Economic turbulence is making forecasting so difficult for the Office for Budget Responsibility (OBR) that its projections are too unreliable to base Government policy on, according to Roger Bootle, managing director of Capital Economics.
Giving evidence to the Treasury Select Committee (TSC) yesterday afternoon, Bootle admitted Capital Economics’ forecasts, despite being among the gloomiest, had not been gloomy enough. He told MPs the Government should question the extent to which it relies on OBR statistics.
He warned that if the OBR had to downgrade projections again it could seriously undermine its credibility as a forecaster and lead the Chancellor to consider its future.
He said: “There is no certainty at all in the OBR’s projections. Forecasting is extremely difficult at the best of times and we are at a particularly difficult juncture at the moment. It is not so much the OBR has not got things right that is worth noting, but the question to what extent should anyone be basing policy on what the OBR or indeed what anyone else, is forecasting?”
Capital Economics’ written submission to the TSC’s short inquiry into the Autumn Statement highlighted a downward revision of GDP in 2015 of £65 billion and downgraded output gap projections. Last week, the OBR cut its growth forecasts for this year from 1.7% to 0.9% and for next year from 2.5% to 0.7%.
Bootle said: “With the output gap projections, one must have some notion of how much spare capacity there is in the economy, but I am not sure there is case for using the techniques used by the OBR to get a precise number and then on the back of that calibrating the whole of fiscal policy.”
He added that having to downgrade the output gap projection again would put Chancellor George Osborne in a “very difficult position”.
He said: “If the OBR revises the output gap down again with the result that more of the deficit is structural rather than cyclical I would imagine its forecasting credibility will have been damaged and it will be open to the Chancellor to decide whether he wants to continue down this route or not.”