In 1976 Jim Callaghan’s government was forced to borrow $3.9 billion from the IMF to stabilise the value of sterling. The money was to be used to repay central banks around the world who had helped to prop up the pound and was contingent upon the UK introducing measures to reduce the budget deficit by drastically cutting public spending. The move caused division in the Labour Party, contributed to the demise of the post-war Keynesian Consensus, and helped to pave the way for Thatcherism.
However, it turned out that the government only needed half of the IMF loan and it managed to repay it much more quickly than expected. HM Treasury had given Chancellor Dennis Healey the wrong figures because the government was borrowing far less than was thought. Some believed this was due to some sinister conspiracy perpetrated by meddling mandarins to save the country from Socialism and usher in a return to sound money. The truth was much more mundane. It turns out that the Treasury had simply got its analysis and forecasts wrong. Never attribute to malice that which is adequately explained by stupidity.
Almost half a century later and we’ve seen history repeat itself (although not quite as dramatically). This is because last week the ONS revised its analysis of UK GDP and found that not only is the economy larger than originally thought, it also recovered more quickly from the pandemic than was previously stated.
Forecasting is tricky and it was notoriously difficult to measure GDP during the pandemic. The nation statistics offices of other countries also found this and the ONS actually did a better job than many of them. It is also important to point out that the ONS is internationally respected and is generally good at its job.
However, the forecasts made by the ONS, OBR, the Bank of England, and other organisations are incredibly important. As we saw in 1976 it led to division in the governing party, led to a paradigm shift in economic thinking, and arguably helped change the course of history. The forecasts from these bodies have far reaching consequences. They determine how much the government decides to borrow, how much to spend, and whether or not it needs to raise taxes or if it has room to cut them. They shape the political debate as policy decisions are deemed to be successful or have failed based on these forecasts. Investment decisions will have already been made based on the incorrect analysis from the ONS meaning that British businesses and the economy may have missed out.
We have seen that even the absence of forecasts can have big implications. One of the many reasons why Kwasi Kwarteng’s so called mini-budget was so disastrous was because he failed to wait for a forecast and analysis from the OBR. This spooked the markets as it signalled that he wasn’t credible and ultimately ended his tenure as Chancellor and brought down Liz Truss’ government.
Forecasts and analysis from the ONS and other bodies can end political careers and bring down governments. More seriously, they have an impact on businesses and the lives and livelihoods of ordinary people. It’s important that they get it right.
It’s encouraging that the Bank of England has brought in former Fed Chairman, Ben Bernanke in to lead a review of its forecasting. The ONS and OBR should take similar steps to improve its output and to ensure it remains world class.
The ONS should also seriously consider relocating its HQ back to London. When it moved to Newport 90 per cent of London based staff resigned rather than move. A 2015 review found that this led to a loss of expertise and had a negative impact on the performance of the ONS. Newport is, of course, a great place, and we know that talent is distributed across the UK. But we also know that London is a draw for people and there is a pool of high quality economists and statisticians there for the ONS to choose from.
We also need to look at pay. People with skills in economics and statistics are in high demand in the City and so if we want to encourage them to work in the public sector then we need to pay them accordingly.
Forecasts and economic analysis sound dull and detached from the real world. However, they have a huge impact on all our lives and so bodies like the ONS need to get even better at it.
Ben Ramanauskas is a research fellow at Oxford University and an associate fellow at Bright Blue.