Today’s piece is about something that, thanks to Rachel Reeves, is back in the headlines:
the role of official forecasting in economic policy. Forecasting is not what most economists
do and is probably not even most of what the official forecaster, the Office for Budget
Responsibility (OBR), does. But it matters.

Let me start with a bit of history. It is 50 years since the government was required by law to publish two official economic forecasts a year. That requirement, under the 1975 Industry Act, was for 35 years fulfilled by the Treasury, before it handed responsibility to the independent OBR in 2010.

The mid-1970s, a turbulent time when inflation hit almost 27 per cent and the UK was forced to turn to the International Monetary Fund for a bailout to support the balance of payments, was also when the veil was lifted on the Treasury’s inner workings.

In 1974, thanks to the efforts of Dr Jeremy Bray, a Labour MP and sometime junior minister, the then chancellor, Denis Healey, placed a copy of the manual for the Treasury macroeconomic model in the House of Commons library. Most MPs then and now would have been bemused by it, though Bray, an econometrician, looked at it closely and decided it was not up to scratch.

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There was a time when, behind my desk, I had every budget document back to the 1960s, possibly before, as well as countless other historic economic documents. I don’t think they were destroyed in one of our office upheavals but are gathering dust somewhere in our archives. Uncovering them would require a Howard Carter Tutankhamun effort.

Thanks to the magic of the internet, however, I have located scans of budgets for the pre-1975 period. There were, it should be said, some forecasts in them, but they were limited and of short duration. The April 1970 budget, for example, provided a forecast for gross domestic product (GDP), though only until mid-1971, but nothing looking forward on inflation, unemployment or the balance of payments.

It also included some suspicious-looking fiscal forecasts, which only a saint would not question. For the 1970-71 fiscal year, current government expenditure was projected to be £21.95 billion, exactly matching the forecast for current receipts. Capital spending was forecast to be £5.34 billion, again exactly matching capital receipts. How tiny those numbers look now.

When the Treasury was required to publish its forecasts, always known as the chancellor’s forecast because they often nudged it one way or another, it published the outlook for a wide range of economic variables. It stuck, though, to the short term. The April 1978 budget, for example, only provided forecasts to mid-1979. It was not until the 1980s that the medium-term outlook mattered too.

I mention all this because, as you may have heard, the 50-year tradition of two official forecasts a year appears to be under threat from a chancellor who, on taking office, strengthened the OBR’s role. In an interview with Times Radio after her speech at the Labour conference, she suggested she would like to go down to a single forecast a year from the current two, saying: “The IMF [International Monetary Fund] have said that and I agree with their recommendations.”

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The IMF, in fact, did not say that. In its latest so-called Article IV assessment of the UK economy, something that happens roughly once a year, it had this formulation: “The OBR could assess rule compliance only once per year ahead of the fall [autumn] budget, while still producing bi-annual forecasts in line with best practice.”

This recommendation has had everybody, including officials at the OBR, scratching their heads. If the OBR produces two full forecasts a year, one in the spring and the other in the autumn, but only the second one includes a black and white assessment of whether the government will meet its fiscal rules or not, you would not have to be much of a Sherlock Holmes to work out what each was saying on the likelihood of the rules being met.

If the forecast includes predictions for the main fiscal variables, even non-economists could work out whether the fiscal rules of only borrowing to invest (current budget balance or surplus) and falling debt relative to GDP are on track.

That said, there is a problem — what the Institute for Fiscal Studies (IFS) calls a “bad equilibrium”. It was encapsulated in March when the chancellor published her spring statement. Armed with a new OBR forecast suggesting that her room for manoeuvre for meeting her fiscal rules had gone down from a wafer-thin £9.9 billion to something invisible to the naked eye, she announced policy decisions worth £6.3 billion at the end of the parliament, mainly disability cuts, to bring it back to that wafer-thin £9.9 billion.

Those disability cuts, of course, were soon mainly reversed for political reasons. That and other factors, notably rising debt interest costs and a lowering of the OBR’s medium-term growth and productivity expectations, are why there is so much speculation about sizeable tax hikes in the November 26 budget, which the Labour conference in Liverpool did nothing to quell.

That was an avoidable error. Reeves has said she only wants one fiscal event a year, yet the spring statement was one, less than five months after her October 2024 budget, with another budget planned in November.

A previous chancellor, I won’t say which one, told me that those occupying the post like to have these parliamentary events. While departmental ministers can be making announcements pretty much every day, chancellors are rationed, because what they say can and does move markets. A statement guarantees them a place on the front pages, in the run-up to it and afterwards, but it is not necessary. Reeves already spends enough time on the front pages.

So, what should happen is this. The OBR should continue to produce two forecasts a year, as now, with assessments of whether the government will meet its fiscal rules or not. But the spring forecast, launched only by the OBR and merely laid before parliament, should be seen as advisory, rather than a call for immediate action.

The chancellor’s response to a spring assessment from the OBR that the fiscal rules are at serious risk of being broken would then be to take note, to thank the watchdog for its efforts and to promise action in the autumn — in the budget — if the situation had not improved by then.

That would get out of the perception, created by the fact that recent chancellors have been operating with very small margins for error, that the OBR is running UK fiscal policy. It would also be a far better option, one which is used elsewhere in Europe, than making the UK less transparent than competitor economies by cutting down the number of official forecasts.

Burying bad news never works.

PS

I promised last week to write about some bold ideas for the chancellor to consider in the run-up to the budget, and you have not been slow in coming up with ideas. My inbox has been pinging with suggestions, and don’t stop now. You can never have enough.

Alongside what people think are common sense proposals for dealing with the UK’s economic problems, there is also a general feeling out there that anybody with a bit of nous could be managing things better than the chancellor. This is not unique to Reeves, though she seems to come in for more flak than most of her predecessors, which may reflect on her, or that as a society we have become hypercritical of politicians.

Having written about these things for very many years, I know how difficult it is to be a successful chancellor. An interesting and fun new book, Can You Run the Economy: It’s Your Turn to be Chancellor, by Joe Mayes, published by Ebury Press, lifts the lid on some of the economic and political trade-offs faced by those who occupy 11 Downing Street.

Mayes, who reports on politics and finance for Bloomberg News, has received endorsements from two former chancellors, Sir Jeremy Hunt and Lord (Norman) Lamont. He takes you on a journey through life as chancellor, including, as above, dealing with the OBR, the Bank of England and the markets.

The book confronts the reader — you as the armchair chancellor — with a series of often unpalatable options. Without giving the game away too much, sometimes the choices do not end well, in one case ending up in let us say a difficult meeting with the prime minister in the cabinet room. In the book, you get a chance to start all over again. Real life is not so forgiving.

david.smith@sunday-times.co.uk