Credibility and public borrowing

I had hoped to avoid the Budget, being unable to improve upon the mighty Mash's coverage. But I had the misfortune to hear Darling on the Today programme, which reminded me of why I so loathe the whole pantomime. It's a perversion of economics.
Darling was repeatedly asked: why should we believe your forecasts for public borrowing? His answer was pretty much wibble.
But the thing is, there's an answer which is both consistent with reasonable economics, and which defends him. It runs roughly thus:

You shouldn't believe my forecasts. Forecasts for public borrowing have always been subject to huge margins of error. There's a rule of thumb, which dates back at least as far as Nigella's dad, which says that the average error is 1% of GDP for each year of forecasting horizon - for both Treasury or private sector forecasts. That means my forecast for net borrowing of £43bn next year (pdf) should read £28-58bn, and the £38bn for 2009-10 should read £8-68bn, with a roughly one-third chance of borrowing being outside these ranges.
One reason for such big margins of error is that the government  isn't much in control of the public finances. Government borrowing is, by definition, the counterpart of private sector lending (Table I of this pdf). And this has recently been much higher than could have been expected, in two senses. First, company profits have persistently been higher than capital spending. Second, fast-growing Asian economies have generated high savings, which - because of asset shortages in the region - have been invested in developed economies such as ours; balance of payments figures (table J of this pdf) show that  foreign buying of UK debt (not just gilts) have been a record levels in recent years.
If someone's lending, someone's got to borrow. That's the government.
This flood of savings explains an important  fact - that despite the prospect of continued public borrowing, gilt yields are very low; index-linked yields are below 1%. Debt markets, then, are acting as if there's no problem with the public finances. And if the people who are stumping up the money don't seem to be worried about public borrowing, why should you be?

This answer, of course, raises other questions - not least about the fact that borrowing is only ever deferred taxation. But it answers the question about the credibility of borrowing forecasts.
But the thing is, Darling didn't say anything like this. He preferred to give the impression that he's on top of things, rather than give an economically coherent answer.
Which is why I hate Budgets. They are part of a folie a deux, in which both Chancellors and their media interlocuters pretend that it's possible to manipulate the public finances in detail. But the truth is that Chancellors don't have such control. And, with gilt yields so low, it doesn't - for now at least - much matter.

Comments

[Luis Enrique]

"I had hoped to avoid the Budget ... but I had the misfortune to hear Darling"

I think we all know what really persuaded you to write this post

[Scott Hughes]

Public borrowing is never going to work out well. It's like giving a credit card to someone who won't have to pay the bill. The power will be abused by people with the power to borrow and spend money that other's will have to pay for.

[Scott Hughes]

Public borrowing is never going to work out well. It's like giving a credit card to someone who won't have to pay the bill. The power will be abused by people with the power to borrow and spend money that other's will have to pay for.

[Paulie]

"...my forecast for net borrowing of £43bn next year should read £28-58bn, and the £38bn for 2009-10 should read £8-68bn, with a roughly one-third chance of borrowing being outside these ranges."

Apropos of the subsequent post here to this one, the headline would read

"Darling announces £126bn borrowing spree"