Bill Jamieson: Look no further than Treasury forecasts for fake news
We might not know the full details as the UK Government is keeping the full report under wraps. But the key points have been leaked in true Whitehall fashion: UK economic growth would be eight per cent lower than current forecasts, in 15 years’ time, if we left the EU with no deal and reverted to World Trade Organisation rules. Growth would be five per cent lower if Britain negotiated a free trade deal and two per cent lower even if the UK were to continue to adhere to the rules of the single market.
How helpful to have forecasts reaching 15 years ahead, helping to guide our long-range planning so we can take appropriate action. But who can predict with confidence out to 2033? Just consider what events unfolded in the past 15 years: how well were they predicted. There was the Iraq war; the 7/7 London bombings; the US sub-prime debacle; and the global banking crisis with RBS and HBOS brought to their knees. How much of that was predicted? Then there was the recession, the EU sovereign debt crisis, the Greek bank debt crisis and the plunge in global interest rates. How many of these were foreseen?
How many predicted Quantitative Easing? Or emergency low interest rates lasting ten years? Or that the UK would vote to leave the EU, or that in the 2017 election Jeremy Corbyn’s Labour would deny the Conservatives an overall majority; or that interest rates would remain ultra-low at 0.5 per cent as we entered 2018?
However, we have more recent, up-to-date guidance as to the Treasury’s form in forecasting matters: its predictions on what would happen in the immediate aftermath of a Leave vote. On unemployment, it warned that this would rise by between 500,000 and 820,000 in the immediate aftermath of the referendum. The outcome? Unemployment has fallen to a 40-year low.
It warned that immediately following a Leave vote, the economy would be pushed into a recession, with four quarters of negative growth. The reality has been positive growth every single quarter since.
Its specific prediction was that in the two years following a Leave vote, UK GDP would fall between three per cent and six per cent. In the event, there was no recession. GDP grew by 1.9 per cent in 2016 and 1.8 per cent in 2017, with better than expected growth in the final quarter.
The Treasury warned that government borrowing would rise by up to £39 billion immediately after the vote. The reality? Borrowing for the financial year to date is down 12 per cent on the same period last year, the lowest year-to-year total since 2007. If you were looking for examples of ‘fake news’, search no further.
The latest forecasts are remarkably similar to the ones made in 2016: long-term growth would be five per cent lower by 2030, of which one per cent was due to the immediate short-term turbulence caused by the Leave vote.
But that turbulence did not materialise. So why, the economist Andrew Lilico has queried, have the numbers not been upgraded by a percentage point? And why haven’t businesses and consumers responded to that bleak long-term forecast by cutting back spending and investment?
A reduction relative to what otherwise might have been (another forecasting turkey-shoot) may well have taken place, though Scottish retail sales figures this week showed a rise of 1.1 per cent in the final quarter of 2017, while business investment grew by 1.7 per cent when compared with the corresponding period in 2016.
Little wonder that Brexit minister Steve Baker has played down the significance of the document to MPs. He said the UK Government would not be publishing the study, adding that it was at a “preliminary” stage and had not been approved by ministers, and that to release it now could damage the UK’s negotiating position with the EU.
Even allowing for all the flaws of previous Treasury forecasting – indeed, rather because of them – it is inexcusable that the UK Government should seek to block publication of this study in full. That is to wave a red flag in the face of MPs tasked with scrutiny of its conduct and the premises on which that conduct is based. Let’s leave aside the motives behind the refusal – so far – to publish (though this ‘forecast’, too, may well prove fake). What is going so wrong with Treasury forecasting that previous predictions have proved so wide of the mark? One possible reason is that demand did not collapse but continued to grow rather normally. Last year the consequences one would expect from a large devaluation showed themselves, with consumption slowing and net exports rising – the so-called ‘expenditure-switching’ effect of a devaluation.
It may also have under-estimated the scale and pace of the global economic upswing, with growth this year set to hit four per cent. A more balanced global economy is well positioned for central banks to start unwinding Quantitative Easing. All this augurs well for cross-border trade and UK export growth.
As for business indicators, the CBI survey of private sector across distribution, manufacturing and services reported a positive balance of plus 19 per cent in the quarter to December, strengthening from plus six per cent in the quarter to November. Its recent surveys of manufacturing have been the best since 1988, underlining strong optimism on export orders.
An important element in all this is the movement of net exports. Here the deficit on our goods and services trade has fallen from an average £10 billion a quarter in 2016 to £5.8 billion in the third quarter of 2017 – an improvement that equates to about 0.8 per cent of GDP. Correcting a £3.6 billion under-estimate of third quarter net exports would, according to economist Patrick Minford, “add 0.7 per cent to Q3 (third-quarter) GDP, nearly tripling the Q3 quarterly growth rate.
Meanwhile Scotland labours under a Scottish Fiscal Commissions forecast of less than one per cent to continue for four years after 2017. We can only hope it proves as accurate as the Treasury’s glittering crystal ball – clear and proven accuracy – and this, we’re assured, over a distance of 15 years. With such a record, even a fairground fortune teller would blanch.