Comparing economic predictions with actual outcomes
George Osborne will certainly find next week’s Autumn Statement an easier ride than in 2011 or 2012. In the past two years, the opposition charge that his austerity had caused growth to stall carried force. With growth restored, now it doesn’t.
Having blamed poor growth on austerity in the past, the opposition is also poorly placed to criticise the government for having fallen short on its goals of bringing down the public sector deficit. Three years ago, the Office for Budget Responsibility (OBR) foresaw this deficit falling by 6.1% of GDP, from 10.5% of GDP in 2010 to just 4.4% in the first half of 2013. By contrast, according to the latest official data, the actual fall is barely more than half as large, down 3.5% from 9.9% to 6.4%. This estimate excludes the effects of the Asset Purchase Facility (see below).
It is important to remember that official statistics for the recent past are themselves only estimates which are often subject to big revisions later. This is true not just for the most recent quarter or two of data but over the whole of the period of interest here. The OBR’s recent inquest into its forecast errors makes this clear. This comparison can only be provisional.
All the same, it still serves to highlight a point we have made before and which is especially topical at the time of the Autumn Statement. However much the headlines are about growth, it is certain that there will be references to forthcoming austerity too. The point is this. The public sector is but one part (or sector) of the national economy and the balances – surpluses or deficits – of all sectors together will always cancel one-another out. This means that if the public sector deficit is to come down, the combined surpluses of the other sectors must come down by the same amount.
The graph below illustrates this by showing all four sector balances – for the public, household, corporate and overseas sectors – first as per the 2010 Autumn forecast and second, according to the latest official statistics. The figures are presented for each of the four years, but to explain them here, we focus on the difference between 2010 and the first half of 2013.
The graph currently shows the actual figures for each of the four sectors for those four years. By clicking the “Projections from 2010” button, you can look at how these figures compare with the OBR’s first forecast. The public sector is shown as bars, the other sectors as lines. Hover over the dots or bars to see the values for each year.
Taking the forecast first: accompanying the 6.1% fall in the public sector deficit, the OBR foresaw the corporate surplus falling 3.6% (to 4.7%), the household surplus falling 1.8% (turning a surplus into a deficit of 1.7%) and the foreign surplus (i.e. the rest of the world’s balance of economic transactions with the UK) falling 0.9% (to 1.4%). Rounding errors aside, these three falls (3.6%, 1.8% and 0.9%) add up to 6.1%.
By contrast, what actually happened was that the 3.5%% fall in the public sector deficit was accompanied by a 3.3% fall in the corporate surplus, a 1.8% fall in the household surplus and a 1.6% rise in the foreign surplus. In its forecasts sector by sector, the OBR was therefore pretty close with the corporate and spot on with households – meaning that almost all of the error in forecasting the public sector was matched by an equal but opposite error in forecasting the foreign sector.
Based on a comparison of two points in time, this particular conclusion is not very robust. But it illustrates the basic point. And that point has some wider conclusions.
First, although the household sector switch from surplus (in 2012) to deficit (in 2013) is seen as the source of the spending boost that has supposedly got the economy growing again recently, it is the sector’s failure to spend up till recently that is the greater surprise when viewed through the lens of the 2010 forecast.
Second, any explicit plan to bring the public sector deficit down further in future carries with it an implicit plan to alter the balances of the other three sectors too. The OBR when it publishes its forecasts will tell us what it thinks is going to happen but it will be interesting to see if the Chancellor – or indeed his shadow – makes any reference to this.
Third, that the sector balances add to zero is an accounting identity that always holds true – but that doesn’t say anything about what causes what. What is certain, however, is that the public sector balance does not exist in isolation, as something that can ever be fully controlled by the government. All sides, it seems to me, conspire to give the impression that a government of right-minded and sufficiently resolute people can be in control. The all-constraining accounting identity – accountants rule economists! – means this cannot be so.
Data sources. Projections: OBR supplementary table 1.7, 29 November2010. Latest data: ONS quarterly national accounts data, 2013 Q2 (downloaded 19 November 2013). Series definitions as per OBR but with following adjustments to PSD (and CSS): Royal Mail +£28bn (2012Q2); APF +£18.5bn (2013Q1 and Q2)
This interactive graph derives from an earlier blog on the topic. Read the full blog here. Unfortunately, this visualisation cannot be viewed in older versions of Internet Explorer (IE 8 and earlier). You can download a newer version here.