An imprecise economic forecast is better than blind faith
When it comes to forecasting the British economy, almost everyone gets it wrong. The Bank of England, the International Monetary Fund, the Treasury. You can add investment banks and independent think tanks to that list. The failure of these institutions to predict uncertain economic events, at least to one decimal place, has provided an open flank for critics.
This soft underbelly of expertise was skilfully exploited by Michael Gove, the environment secretary, during the European Union referendum campaign and only last weekend David Davis, the former Brexit secretary, accused Treasury civil servants of undermining Brexit with the use of “mathematical mumbo jumbo”. These attacks have near-cousins across the Atlantic with the Trump administration’s use of alternative facts. The rhetorical simplicity cuts through to the public in a way that conditional forecasts never will. Ronald Reagan was spot on when he opined that “if you are explaining, you are losing”. Despite their limitations, do economic forecasts deserve a fairer hearing?
The case for the defence does not begin strongly. Of the 38 forecasters that submitted their annual growth forecast to the Treasury in January 2017, not one guessed the UK growth rate of 1.7 per cent. There were estimates as low as -1.3 per cent and as high as 2.6 per cent. In recent times economic forecasters have vied with pollsters to smear the most egg on their faces. Despite this chequered record, I believe there are three reasons to keep the faith.
First, economic forecasts help to frame crucial social and political debates. An important example was last week’s report from the Office for Budget Responsibility on the long-term outlook for the public finances. Amid the Brexit-related news flow, this high-quality report garnered less attention than it deserved. It projected that, unchecked, the UK’s debt would grow from 80 per cent of GDP to more than 280 per cent by about the middle of the century — a deeply worrying trajectory.
I will offer readers any odds that this forecast will be correct by 2068. It won’t be. Technologies we haven’t yet imagined, economic and political events we cannot foresee and changing behaviours will alter the economy beyond all recognition, making this precision forecast largely obsolete. Precision is not the important role played by long-term forecasts. They are a conversation on difficult tax and spending decisions that have been put off for decades. It is arguable, if optimistic, that if such analysis was available 30 years ago the tax and spending time bomb of an ageing population could have been at least partially diffused.
Second, businesses do not work under certainty and do not expect forecasters to provide it. There is not a single UK company that knows its exact revenues and costs at the outset of the year. Boardrooms seek clarity and consistency in forecasts to inform investment decisions. They recognise that certainty is the currency of Shangri-La. Economic forecasts that provide an informed view have a valuable role, even if the assumptions they are built on are found later to be wide of the mark. Many of the populists attacking forecasting expertise have never run a business. They often fail to understand that profit is the reward for operating in an uncertain world.
Finally, ask yourself what is the alternative to efforts to scan the economic horizon? It would mean placing trust in a seemingly benevolent, if untested, ideology. While some, including contributors to this paper, may long for the ambition and ideals of a strongman or, indeed, a strongwoman, there is nothing strong about dismissing expertise. Ignoring forecasts is a reliable signal that the alternative being proposed is weak, or poorly planned. Expertise, even with its flaws, is preferable to blind faith.
A version of this piece was published in The Times.