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?

The OBR includes this handy breakdown in its latest report showing where its June 2010 forecast - which projected growth of 2.8 over the year – was out:

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.

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• TomNightingale

  So they forecast 102.8. It turned out to be 101.7. That is an error of about just over 1%.

  And if you think I am joking, think again.

• VivaLaRevolution

  error —1.2

  set up by tories
  so not actually independent
  they know what they have to come up with
  to make it look good

• http://twitter.com/francessmith frances smith

  denial seems to be a major factor in economic forecasting. the obr is in denial about the effects of cuts in government spending on growth, and blames it all on high inflation. whereas the bank of england is in denial about the impact of high inflation of growth, and blames it all on the threat of deflation.

  we are doomed!

• Croydon

  Another department set up to pay high wages to blokes in suits who give press conferences!

• Guest

  A consumer confidence shock which manifested in lower than expected nominal consumption spending would make sense.  But the OBR say in the very next paragraph that did not happen – it was the deflator which came in above forecast, not spending.  How would a consumer confidence shock result in an upwards price shock?  Quite the contrary, I’d have thought. So this argument makes no sense, Ben.

  “The contribution of nominal consumption to money GDP was only 0.1 percentage points lower than forecast, suggesting that higher-than-expected inflation from the second half of 2010 was a key driver of the weakness in real consumption.”

  A more thoughtful analysis might look at what % of nominal spending has been redirected to petrol (available via the retail sales data) through price shocks there and VAT (via HMRC/PSF figures).  My suspicion is that the OBR vastly underestimated how easily and quickly the VAT rise would be passed through to consumers.  £12bn extra VAT revenue was raised in the first 9 months.  If you presume that spending would otherwise have been been directed to extra volume of sales, that is 1% off real GDP right there.

• http://www.facebook.com/people/Ray-Hunter/663316771 Ray Hunter

  People do not like this government and have “Voted with their feet”, on one hand they are buying less goods, and on the other hand paying up on their credit cards and wiping out there loans and being prudent with there money which is a good thing,  buoyancy will be back in spending when we have more in our pockets than just enough to pay our bills, this is a government that takes more than it gives to working people and in their own way people have told them to take a running jump, this is a useless government which will destroy more than it will ever build.

• derekemery

  Why did they predict an increase in private consumption in the face of large increases in price inflation for energy food and fuel when they knew salaries were barely increasing and nowhere near matching inflation? Perhaps they though the public would borrow more although the experience is that during recession people cutback and try to build savings in case of their unemployment?

  One the other hand……

  Aren’t all government departments required to be optimistic because that is what politicians of all parties demand. Labour forecasts were for over 3% growth now because that’s what was need to fund their spending plans (the chicken always proceeds the egg in politics) Departments would come under  considerable pressure if they attempted to publish other than optimistic predictions and never allowed to come to print. Therefore they are forced to be optimistic.

• charlescawley

  Perhaps The OBR has, like most of the politicians, failed to realise that the real problem beneath it all is not how the money is shuffled around.

  The problem is a significant part of the management class has run amuck.  A list of managers will be sufficient to make the point without mentioning individual offensive behaviour.

  Bosses of: Councils, Trade Unions, FTSE 100 companies, Quangos, Charities, NHS,

  Secrecy enforced with shareholder money to keep shareholders ignorant of their own companies

  Secrecy enforced with public money to keep the public ignorant of NHS and other publicly owned organisations

  Etc Etc:.

  The costly irony is that the damage to national productivity is many times the amount leached by these takers in their pursuit of selfish personal gain.

  The OBR simply failed to take into account the continuing cancer on productivity represented by a part of the management class run amuck and out of control.

  A Reform of Management Act would be vastly more productive than another shuffling of vast sums of money.  Rearranging the deck chairs is not the answer; we need to get down to inside the hull to sort out the social and organisational cause of what could well be impending penury.

  1. Whistleblowing compulsory for all public servants.

  2. An offence of Criminal Secrecy for anyone attempting to gag or prevent people from speaking out about serious fraud, corruption, theft or gross mismanagement in the private and public sectors

  3. Collective responsibility for all board members of organisations in the public and private sectors.  One director guilty of fraud, theft, corruption or gross mismanagement will bring punishment on all.  This will create immense positive peer pressure and respect for good managers causing the good to drive out the bad.

  So, here’s a start.  It is not a left wing right wing thing… these rogues are assaulting owners and destroying jobs.  They are wrecking things for everyone else.

  The OBR and the politicians must get to grips and understand the real cause of our economic position…. poor productivity.  Without good management… and controlled management… no amount of money shuffling, printing or wild projects will do any good whatsoever. 

  The OBR, Osborn and The Labour Party need to stop moving the deckchairs around and go down below to do serious work to stop the ship from sinking.  So far, they show no signs whatsoever of doing this.  The longer they delay the more we shall pay for this landmark and most desperate failure.

• 12758

  They’re wrong because neo-classical economics is provably false. Yet because this theory suits those in power and is simple enough for their limited mathematical background they stick with it. Economics should be no more a matter of opinion than engineering. Yet because it  attracts those with an arts background rather than a science background, it gets dumbed down to the point of being wrong.

  What has happened is exactly what alternative economists said would happen. They predicted the crash, they predicted this, and worryingly, they are predicting  a depression lasting up to two decades, if the current policies are followed.

  http://www.youtube.com/user/ProfSteveKeen

• Guest

  “in the face of large increases in price inflation for energy food and fuel”

  Erm, because the commodity price spikes in 2011 were not predicted in June 2010.  Strangely, the OBR’s foresight does not extend to predicting the disruption to the oil market from a civil war in Libya which had not yet happened.