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FactCheck: is the treasury good at forecasting?

By Channel 4 News

Updated on 13 March 2008

Alistair Darling says the government's pretty good at making accurate economic projections. Is he right?

The claim

"The treasury's record of forecasting over the last ten years has been good."
Alistair Darling, Today, 14 March 2008

The background

Poor old politicians. Not only do they have to defend their record and current course of action, they also have to predict where things are headed. This is in order to keep the country on the rail, and set the right policies for the future.

In yesterday's budget, the chancellor readjusted some of his economic forecasts, saying that borrowing would, on average, be £5bn a year higher over the next four years than he predicted during the pre-budget report in October, just five months ago.

Defending his record today, the chancellor said this change wasn't entirely surprising, given the turbulence that kicked off in the financial markets last year, with the American economy struggling.

But how reliable have their forecasts been in the past? Today, Alistair Darling claimed the government had a good track record of predicting things right. Is he right?

The analysis

During Labour's first term - back in the days of "prudence" and sticking to Tory spending plans - the party's borrowing forecasts tended to be pessimistic.

But things changed after 2001, with the chancellor having to revise borrowing forecasts up for each of the last seven budgets.

For example, in the 2004 budget, Gordon Brown said borrowing was £37.5bn, and would go to £33bn the following year, and this year would be £31bn. The next year's budget, however, saw all the figures being put up by a billion.

As Darling said in yesterday's budget, the current borrowing figure is £36bn - not £31bn.

This is important, politically; Gordon Brown has set great store on the golden rule, which states that the government will balance the books over an economic cycle.

And although the economic picture can fluctuate year on year, Labour's optimism is something the independent Institute for Fiscal Studies - the country's most respected independent financial thinktank - has warned about.

Back in January 2005, the IFS's Green Budget - a comprehensive analysis of the state of the country's finances - estimated the chancellor would need to raise taxes by £11bn to make things add up.

The Institute suggested then that "government borrowing will be higher over the next few years than the Treasury thinks, in large part because tax revenues are not expected to grow as quickly as it hopes".

'The problem with the borrowing forecasts being too optimistic is that when you do run into trouble, you have to do these things suddenly.'
Gemma Tetlow, senior research economist at the IFS

So what happened? The government did take action, with a lean comprehensive spending review, although not until after the 2005 election.

Accordingly, the IFS noted in its 2006 budget analysis that "the run of consistently overoptimistic fiscal predictions" may be coming to an end.

However, this doesn't seem to be the case more recently. The IFS predicted in January that the government had an £8bn budget hole which would have to be filled by raising more money, or cutting spending.

The measures introduced in this budget plugged that hole to the tune of £5.5bn, although £4bn of this would have to come from cuts in the next comprehensive spending review - as yet, it's not clear exactly where these would be made.

How has the government done compared to its predecessors? According to IFS analysis of budgets over the past 30 years, one-year ahead borrowing forecasts pre-Labour tended to be out to the tune of one per cent of GDP (about £13.6bn in today's money). Under the present government, the average error up to 2006 was broadly similar: 0.9 per cent of GDP, or £12.6bn.

So are Labour's prediction errors fair enough? Although no financial forecast can be guaranteed to get things spot on, erring too far on the side of rosiness can have serious consequences.

"If borrowing is going to be higher, you'd rather know sooner to take action - whether to rein in spending plans or introduce more taxes - gradually," said Gemma Tetlow, a senior research economist at the IFS.

"The problem with the borrowing forecasts being too optimistic is that when you do run into trouble, you have to do these things suddenly."

The verdict

Statistically, the government's record of predicting borrowing is comparable to its predecessors. But its borrowing forecasts have been pretty consistently over-optimistic in recent years - something which independent commentators have pointed out.

This gives the government less flexibility now, as the global economy enters a tricky period. And just how tricky this will be is, sadly, not a question that can be answered without a time machine or a crystal ball.

FactCheck rating: 3.5

How ratings work

Every time a FactCheck article is published we'll give it a rating from zero to five.

The lower end of the scale indicates that the claim in question largerly checks out, while the upper end of the scale suggests misrepresentation, exaggeration, a massaging of statistics and/or language.

In the unlikely event that we award a 5 out of 5, our factcheckers have concluded that the claim under examination has absolutely no basis in fact.

The sources

Budget speech 2008
Budget statement 2007
Budget statement 2006
Budget statement 2005
Budget statement 2004
IFS: budget 2008
IFS: budget 2007
IFS: budget 2006
IFS: Green budget 2005

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