Cooking the Books: Economic soothsaying (2010)

The Cooking the Books column from the August 2010 issue of the Socialist Standard

One bit of window-dressing George Osborne did on taking over as Chancellor was to set up a supposedly independent “Office for Budget Responsibility” (OBR) to calculate by how much the economy can be expected to grow, for the government to take into account when drawing up its budget.

Economic forecasting is no more reliable than the weather forecast. It is based on assumptions derived from past experiences and only “forecasts” what is likely to happen, not what will happen. Thus, when, on the budget, the OBR forecast that the economy (GDP) will grow by 2.3 percent in 2011 all they are really saying is that it is more likely than not that something like this will happen. Other economic soothsayers are saying that 2.3 percent is over-optimistic. The Business Secretary, Vince Cable, is saying that there is a one in four chance of a double-dip recession (London Times, 9 July), i.e., of the economy shrinking next year. Basically, it’s just guesswork.

The OBR prediction of growth next year is based on the key assumption that business investment will recover:

“Business investment is forecast to pick up during 2010, though in the year as a whole by only 1½ per cent. The recovery is maintained in 2011, although it takes until 2013 before investment returns to its pre-recession peak . . . The measures to reform corporation tax, which are estimated to reduce the cost of capital faced by firms by about 3 per cent, should have a positive effect on investment . .. Business investment also strengthens as resources released from the government sector flow into the private sector.”

They are right to see any growth as arising from a revival of business investment since capital accumulation is what drives the capitalist economy. But that business investment will resume just because government spending is reduced is an ideological assumption; which is shared by the new government (so much for the independence of the OBR). As the London Times (23 June) put it, that the economy will grow next year “derives from Osborne’s belief that public spending has been ‘crowding out private endeavour’ and is a big economic judgment.”

The theory is that, as taxes on profits are being reduced, capitalist firms will invest more. But it is by no means as simple as that. If businesses judge there is no prospect of making a profit from expanding production they won’t do it. They will simply hoard their extra profits and build up cash mountains. There are plenty of examples of this happening in the past. Japan’s decade of stagnation in the 1990s, for example. You can bring a horse to water but you can’t make it drink.

Long-term predictions are even less reliable. Even so, the OBR has indulged in this, predicting (and we record the figures for future reference) that in 2012 growth will be 2.8 percent, in 2013 2.9 percent, and 2.7 percent in 2014 and 2015. This is not worth the paper it’s written on. It’s like the Met Office predicting a barbecue summer in two years time. After all, no economic soothsayer predicted in 2004 that in 2009 GDP would fall by 4.9 percent. They didn’t in 2005, or 2006, or 2007, either.

The fact is that the way the capitalist economy is going to go is unpredictable. Governments can only navigate by sight within it, reacting to what it throws up.