This year’s Autumn Statement paints a dramatic statement for prospects for growth. Instead of being in the black we are now in the red. Borrowing is back, and public spending restraint is a bit looser, but are the measures in the Autumn Statement going to drive growth and help those most affected by austerity?
Although debt is at a very high level now, falling debt is potentially sustainable and positive, but are we okay with it being 90% of GDP and for how long are we okay with it?
Like much of the rhetoric around Brexit, we are at the whim of sentiment and perception as much as reality at the moment and the questions above are no different. But in reflection of the press coverage and expert narrative on the gloom, it’s worth remembering the purpose of forecasting. We are not dealing with the erroneous musings of Britain’s worst enemy, the tyrant of the people, the expert, we are instead being presented with a series of options and potential consequences by well-informed considered people. We should consider and understand forecasts in order to make the most informed decisions for ourselves. We need to treat economic forecasts as we would weather forecasts, as precautionary, helping us choose the coat we wear, whether we leave the house, or whether we go to the beach. We all use weather forecasts effectively and understand that there is, despite the advances in technology, a chance they may be wrong, but in general they are accurate enough to plan our days. There is an opportunity to use economic forecasts in the same way, as a guide, as a broad understanding of the direction of travel, as a guide to paths we don’t want to travel.
My blog of 23rd June focussed on the role of forecasting as a tool to identify risks and mitigate against negative impacts. The Office of Budget Responsibility have done their best to forecast in uncertain times and they are doing their job well. Highlighting the issues policymakers face in a wholly uncertain world, they try to highlight the drivers of the forecast to bring out the areas that government must tackle if they are to avert a disastrous economic future.
Brexit gloomy woes include;
- growth to fall to 1.4% in 2017 down from 2.2%,
- borrowing up,
- debt as a % of GDP to reach a new peak at 90.2%, and
- government no longer seeking a surplus.
They highlight that the government is no longer on course to balance the budget. The precarious journey we were already on has entered decidedly choppier seas leading to Parliament formally dropping its previous ambitions and loosening fiscal targets. These changes have made them reconsider the view they had. Instead of an outlook that saw a thunder storm on the distance horizon, whose path was too far away to judge, they now see that storm closer and they now have a better understanding of its path and we are in it. The first wave economic front has brought a falling pound and chaotic markets, falls in imports and increased costs. What they don’t know is whether this storm brings light showers, torrential rain, snow or tornadoes. The closer it gets the better they will understand, and the clearer the prediction of impact. In the meantime we need to consider their warnings and how we might prepare. Just as we order salt for icy roads and build sandbanks to control flooding, the Autumn Statement is our first line defence against the unpredictable economic climate fronts of Brexit.
So how did the statement fair in preparing us?
Plugging the deficit that OBR highlights – the hope is, with the series of measures in the Autumn Statement, that the economy will be stimulated to grow, resulting in increased tax take. In the Autumn Statement this is largely done via infrastructure investment using 0.4% of GDP (£9.5bn), and planes, trains and automobiles are back in vogue, but it’s also accompanied by the continued commitment to the cut in corporation tax. Both these aim to increase private sector investment, stimulating growth through government investment in tangible assets, which as well as being a large construction investment that provides jobs and growth to stimulate the construction sector, it also provides long term solutions to accessibility and infrastructure issues. Meanwhile the corporate tax cut aims to make the UK more attractive to companies and investors, who in turn will employ workers and generate profits which can be taxed. The premise being that although the rate is lower, more companies will form, therefore tax take will rise. However we can assume that OBR have taken account of any potential increase through this route as it was already announced and they have already stated that they have taken account of the benefits of Brexit. So the infrastructure investment programme will have to combat the deficit and be significant enough to make serious shifts in local growth.
Preparing for Brexit – The OBR has no more idea of the specific challenges we face than anyone else, it’s a completely new event in political history, and this has meant that key decisions have not been made. They have therefore made a judgement on general issues; trade flows will reduce, lower investment, and lower net inward migration, and they therefore suggest a lower potential output. The biggest issue here is uncertainty; this drives perception, which drives our approach to spending and investment. By far the biggest risk to the UK is this, and at the moment leading indicators are all over the place illustrating the difficulty everyone is having knowing how to react to Brexit. Unfortunately there are few options open to government to qualm fears or alleviate the uncertainty, apart from being able to demonstrate a clear plan and outline certainty where ever they can. But this is a very public contract negotiation, where it may be foolish in the long term to reveal your hand. So did the Autumn Statement give us any certainty? Responses to the Statement would suggest no, but those responsible for negotiating Brexit are in a difficult position, not least because many of them were pro-remain.
So what questions for those who carry out forecasting research?
This raises the issue of forecasting in uncertain times and causes us to question the whole basis of forecasts in terms of predicting shocks. It also raises the issue of how we take account of individual and business perception in decision making. We also need to be prepared to research scenarios and identify the areas where we can intervene to change a forecast.