Do we really know what's happening to our economy?

We are only two days away from the Budget and there seems to be no shortage of opinion (including mine) about what it should contain.  But do we really know what's going on in the economy?  At best, we have a general idea.  Surveys of manufacturers appear to point to growth around or above trend (whatever trend growth is at present) but the relationship is not guaranteed and besides, the most recent data has been a bit weaker.

The Office for Budget Responsibility (OBR) made the point, in its Autumn Economic and Fiscal Outlook, that GDP data gets revised for years afterwards.  It illustrates this by looking at the 1990s recession, using Office for National Statistics and Bank of England data (see its chart below).

OBR 1990s recession estimates

It shows that the recession was originally estimated to be over 1.5% deeper than it actually was.  That's all very interesting, but imagine if you are a policy-maker - the Chancellor of the Exchequer say - in the early 1990s ie during the recession and early recovery.  In early 1992, this data did not even indicate a recovery was taking place; you might have believed that the recession was getting worse.  Then again, perhaps the revisions from 1993 onwards incorporated the outcome of actions you took (or didn't take) because you thought things were worse than they were.

It's not easy being a Chancellor.  Charts like the one above show that economic policy needs to be about more than the odd tweak to tax and spending here and there, because they are of limited use when you don't really know what's going on.  It is about government words and actions demonstrating clear support for the economy.  It needs to do so primarily via direct job creation and investment, since both contribute to the future potential of the economy (as well as increasing well-being), which means that if we over-compensate we at least have increased the productive potential of our economy (rather than simply increased debt levels via over-consumption).

Stephen Beer, 19/03/2012

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