Or at least misleading. He uses the misleading example of the past few years to prove some prejudice about how the Treasury can never get the forecasts right – how they are a bunch of Yes men, PollyAnnas, systemically optimstic:
The economic world is necessarily uncertain and there is usually a range of estimates that can be defended. But always to choose the best from that range is to create bias, and the bias may be very large. So it seems to have been with forecasts of public finances. Almost without exception, they have been proven unduly optimistic by events.
Note the period he has chosen: the period leading up to the hardest fall in NGDP since, well, ever really. Of course they all overestimated. Is this systemic? Well, look at Chart 2D in this report from the Treasury.
The untrained eye could soon discern a pattern. The Treasury tends to be too pessimistic during booms, and too optimistic as slumps take hold. And guess what? The whole world gets suckered into this. In 2006 you won’t find many people predicting a slump in stamp duty and corporation tax for 2009. We forget how pessimistic Brown and the Bank were a decade ago. Positive surprises happen too.
So John Kay’s underlying premise is wrong. So too is his solution:
In the field of fiscal policy, at least, there are clear steps that can be taken to improve the situation. The main requirement is to depoliticise the presentation of data. The best mechanism for this is a fiscal policy commission with independent responsibility for projections of the public finances. Such bodies exist in several other countries and the opposition Conservatives have proposed to establish one in Britain.
If delegate-to-a-quango always worked this neatly, then life would be fine. The SMF have come out with something similar, although they distinguish it from the Conservatives’ Office for Budget Responsibility. The SMF’s document looks good, and I am sure is based upon more than the lazy data-mining Professor Kay has just indulged in. They are correct to write about the ‘complete failure’ of the current framework, as we did in Fiscal Rules OK. They can also see problems with an OBR:
Confronted with contradictory fiscal projections from an independent fiscal council, the government of the day would always retain the option to question the credibility and accuracy of the projections produced by an independent fiscal advisory body, just as previous governments have sought to dismiss independent external fiscal projections by respected research institutes.
In our view, they confused accountability:
The creation of an OBR would blur responsibility for fiscal decisions. It would see the Chancellor first mandating the OBR with a long term goal for public finances, the OBR responding to this with its own forecasts and recommendations, and then the Chancellor choosing whether to ignore them. If mistakes were made, what or who should be blamed – the original mandate, the members of the OBR, or the Chancellor’s response to its advice? This is no way to make fiscal responsibility more transparent.
The Tories are dead keen on their OBR, because (a) it sends a powerful signal to people that they are Serious and (b) it enables them to hard-code their own fiscal approach by choosing in advance the person in charge. This person may have very particular views on fiscal matters, the interplay of economic growth and debt sustainability, and so on. If they differ from the democratic mood, how are they reached? Will Sir Alan Budd be quizzed before a committee of MPs? He darned well should be.