We are finding all sorts of skeletons in various cupboards and all sorts of decisions taken at the last minute. By the end the previous government was totally irresponsible and has left this country with absolutely terrible public finance.But as I advised him:
Kitchen sink the bad news. Every finance director knows this trick. Your first announcements should be about how bad things look, and how there are probably many gremlins you haven’t yet discovered which your incompetent predecessor left you.I’ve got three observations here.
It’s hard to give the impression that you’re good at the job. But you can exploit the framing effect, by making your predecessor look bad.
1. The gilt market isn’t worried by these remarks. Yes, the June long gilt future has fallen a tad, but by no more than the bund future. The market knows Osborne is just reading from chapter one of Chancellor for Dummies.
2. Osborne makes a remarkably naïve claim here:
Forecasts were fiddled in order to help the government to present the sort of Budget it wanted to presentBut every economist who has ever forecast anything has “fiddled” the forecast. This is because the numbers that drop mechanically out of econometric models always need tweaking. This can be because, even in the best of times, a few equations will just break down, or because there’s something that’s happened or about to happen that they don’t handle well.
This has been especially true recently. Before 2008, most forecast models did not have a well-described bank credit channel; the view - which worked well for two decades - was that low interest rates would stimulate demand as the supply of credit was endogenous. But of course, sticking to this view after the collapse of Lehmans would have been absurd. Only a fool would have said in autumn 2008 “interest rates have fallen, so demand will accelerate”, even though this is what the models- including, I believe, the Treasury’s - said. A judgmental intervention - “fiddling” the forecast - was necessary.
Forecasts are always “fiddled.”
3. The last significant data point we have shows that Darling was too pessimistic about the public finances. Public sector net borrowing last year, at £152.8bn, was £22bn (1.6% of GDP) lower than forecast in the 2009 Budget. It’s not obvious how this error helped Mr Darling present a Budget he would have preferred. Quite the opposite. Had he known then that the public finances weren’t going to be quite as bad as thought, he could have done more Keynesian counter-cyclical spending.