Economic forecasting and public spending: The perils of planning on the basis of economic forecasts

Posted: November 26, 2015 in economy
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 THE joke is not new but it is a good one. How do we know that economists have a sense of humour? They put decimal points in their forecasts. Yesterday, Britain's Office for Budget Responsibility published its analysis of the government's spending package. The big news was that the OBR revised up its assumption on the tax revenues the government could raise, giving chancellor George Osborne the leeway to retreat from some (but not all) unpopular spending cuts. But for the purposes of this blog let us focus on its economic assumptions.The OBR revised up its forecast for 2016 and 2017 growth by a tenth of a percentage point in each year, from 2.4% to 2.5%. That is amazingly precise. The average error in estimating UK GDP growth in the official statistics, after the year has actually ended, is half a percentage point. The OBR's forecasts for GDP growth in successive years are 2015 (2.4%), 2016 (2.4%), 2017 (2.5%), 2018 (2.4%), 2019 (2.3%), 2020 (2.3%). That is an amazingly smooth pattern. Here are the annual numbers for GDP growth since 1948. There has never been a five-year run of steady growth in the 2-3% range; the longest such run was 2004-2006. After a while, growth tends to accelerate and then collapse. Since 1955, there have been seven recessions (defined as two successive quarters of falling output) or one every 8-9 years. Given the current recovery began …

via Economic Crisis


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