Osborne follows the rules

A few months ago, I wrote that any idiot could be Chancellor, as long as he obeyed a few rules. Well, any idiot has become Chancellor, and he’s following the rules. He’s told the FT:

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.
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.

I’ve got three observations here.
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 present

But 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.

Comments

[Alex, Leeds]

Oh come on Chris, really?

"But 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."

There's a difference between tweaking figures to improve responsiveness to unforeseen factors (aiming to improve accuracy) and deliberately fiddling them to present a politically desirable outcome. I strongly suspect Osborne is implying the latter, while you're suggesting that he is shocked at the former.

You're attacking a straw man here, either through your own moment of naivete (which I doubt) or through deliberate dishonesty.

[chris]

You're right - there is such a difference. But is this really what Osborne's suggesting? I mean, how was it politically desireable to forecast £22bn more borrowing than actually occurred?

[photo ex machina]

I think Osborne was referring to political expediency in this instance. He may even have a point but ultimately he's still playing the blame game.

[Alex]

"I mean, how was it politically desireable to forecast £22bn more borrowing than actually occurred?"

Er, it's simple really. If you have lower borrowing than expected, then that can be framed as good news. See, things aren't as bad as we thought! Or: things are improving!

[CS Clark]

'If you have lower borrowing than expected, then that can be framed as good news.'

Well sure Alex, as long as there's no political drawbacks from having a higher projection up to the point it turns out to be wrong, and as long as people really pay attention to the 'good news' when it comes. Otherwise it's about as clever as repeatedly punching yourself in the face so that you'll feel better when you stop.

The thing that strikes me about Darling's overshoot is that - while it seems a lifetime away now - at the time it wasn't seen as incredibly surprising. Nice, sure, but no-one was demanding public inquiries into how he was so off the mark compared with all the many independent forecasts that were exactly right. And yet the number involved is more than three times this six billion which will destroy the economy one way or another.

[The Silent Sceptic]

CS Clark - isn't your first paragraph exactly the approach taken by Hal in Henry IVth part I?

Unfortunately I can't remember whether it worked out well for him or not.

[Glenn]

The answer is pretty simple really...

The PSBR forecast changes - employment payrolls did not decrease by as much as forecast (based on previous recessions) and claimant unemployment simply did not increase as much as expected either.

So the tax income from PAYE didn't decrease by as much and the costs of unemployment benefits ditto. Result is an improvement in PSBR forecast.

And the temporary VAT reduction also seems to have maintained spending/consumption too.

Fiddling forecasts - its usually about making them internally coherent as much as anything.

The best forecasts are updated regularly to take account of new events or changes in decision making parameters. They are planning tools, and are imperfect, but hey, a view of the future needs to be taken in order to make policies.

[Tim Warrington]

I dont know any Financial guru that hasnt manipulated the figures to some degree. This is also a good thing as it helps with planning long term and creating targets. If the targets arent met or are way off then it is obvious the figures wernt just tweaked but plucked from the air.

[Fred Kapoor]

@Photo ex machina, I agree with your comment, when reading the article it also came to my mind that, that was exactly what Osborne meant. And @Glenn I couldn't have explained it better.
Very interesting article.