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    The problem with government forecasts

    10 September 2020

    Government bean counters have produced some pretty lousy economic forecasts over the years, but here is one that really takes the biscuit. In 2013 the Cabinet Office updated the government’s plans for a potential pandemic. They assumed a base case of 54,000 excess deaths across Britain – but with the possibility of up to 350,000 deaths in several waves. What did they think would happen to the economy? “Overall,” the forecasters concluded, “an influenza pandemic might be expected to reduce current year GDP growth by some 0.75 per cent”.

    0.75 per cent? As we now know, the UK shrank by 20.3 per cent in the second quarter of this year – about 30 times more than the government had assumed. Admittedly they were planning for an influenza pandemic rather than one caused by a coronavirus. But even so. So far, we have had fewer deaths than the government foresaw – and yet the economy has tanked beyond the wildest imaginings of the government’s forecasters.

    It might go some way to explaining why the economy has come such a poor second to epidemiology over the past six months. All that seems to matter, even now, is getting the daily number of new infections down – and if jobs and businesses had to be sacrificed to lower these figures, so be it. But more to the point it raises serious questions about the science – or dark art – of economic forecasting.

    How on Earth did the Cabinet Office’s forecasters model a Britain in which between 54,000 and 350,000 people were killed by a virus over the course of a few weeks and come to the conclusion that it would shrink the economy by less than one per cent? Did they not contemplate fear, forced closures of businesses due to absentees and, if not by government decree, a decline in socialising? The working assumption was that up to 50 per cent of the workforce might require time off work at some stage. Yet somehow the tills were still going to be ringing, the restaurants and theatres would be fairly full, with maybe just a few people drawing in their horns and not spending so much.

    It is reminiscent of other forecasting failures in recent times. In May 2016, shortly before the EU referendum, the Treasury forecast that in the event of a leave vote, UK GDP would shrink by 3.5 to 6 per cent within two years (relative to what it would have been had there been a remain vote, that is). Unemployment, it forecast, would rise by between 500,000 and 800,000. In the event, the economy continued to grow and unemployment fell.

    Those forecasts, too, seemed to hinge on a somewhat muddled piece of reasoning – they assumed that a Brexit vote would come as a huge shock to the country which would stun the population into tightening its purse strings. Yet if the country was to vote leave it would surely mean that at least 50 per cent of the population would be minded to celebrate rather than to descend into panic.

    There is a lesson to be drawn from economic forecasting failures over Brexit and Covid 19: never, ever trust a government economic forecast. Every Budget, when the Chancellor reveals the OBR’s forecasts for economic growth in coming years, MPs ought to break out into mocking laughter. But it is a fair guess that plenty of people will still take them seriously. We are so desperate for information and guidance over the future that we have a weakness for clinging to whatever information is available, even if, deep down, we really suspect that it is useless.