Thursday, June 11, 2015


This post is partly a placeholder for reference. Someone else might have done this already but I haven't found this direct comparison anywhere else. What I wanted to show here is the huge gap between George Osborne's economic projections and what has actually happened. If you read many of the economic blogs around this is talked about quite widely but I couldn't find the data put together like this anywhere.

Next month Mr Osborne will lay out his 'emergency budget' because the last budget done this year by - well - George Osborne was so terrible he has to lay out a whole new one again just 3 months later.

In addition he has already changed last year's with the immediate 'savings' demanded from government departments. If the mood music is anything to go by the second budget of 2015 will be very much like the second budget of 2010. I just wanted to point out that whatever economic numbers he puts into that budget should be treated with a significant degree of skepticism given his previous track record with projections. That's what this post is about. And it's not just chance that his numbers were wrong - he is ignoring much of what is known about how economies work to produce these projections and many critics pointed this out in 2010 and have been proven right. Moreover he shows no sign of having changed his approach so this is my prediction: The numbers will be wrong. Very wrong. I would be staggered if he manages to clear the deficit by 2020. Given that he said in 2010 that it was vital to clear it by 2015, it is a remarkable failure in its own terms. The main reason he gets away with this is that it was a complete myth that addressing the deficit was the main priority. But more of that later. Let's look at the numbers (in each case, click on the tables/graphs to enlarge):

I have taken the forecasts from each of Osborne's budget speeches.

In graphic form it looks like this:

Two points to note; firstly how wrong the projections from 2010 and 2011 were. And secondly how the prediction for the financial year 2010-11 was wrong in the opposite direction to subsequent years. That is the deficit in 2010-11 was less than predicted and higher than predicted in each of the other years. This is true for the projections made in 2010, 2011 and 2012. The 2013 and 2014 projections were much closer to reality.

Of note, the revenue reductions that Osborne planned were essentially achieved. The much bigger than predicted deficits were due to much lower tax receipts than expected as the economy failed to grow as planned. This is seen in these data below:

UK GDP Growth (%)

Once again, the projections are taken from each of the chancellor's budget speeches. Graphically it looks like this:

The chancellor hugely over-estimated growth in 2011 and 2012. 2013 was still below his initial projections with 2014 being basically in line. It's quite useful to look at these numbers summatively - i.e. where in 2010 the chancellor predicted the economy would be compared to where it actually is.

Again in 2012 the projections were much more accurate than 2010 and 2011. This is no coincidence, for it's in 2012 that he relaxed austerity as the economy floundered.

I think at this point it's worth just covering some basics. GDP (Gross Domestic Product) is an estimate of the total economic activity of a country - all the shops and schools and factories and hospitals and building sites and hotels and bars and car mechanics and farms - summed together. As technology progresses and efficiencies improve - leading to greater productivity - the natural trend is for GDP to grow - this has been the pattern since the industrial revolution. This is why growth is always being talked about in any discussion of national economies. A recession is defined as two consecutive quarters when the economy shrinks (sometimes termed negative growth).

So because the Chancellor's growth projections were so wrong, the tax revenue projections were wrong and hence despite cutting spending as planned, the deficit has been much higher than he said. Tax revenues are estimated simply as a proportion of the entire economy. If the economy is smaller, than the tax take is correspondingly smaller

To me, this speaks volumes as I think it indicates that the claims Osborne makes about how the economy works are completely wrong. The 'Confidence Fairy' as Krugman calls it is a myth, the private sector doesn't somehow explode because the public sector is retrenching. It is interesting that if you look at the first two quarters of the financial year 2010-11 when the policies of his predecessor when in place before the measures taken in June 2010 worked through to the economy at large, the economy continued to grow before going into a major slump until 2013 following a relaxation of the austerity measures. It is noteworthy I think that in 2009 Alastair Darling predicted a deficit for 2009-10 of £175Bn and it was actually £22Bn less. This is because he was very cautious in the assumptions he made about the effects of the fiscal stimulus. Osborne underestimated growth in 2010 and then overestimated it for all the subsequent years.

You could, potentially write this all off as bad luck or the effects of other factors. I don't intend to discuss here in full why the other factors are probably irrelevant. But I will say this: according to Paul Krugman (and others) mainstream economic theory predicted that growth would be much lower than Osborne's projections. They made these calculations in 2010 and were scarily accurate. So who do you believe the chancellor who consistently over-estimates his own competence whilst ignoring academic economists. Or the academics whose predictions have been much more accurate and who have working models that tell you why their predictions will work? One of the reasons I like Paul Krugman so much is that he shows the data that supports his position - as opposed to the unsupported assertions by certain others.

All this matters as the next budget is very likely to be similar to 2010. We may not suffer a recession as a consequence but look out for the growth projections made in the budget. I, for one, suspect they will be true-to-form and consistently over optimistic with the inevitable knock-on effect that the deficit projections will once again be completely wrong. If clearing the deficit really was as critical as Osborne claimed then we really would be facing massive interest rates. Conversely, the effects of austerity on the wider economy and thus well being of us all are somehow airbrushed out. A very conservative estimate of this is that the economy is £100Bn smaller than it would otherwise be. That is we are all £1500/year worse off. Every year.

All this is avoidable. Counter-cyclical spending as advocated by anyone with just a basic understanding of Keynes' insights would promote growth and thus support tax revenues and manage the deficit easily. As long as Britain has spare capacity in the economy (and there's lots) and the ability for the government to borrow cheaply (record low borrowing costs) there is all the freedom in the world for Keynesian policies and thus the deficit would improve.

Three big advantages of this approach. Firstly we might actually meet borrowing targets. Secondly the economy would be healthier overall and thus we would all be better off and thirdly the most damaging of cuts which have hit the poorest really hard could have been avoided.

This is an economic argument but it is also a moral one.

The question for me is that given the last 5 years, as Simon Wren-Lewis (Oxford Professor of economics) points out, to repeat the same mistakes as Osborne seems to intend is unforgivable. Either he is stupid or something else. I am really not sure whether his economic illiteracy is ignorance or malice. Either way he is probably the worst chancellor this country has ever had. Certainly the worst in my lifetime. I am sure, however much the Tories have managed to convince the contemporary public, history will not be kind at all. Sadly for those that suffer the most now, by then it will be too late.

Anyway in the meantime look out for the economic projections in next's month's budget and then don't believe them and if we do go into recession in the next 18 months look out for some very creative excuses from the Rt Hon Mr Osborne.



Anonymous said...

This is an excellent analysis.

How can I share on different social media?

alienfromzog said...

Thanks Anon. I'm sorry I don't have share buttons but the simplest way is to copy and paste this link: