Brexit has made a fool of the forecasters

The economic crystal ballgazer-in-chief should give up the pretence of making reliable fiscal predictions

This dates me, I know, but once upon a time, when he was just a humble economics correspondent, I was Robert Chote’s boss. Wise beyond his years, he held economic forecasting in particularly low regard, and would repeatedly mock this pseudoscience as an entirely worthless endeavour.

Worthless or not, there is no limit to the human appetite for prediction and, as chairman of the independent Office for Budget Responsibility, Mr Chote today finds himself in the somewhat unlikely role of the Government’s economic forecaster-in-chief.

Virtually all the forecasts he’s made in the six years since taking up the post – on the economy and the public finances – have been proved wrong. And next week, when the Chancellor, Philip Hammond, delivers the Autumn Statement, Chote is going to have to admit to being wrong again.

The latest forecasts are expected to show that the Government will need to borrow roughly £100 billion more over the next five years than the OBR said it would only last March. Forecasts for growth will also be slashed, transforming the previously predicted budget surplus of £10.4 billion for 2019/20 into a near £20 billion deficit.

George Osborne’s fiscal targets will have been reduced to rubble, while the holy grail of a balanced budget will be pushed further out into a constantly receding future. So far, so familiar – depressingly so; it’s what happens every year. What makes the latest forecasts potentially explosive, however, is that the deterioration will, at least in part, be blamed on Brexit.

All forecasting has to be based on certain assumptions, some of which will inevitably turn out to be misguided. Few predictions can outlive the mangle of unexpected events. Yet as is already apparent, it is virtually impossible to know what effect Brexit will have on the economy, and therefore the public finances.

Ahead of the referendum, the Treasury said that a vote to leave the EU would cause “an immediate and profound economic shock”.

So far, there has been very little sign of it. To the contrary, according to data released yesterday, retail sales in October were 7.4 per cent higher than a year earlier. Far from being left in a state of catatonic shock, British consumers have been spending like newly landed sailors on a drunken night out, oblivious to the deep psychological trauma that has supposedly been inflicted on them. The only economist I’m aware of who came anywhere close to predicting this upbeat outcome is the longstanding Eurosceptic Patrick Minford.

If the short-term impact has been so profoundly misjudged, what credibility can we attach to the longer-term forecasts of lower growth to come, now commonplace in the City and apparently about to be repeated by the OBR? What indeed is the point of the OBR at all if before it even announces its latest assessments, we know they are almost bound to be wrong?

No doubt Mr Chote will do his best to duck the inevitable flak, both by avoiding some of the more pessimistic Treasury thinking on the consequences of Brexit, and playing down its contribution to slower growth. But in the end, there’s no getting away from it; like Mr Hammond himself, the OBR will find itself accused of being too downbeat, of being on the side of those who see all the downsides in Brexit, rather than its opportunities.

The whole purpose of the OBR was to try and divorce the forecasts from the politics, or to remove the suspicion, rampant when Gordon Brown was Chancellor, of the economic forecasts being politically manipulated so as to present the Government’s finances in the best possible light.

By promising “independent” adjudication of whether targets were likely to be met, the OBR was intended to lend economic policy a greater degree of credibility than it might otherwise have enjoyed. Yet Brexit threatens to plunge the OBR’s already unreliable forecasts into the same political quagmire as those of the Bank of England, the Treasury and other assorted “experts”.

So here’s a kind of back-to-thefuture suggestion. The OBR should simply give up the futile pretence of prediction, and go with the consensus, which it usually hugs in any case. Alternatively, it could do what Nigel Lawson used to when he was Chancellor, which was merely to assume trend growth going forward whatever the circumstances. If everyone knows that’s what you are doing, then you cannot be accused of being wrong.

Beyond a simple rolling target of achieving a balanced current budget across the economic cycle, the Chancellor should also give up on fiscal rules, which have similarly been breached so often since Gordon Brown began the craze for them that they are today a complete laughing stock.

In the meantime, the only important thing to remember about forecasting is that it invariably tells you far more about the forecaster than it does about the future. Prediction, goes the Danish proverb, is difficult, especially when it’s about what’s to come.