So Darling was right...

Was that it?  The pre budget forecast of the new Office for Budget Responsibility was supposed to show things were much worse than the previous (Labour) government had led everyone to believe.  In fact, while it revises down forecasts for economic growth from next year (with a slight increase this year), it also revises down the annual deficit.

 

There is one key difference that has been highlighted.  This is that the estimate of the structural deficit (which remains through the cycle) has been revised up by the OBR, from 7.3% of GDP in 2010/11 in Alistair Darling's March budget to 8.0%.  However, this figure of 8.0% of GDP is merely Darling's forecast in December, which itself was down from his Budget 2009 figure of 8.9%.  By the time you get to 2014/15, the new OBR forecast is 2.8% of GDP, up from Darling's 2010 Budget forecast of 2.5% but down from his December forecast of 3.1%.

 

I've kept this next paragaph in but see my clarification below.

An interesting point is that there is no mention (that I can see) of the effect of the bank bailouts.  The March Budget had a deficit figure for 2009/10 of £155.9bn excluding including bank bailouts (£166.5bn including excluding them), rising to £157bn in 2010/11 and falling to £126bn in 2011/12.  Now look at the new OBR figures - for 2009/10 it has £156.1bn (which it states is a reduction of £10.4bn from the previous figure of £166.5bn).  For 2010/11 it forecasts a deficit of £155bn, with a forecast of £127bn for 2011/12.  Has there actually been any change from Darling's figures at all?  The OBR report does not mention the cost of the bank bailouts (that I have found).  These new forecasts either exclude the bank bailout costs (which the govt expects to get back) [actually the financial interventions have produced gains in 09/10] or they are an amazing coincidence - in which case the deficit excluding including bailouts must be even lower (though it's not quoted).  I've emailed the Treasury to ask for more information. But see my clarification below.

 

The real question?  Why are forecasts attracting so many headlines?  The margins of error are large (as the OBR illustrates with its fan chart forecasts based on probability they are correct).  Economic growth forecasts are being revised all the time and often quite substantially.  Estimates of the structural deficit vary a lot too.

 

The lower growth forecasts do highlight the risks of lower growth however.  Too aggressive action too soon and we risk even lower growth - and higher deficits.

 

Correction/clarification

My figures above are correct once I sort out my exclusions and inclusions and some more data sheds more light.  The 2009/10 deficit was revised in April to £145.4bn or £156.1bn excluding financial interventions.  This tallies with the OBR figure for 2009/10, which means the OBR is quoting ex financial intervention (ie the larger figure).  This does mean the deficit including financial interventions may be lower than the figures the OBR is quoting and it means the similarity in the numbers is a coincidence.  However, by the time we get to 2011/12, both the March Budget and the OBR are pretty much in the same place ie in March the deficit ex interventions in 2011/12 was forecast to be £131bn whereas the OBR forecasts £127bn.

 


Stephen Beer, 15/06/2010

 
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