Why did the OBR get things wrong?
The Office for Budget Responsibility has now had to downgrade its growth estimates four times. The latest came with today’s Economic and Fiscal Outlook, published alongside George Osborne’s Autumn Statement.
So where is the forecaster going wrong?
As one can see, consumption projections were significantly out, by about 1.4 per cent. People spent much less than the OBR expected. Investment was also lower than forecast. Businesses did not spend to increase their capacity.
Rather surprisingly, the contribution of government spending and exports to growth came in higher than the OBR expected. And as the report notes, “the effects of the euro area crisis had not started to bite over this period”.
So why did the UK economy not behave in the manner that the OBR expected in June 2010? The OBR says that higher than expected inflation was the culprit. High prices reduced real incomes and dissuaded people from shopping. And businesses did not invest, according to the OBR, because the public weren’t spending.
Is this convincing? Up to a point. High inflation is unlikely to have helped the economy. Yet the OBR doesn’t even consider the possibility that the Chancellor’s pledges of draconian austerity last year might have helped to undermine consumer confidence.Tagged in: george osborne, Office for Budget Responsibility
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