One of the sillier questions of the week, asked of all parties has been: “do their sums add up?” Are the Tories/Labour/Lib Dems tax and spending plans consistent?
In truth, it’s quite possible that the next government, whoever it is, will be able to increase spending, cut taxes and cut borrowing. This is because the baseline for government borrowing is very uncertain. Without any policy change at all, therefore, there’s a chance of borrowing falling sharply.
Here’s the track record of Budget forecasts for public sector net borrowing in recent years:
2004 Budget. Forecast = £33bn. Outturn = £34.4bn (assuming Red Book is right.)
2003 Budget. Forecast = £27bn. Outturn = £35.4bn.
2002 Budget. Forecast = £11bn. Outturn = £25.2bn.
2001 Budget. Forecast = minus £6bn. Outturn = £0.5bn.
2000 Budget. Forecast = minus £6bn. Outturn = minus £15.4bn.
1999 Budget. Forecast = £3bn. Outturn = minus £15.2bn.
1998 Budget. Forecast = £2bn. Outturn = minus £3.6bn.
So, in recent years the average error in forecasts for public borrowing has been £9bn. Almost 1 per cent of GDP. And this has been at a time of remarkable macroeconomic stability, which should increase the predictability of the public finances.
Error margins for longer-term forecasts are even bigger. Economists have a rule of thumb (which they don’t often share with the public) that the standard error is one per cent of GDP for each year of forecast – 1 per cent one year out, 2 per cent two years’out and so on.
There’s something else about forecast errors. They are cyclical. Budgets under-predict deficits in bad times, and under-predict surpluses in good times.
Now, the Chancellor expects PSNB in 2005-06 to be £32bn. If we get an average error on the optimistic side, the outturn will be £23bn.
So, let’s fast forward to November’s Pre-Budget Report. The Chancellor – whoever he proves to be - has seen early signs of better-than-expected borrowing. He then announces some spending increase on the NHS and promises some tax cuts for 2006-07.
Come the Budget of 2006, he’ll be able to announce that he’s cut taxes, cut borrowing and increased spending on "frontline services": “The scaremongering of the benches opposite was rubbish. Lies, all lies. The economy is safe only in our hands.” Easy, isn't it?