Opinion

Bank of England governor's men fiddle with UK forecasts

By David Blanchflower (China Daily)
Updated: 2010-07-14 10:54

It is time to reveal a dirty little insider's secret. It isn't hard to make time-series forecasting models produce wildly different results.

Estimates have a tendency to whizz around all over the place in the face of small changes in assumptions, data used and time period covered. And errors can be huge, especially at turning points, so carefully considered judgment matters. Economic forecasts can be massaged, so independence is vital.

During my time on the Bank of England's Monetary Policy Committee, which makes quarterly economic prognoses, Governor Mervyn King controlled the hiring and firing of the forecast team, who did his bidding. They had to produce a result that was consistent with King's views, or else they would be history. A patchwork of arbitrary fixes and prejudices frequently drive forecasts, which for the uninitiated are hard to see.

King always emphasized the importance of top-down judgments, which means you can just make stuff up as you go along. Worryingly, this was often only loosely based on the workings of the real world. Such glorified guesswork operated reasonably well during the boom years, but failed miserably when the recession hit. To put it bluntly, it isn't that hard to manipulate a forecast. I have seen it done.

On May 17, 2010, the UK's new Chancellor of the Exchequer, George Osborne, announced that the Treasury would stop producing its own economic forecasts.

"I am the first chancellor to remove the temptation to fiddle the figures by giving up control over the economic and fiscal forecast," he said. "I recognize that this will create a rod for my back down the line, and for the backs of future chancellors. That is the whole point. We need to fix the budget to fit the figures, not fix the figures to fit the budget. To do this, I am today establishing a new independent Office for Budget Responsibility (OBR). For the first time, we will have a truly independent assessment of the state of the nation's finances."

Bold stuff. Unfortunately, after only a couple of months the OBR is proving to be neither responsible nor independent. Instead, there is growing evidence that this new organization had actually fiddled its own figures to get the new coalition government out of a jam. The OBR, as currently constituted, has failed almost as soon as it began.

An office with "responsibility" in its title and "independent" in its Web address was always going to have a lot to live up to. The OBR has manifestly shown that it isn't taking care of its duties and doesn't appear to be autonomous. Appearance is everything.