Tuesday, June 15, 2010

OBR: openly uncertain, but no more accurate than the Treasury

The Office for Budget Responsibility has spoken! And, if you duck past the headlines about growth predictions being a bit worse and borrowing predictions being a bit better, one or two interesting things emerge.

The first is that the OBR is wholeheartedly joining in with the Bank of England’s campaign to put uncertainty at the heart of economic policy making. The Bank has popularised ‘fan charts’ showing a probability distribution of outcomes. The OBR is doing the same:

I love these charts. I am, if you can resist the urge to hunt me down and kill me for making such a laboured pun that’s both crushingly obvious and startling feeble, a fan. They grab you – the public, the media, the politicians – by the lapels, shake you and yell “It’s not that simple!” Hopefully this will make us all grow up a bit and stop demanding certainty and/or pretending to it. (Well, OK, I’m not holding my breath…)

And while both the central projections in these charts are lower than the figures in Alistair Darling’s Budget in March, those earlier forecasts are still well within the bounds of what’s likely. For instance, the 3.25% growth figure for 2012 on which Darling’s fiscal plans were based is higher than the OBR’s central 2.8%, but it’s still lower than a bit over a third of the range of the fan chart.

Another nice little nugget for the anoraks comes in Appendix A of the report, explaining how the OBR worked out the probability distribution of the fan charts:

We could take one of two possible approaches to quantifying uncertainty at this stage. The first is to choose parameters that reflect our subjective view of the distribution of risks. This has the advantage of flexibility but it may be difficult to explain how the parameters have been chosen. The second, which is the approach we have taken, uses the distribution of past forecast errors made by the Treasury to quantify the probability distribution around our forecasts.

In other words, the OBR is operating on the assumption that it will be no more or less accurate in its predictions than previous, ‘politically fiddled’, Treasury forecasts. That’s one in the eye for George Osborne.

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