that breaks the camel's back" or "the tipping point" which turns expansion into sharp contraction have often been different on each occasion.

The ability of economists predicting a recession is akin to seismologists predicting the precise date of an earthquake, or volcanologists predicting an eruption.

I do agree with your general point raised on trade in particular, as highlighted above under previous comments under #11. Growing exports by a third seems optimistic to say the least, based on current performance, though the improvement in the German economy suggests that the European outlook may be more positive than you have implied above in #24.

My point is that the government is solely concerned with cutting costs and is fully submerged in budget negotiation purdour, not to mention putting the banks straight, but has failed to elucidate a clear strategy to turn the economy round; generate growth and increase demand. It is making decisions about cuts in a complete macro-economic strategy and policy vacuum. Which companies will generate the growth in trade and employment required across the whole economy and how?

30. At 10:17am on 10 Sep 2010, Squarepeg

Great post Squarepeg. Hope everyone reads it.

31. At 11:32am on 10 Sep 2010, fleche_dor wrote:

"The Bank of England, which has its own econometric models of the UK economy and makes, produces and publishes its own forecasts is probably one of the most respected in the business. Forecasts appear monthly in its Inflation Report and other publications. "Fan Charts" describe the level of statistical probability for predicting the outcomes of various economic variables. The further into the future one looks, the greater the degree of uncertainty."

-----------------------------

I think you'll find that 'Paul-the-world-cup-octupus' could probably do a better job of predicting the UK's economic outlook than the BoE.

I would like to know if their models and 'fan-charts' have ever been validated in any way!

#33 debtjuggler

My understanding is that the OBR will validate the government's sic HM Treasury's predictions, but will not do so for the BoE. The OBR may well take into account the Old Lady of Threadneedle Street's forecasts in its process of validation of the Chancellor's predictions, though.

Most economists in the City and independent economic consultancies produce their own take on what the crystal ball shows. Mr Chote may take these into account, too.

May I say that I enjoyed your remark about the octopus? Though I did think it was "apPauling". The key difference is that Paul was making a choice from two options, where he had a 50% chance of success. Paul was either right, or wrong. The economic variables included in forecasting models say for GDP tend to be rather more numerous, hence the greater degree of uncertainty, attached. It will be more difficult to be quite so categoric about the Treasury's forecasts, though that will be Mr Chote's challenging task. If Mr Chote wanted to stick to Paul's level of sophistication the toss of a coin would probably suffice.

To take just two variables from the initial OBR validation by Sir Alan Budd. The government's tax receipts from the first part of this year were above forecasts. There seems to be a consensus that a third growth in exports seems, at the moment at least, over optimistic. The first may be adjusted by the outturns; the latter may be more difficult to adjust.

Many thanks for the bouquets and the bickbats.

I personally don't respect or value the basis of most forecasting as it is too inductive - you need to be a detective to deduce what has happened, to analyse what is happening now and to crystal ball gaze on what you think will happen.

In terms of personal forecasting, I got my entire family to sell their investments and move their savings in the £ and buy deutchmarks three months before we fell out of the ERM and massively devalued, I pulled my pension investments out of financial services and moved into alternative energy stocks six months before the sub-prime storm hit and I have been steadily getting out of any form of investment that involves cash, bonds or equities and have been investing in UK farm land which is a finite and productive resource that has tripled in value in the last six years and is not part of the housing or commercial property bubbles - land is impossible to steal and produces a rising rate of return - cereals/meat prices currently up 40%.

There is to my knowledge no commercially available investment product exists that gets anywhere near this in terms of its return, low risk profile that also enjoys complete death duty exemption, or one that has virtually no management charges either.

As you can see I act on my personal assessment of the economic outlook - I think the BoE MPC is a farce not only because they have virtually no ability to influence events, whilst the OBR is like the little boy in the fable in the crowd watching the naked king who thinks he is showing off his new clothes - the rest of the crowd pretend they can see these sumptuous garments - does he point out that "the king has no clothes!" and risk the approbrium of the crowd, or does he tell the truth?

The crowd has heard the rumours of lavish new clothes that can only be seen by true believers - so they feel they must go along with the deception - indeed they even deceive themselves - IMHO the ConDems are attempting to get us to believe they can fly in the face of reality and produce a smart new Britain - I simply find the OBR forecasts based on what we know and what I foresee to be completely incredible - gosh! Is that the King I see in the distance? Is that really a pink sporran he's got on?

...oohh....

Anyway, I await Hans Christian Chote's first fable with interest....

#1: Stephanie: Thank you for the promised article /blogs/thereporters/stephanieflanders/2010/09/austerity_plans_where_do_you_stand.html.

#15 Ooops. Geoff, the abatement of my breathing has now ceased.

Forecasting is a mug's game. Ask any sales or marketing manager charged with forecasting next years sales: all the sophistry in the world can't make correct forecasts. Nor has the BoE ever got it's forecasts spot on. That's why 'Merve the swerve' & his pals always forecast a range of probabilities. A range that gets wider and wider the further into the future it looks.
No business plan or forecast ever survives contact with the punters. We simply cannot forecast what the UK's customers and creditors will be believing next year. Yet it's those beliefs that will determine the UK's growth and debt.
Robert Chote knows this. But media commentators - who also know that forecasts are uncertain - will still blame him if he gets it wrong.
So why's he taking on this poisoned chalice? Is the money that good?