Thursday 31 December 2020

Marking myself to market: my forecasts for 2020, evaluated

Every year the Financial Times asks, just before Christmas, 100-odd UK economists for their predictions for the year to come.  And in recent years, in the spirit of Brad Delong’s call for economists to “mark their beliefs to market”, I’ve looked back at what I said last year.  This year, of course, is different.  The FT headline on New Year’s Day last year was “Economists predict little change in growth for 2020”.  And the summary was: 

“Any bounce that the UK economy received from Boris Johnson’s decisive election victory would swiftly fizzle out in 2020 as the uncertainties from Brexit continue to curb business investment, according to the FT’s annual survey of more than 85 leading economists. The vast majority of those polled predicted there would be little or no improvement in economic growth this year as chronically weak productivity persists and Britain’s future trading relationship with the EU remains unknown.”

Nothing wrong with this in its own terms. Indeed, given the number of political commentators and journalists (not to mention politicians) who predicted a “Boris bounce”, this suggests that we economists do indeed know what we’re doing, at least when it comes to analysis of the short-term economic impact of social and political events.

Not, however, when it comes to crises. Economists were rightly criticised for our failures in the run-up to the financial crisis of 2008-09 – although, in my view, the valid critique was not of our failure to forecast the crisis but much deeper failures of analysis of the factors that led to it. Nobody is criticising us for not forecasting the pandemic, and therefore (a little light mockery aside) no one is paying much attention to the fact that our forecasts for GDP, unemployment etc in 2020 have no resemblance to what actually happened.

I actually think economists and economics have performed relatively well during the covid-19 pandemic – better than in 2008-09 and its aftermath, and better than I would have expected. But that’s a topic for another blog. Meanwhile, for the record and for future comparisons, here are my predictions from last year. The FT economists’ survey for 2021 will be published early in the New Year, as usual.

Q1. Will the UK see a "Boris bounce" in growth in 2020 - and how long will any improvement last? 

"There may be some post-election boost to consumer confidence and perhaps house prices. But Brexit uncertainty, combined with global economic weakness, will continue to overhang the economy; there is no reason to expect a big upsurge in business investment, given that the UK faces another possible cliff-edge in terms of its trading relationship with the EU in December 2020.  The UK economy will continue to stagnate with only modest growth (and the risks are to the downside)."

EvaluationPre-covid, this was correct; there was no “Boris bounce” and the UK economy was flat in the first quarter of 2020.

Q2. To what extent will fiscal stimulus support the economy in 2020 and beyond?

"To a limited extent; the deficit will rise, both because of lower revenues and discretionary spending increases, but the macroeconomic impact will be modest. However, if there is a more severe downturn, the government will introduce further discretionary stimulus."

Evaluation: Correct and indeed hugely understated! But I got the main point - the government would not repeat the errors of 2010.

 Q3.     Will households feel better or worse off at the end of 2020

 "Wage growth is likely to slow somewhat, so not much better off."

EvaluationAlso technically correct. In fact wage growth as measured by average earnings has indeed slowed only slightly despite covid. 

Q4.  What should the new Bank of England governor change in the conduct of monetary policy? 

"After 10 years of ultra-low interest rates it is past time for a thorough review of the Banks’ mandate – both the exclusive focus on inflation and the level of the target, as well as the wider relationship with fiscal policy. Obviously the Bank cannot and should not lead such a review but it – and especially the Governor – will have an important role to play."

EvaluationNothing much has happened here although there may be an opportunity post-pandemic to look again at these issues.

Q5.  Optional quantitative question - what do you expect for GDP, interest rates, wage growth out of the following options - much higher/a little higher/no change/a little lower/much lower

GDP growth :  a little lower

Interest rates:  no change

Wage growth: a little lower

Evaluation: nul points!

Q6. Is there anything else you would like to tell us?

"Yes, I'm a bit worried about this bat flu in China. " 

Just kidding. I'm not Dominic Cummings. In fact I wrote this: 

 "Last year I said that een abstracting fromv Brexit, the UK economy, like the global economy, is not in great shape. While overall inequality has been relatively stable (although may now be rising), levels of deprivation are a disgrace for a relatively rich, advanced developed economy. The flexible labour market (largely a legacy of policy choices from the mid-1980s on) has delivered close to “full employment” but the current model is clearly not sustainable. And we are no closer to working out how to overcome the chronic short-termism of British business and government. I stand by this."

Evaluation: I still stand by this!

Monday 23 December 2019

Marking myself to market: my forecasts for 2019, evaluated

Every year the Financial Times asks, just before Christmas, 100-odd UK economists for their predictions for the year to come.  And in recent years, in the spirit of Brad Delong’s call for economists to “mark their beliefs to market”, I’ve looked back at what I said last year.  
First, however, it’s worth noting that the collective views of the economists surveyed were, as in the previous year, pretty accurate. The FT survey, unsurprisingly, reflects the overwhelming consensus amongst UK economists that the Brexit vote has already and will continue to be a drag on UK economic growth for the foreseeable future. Here’s the FT’s summary of our views:
“Uncertainty will hobble UK business investment and depress consumer spending in 2019, stunting long-term growth even if Britain manages to avoid a disorderly Brexit, according to a poll of more than 80 leading economists. The best the UK can expect over the year is uninspiring growth remaining at its current level of about 1.5 per cent, even if the economy eventually enjoys a modest rebound on the back of a deal with the EU, the FT’s annual survey on the UK’s economic outlook suggests.” 

Our collective pessimism continues to be vindicated: based on the data so far, this is a pretty good summary of 2019.  

So here are my detailed responses from December 2018 (the whole FT survey is here) with some ex post self-assessment.

To what extent will Brexit-related uncertainty in the first quarter of the year affect the UK economy?

"Brexit-related uncertainty has already affected the economy, with essentially no growth during the past few months; we may already be in recession. I would expect — absent a speedy resolution which seems unlikely — the impacts to spread from large businesses to consumers and business more generally."

Assessment: My response was very much consistent with that of others; and with what actually happened. While there have been ups and downs in measured growth (see next answer) as a result of stockpiling, the underlying picture is of weakness, partly driven by Brexit uncertainty, partly by wider factors.

How will Brexit affect the UK economy over the course of 2019?

"Assuming the worst-case (chaotic no deal) outcome does not materialise, uncertainty is likely to continue. That is, either Article 50 is extended or some version of the current deal is accepted, neither of which resolves the medium to long-term issues, but the current threat of a cliff-edge on March 29 is removed. This should improve confidence in the short term, but Brexit will continue to weigh on business investment for the foreseeable future. So while there might be a “relief bounce”, I wouldn’t expect a substantial “deal dividend”. No deal would almost certainly lead to a severe recession, although uncertainties are huge."

Assessment: This is accurate to date, although we don’t know yet if there will in fact be the claimed “deal dividend” (my answer to this year’s survey says much the same thing).  We don’t know what would have happened in the event of No deal.

After a long squeeze, real wages are finally rising. Will households feel better off at the end of 2019?

"Since the Brexit referendum, real wages have risen by just over 1 per cent; in the two years before the referendum they rose by about 3.5 per cent. From the 1950s to 2008, they typically rose 1.5 per cent or so annually. So by any standards, real wage growth remains anaemic, particularly given low unemployment. Given Brexit uncertainties, as well as the slowing global outlook, I wouldn’t expect real wage growth to be particularly impressive by historical standards any time soon."

Assessment: Real wages grew by about 1.5% in 2019.  Certainly not impressive by historical standards, although perhaps slightly better than I expected; but they may now be slowing.

How far will the government act in 2019 on its promise to end austerity?

"The test of whether the government has made good its promise will be whether we see a real reversal in the rise in rough sleeping, demand for food banks, NHS waiting times and so on; levels of hardship for the most vulnerable in our society that would have been almost unimaginable a decade ago. My prediction would be that, assuming no change of government, we will see some rhetoric but little action: the government may reduce the scale of future cuts to some services, but will do very little to restore the very large and damaging cuts to disability and family benefits, social care, legal aid, justice, prisons and so on."

Assessment: Entirely accurate, unfortunately.

How will monetary policy change in 2019? Do you think the Bank of England will get it right?

"Obviously, this too depends on Brexit, but I think that as the economy weakens the bank will (rightly) be reluctant to raise rates quickly. If there is a short-term fix other than no deal, rates might rise by 0.25bp or 0.5bp, but still remain at historically very low levels. In a chaotic no-deal scenario, I think it’s highly implausible that the bank would raise rates."

Assessment: Correct.

Would you like to tell us anything else?

"Short-term economic forecasts for the UK are currently contingent on short-term political forecasts about Brexit. And as William Goldman (who died a few weeks ago) said, “nobody knows anything”. But, even abstracting from Brexit, the UK economy, like the global economy, is not in great shape. While overall inequality has been relatively stable (although may now be rising), levels of deprivation are a disgrace for a relatively rich, advanced developed economy. By prioritising short-term deficit reduction (in some cases via transparent accounting fiddles, as with the student loans fiasco, now reversed by ONS) over long-term sustainability, the government has left a poisonous legacy for anyone, from whatever party, who wants to be honest with the public about fiscal choices. The flexible labour market (largely a legacy of policy choices from the mid-1980s on) has delivered close to “full employment” but the current model is clearly not sustainable. And we are no closer to working out how to overcome the chronic short-termism of British business and government. Other than that, everything is fine. Happy New Year."

I stand by all this.

Thursday 20 December 2018

Marking myself to market: my forecasts for 2018, evaluated

Every year the Financial Times asks, just before Christmas, 100-odd UK economists for their predictions for the year to come.  And in recent years, in the spirit of Brad Delong’s call for economists to “mark their beliefs to market”, I’ve looked back at what I said last year.  Overall, I don’t think I did too badly – and nor did my colleagues, collectively, with the FT’s summary of our views not being far off what actually happened:

The UK’s economy will slow further in 2018 as business investment remains on hold, interest rates creep up and indebted consumers curb their spending, according to more than 100 leading economists. The majority of economists who took part in the Financial Times annual predictions survey agreed that inflation would start to recede this year, after last year correctly forecasting it would rise sharply. However, after wrongly predicting that interest rates would remain frozen in 2017, economists believe there will be a further 0.5 percentage point rise this year. The UK was one of the fastest growing advanced economies in 2016 but dropped below all other G7 economies in 2017 and is expected to remain towards the back of the pack this year, with Japan and Italy.

Here are my detailed responses from December 2017 (the whole FT survey is here) with some ex post self-assessment. 
1. Economic prospects
How fast do you think the UK economy will grow in 2018 and how will this compare to other countries?  Please explain your answer

The UK economy has slowed considerably with respect to other countries, and I would expect this period of relatively sluggish growth to continue.  Brexit-related uncertainty will persist, which will reduce business and perhaps consumer confidence.  Meanwhile, the labour market will slow, and net migration will continue to fall, reducing labour supply and hence potential growth.  However, if world growth continues to be relatively strong, this will help UK exports and manufacturing, and the impact of the sharp fall in the exchange rate post-Brexit will dissipate.

Assessment: Broadly accurate overall, although slightly too pessimistic with respect to the labour market, and exports have not performed as well as I hoped.

2. Brexit
Compared to what you thought 12 months ago about the UK's long-term economic prospects outside the EU, are you now more optimistic or more pessimistic than you were? Please explain your answer

My central expectation hasn’t changed much, but the variance has increased significantly, because of political events.  It is now considerably more likely that trading arrangements between the UK and EU will remain more or less unchanged until at least 2021 and possibly thereafter, while the possibility of the UK remaining in the EU, while still unlikely, is no longer completely implausible.  Such scenarios would be considerably more benign than I expected last year.  At the same time the risk of a chaotic or disorderly Brexit has not gone away, and the government has shown itself completely incapable of agreeing, let alone implementing, a coherent strategy for the Brexit negotiations, which gives little comfort that they are capable of negotiating a future arrangement with the EU that is in the UK’s economic interests.  So the downside risks have also, if anything, increased.  Right now, anyone who gives a point estimate for the economic impact of Brexit should not be taken too seriously..

Assessment: Hard to argue with this in broad terms, but since this was explicitly about the long-term, we don’t really know. The last sentence still applies.

3. Outlook for consumers
In 2017, consumers' finances were squeezed by rapidly rising prices. Will 2018 be an easier year for UK households and what are the implications for consumer spending?

The impact of exchange rate changes will dissipate, but wage growth will remain subdued by historical standards, and the labour market may weaken somewhat (in the most likely scenario – there are clearly significant risks).  So consumers may have it somewhat easier than this year, but there’s no prospect of a spending boom.

Assessment: As above, a bit too pessimistic about the labour market, but broadly right about the implications for consumer spending.

4. Wages
With unemployment at a 40-year low, how much of a pay rise will British workers get in 2018? Please explain your answer

See above – in the most likely scenario, somewhat more than they got this year (which was basically nothing!) because of the fall in inflation, but nominal wage growth will still remain fairly low by historical standards.

Assessment: Accurate. Despite the hype about the “fastest wage growth in a decade” resulting from the ONS’ misleading focus on nominal wages, real wage growth of 1% of so is nothing to get excited above.

5. Monetary policy
How far will the Bank of England raise interest rates next year? Do you think they should? Please explain your answer

Perhaps to 1% by the end of the year if things go reasonably well in the Brexit negotiations, but they could easily get stuck at 0.75%.

Assessment: Correct.

6. Productivity
Will the UK experience a resurgence of productivity growth in 2018? Please explain your answer

Looking at productivity quarter to quarter or even year on year isn’t very illuminating – a sharp recession and labour market shakeout might easily raise observed productivity. The question is really whether we can break the post-2008 trend of very low/no productivity growth and return to the 1973 to 2008 one of 2% a year or so.  And we won’t know that in 2018.  More broadly, since we don’t fully understand the post-2008 slowdown, it is very difficult to say what will reverse it, but so far there is no indication that current policies or trends will do so.  The UK could have used the long period of historically very low interest rates to boost investment in productivity-enhancing infrastructure and in housing, but chose do the opposite. While the government has made some tentative moves towards reversing this, they will take a long time to bear fruit. 

Assessment: I wouldn’t change this.  

Sunday 18 March 2018

Child poverty forecasts: my bet with Christopher Snowdon

Last week, the Equality and Human Rights Commission published an analysis, by Howard Reed and me, of the impact of changes to tax and benefits on household living standards over the entire period 2010 to 2021-22.  I summarised the key results in the Guardian. We show that these changes are highly regressive: the direct impact is to reduce the net incomes of the poorest fifth of households by about a tenth, on average, while making little or no difference to the incomes of the richest fifth.

We also expect that the impact will be a large rise in child poverty; in particular, we are projecting that as a result of the changes to taxes and benefits, the proportion of children in Great Britain living in households with less than 60% of median income (after housing costs) will rise from just over 30% to about 41% in 2021-22 (Table 1 of the Executive Summary of our report. We could have used other definitions of child poverty – the numbers would be different but the results would be qualitatively similar).

This prediction – which is indeed dramatic – caught the eye of Christopher Snowdon of the Institute for Economic Affairs. Chris’s view is that we are being far too pessimistic; in particular, he notes that predictions made in the early years of the Coalition government by the IFS and others of a sharp rise in child poverty have yet to materialise, partly because of rising employment rates and partly because real wage growth, and hence median income growth, has been very slow.  He also notes, correctly, that the rise we are predicting would be historically unprecedented.

Now economists in general have come in for a lot of flak recently for getting forecasts wrong. Much of this is in my view unfair or misconceived. Nevertheless, I strongly believe that those of us who claim to be experts, and make predictions based on our expertise, should be prepared to stand by those predictions; we should put our money where our mouths are.  

So I offered Chris a bet, which he has accepted, that relative child poverty (on the definition we model) will rise above 37%. This takes into account (in crude terms) the fact that our forecast has a fairly large margin of error: I don’t expect it to be precisely right.  In particular, as Chris rightly highlights below, all sorts of other things will happen to the economy, real wages, rents, etc.  Our model is not a macroeconomic one, and is not designed to forecast those variables, which will impact the results. 

In order to be meaningful, the bet has to be large enough for us to care who wins (ie, it can’t just be a token amount), so it’s for £1,000.  This isn’t the first time I’ve done this: my previous bet with Andrew Lilico (also for £1,000) was on the level of inflation in 2015:  he thought inflation would rise sharply; I disagreed.  I won (unfortunately, Andrew says he’s not allowed to make any further bets with me, although I keep on offering, since Andrew’s predictions on the Brexit process frequently venture into the realms of fantasy).

However, the bet with Andrew was rather easier to define, since we were simply making competing predictions of inflation (“unconditional forecast”).  But the forecast Howard and I are making is conditional; it’s explicitly based on the government implementing the changes to taxes and benefits that have been legislated for or are clearly stated to be government policy.  If those changes aren’t implemented, the forecast isn’t valid any more, and we shouldn’t be held to it.

This raises a slight difficulty in making the bet  - of course there will be further changes in one direction or another, but will they be large enough to mean that we should be no longer held to the forecast and hence the bet should be invalidated?  How big a U-turn – for example on the four-year freeze to most working age benefits, which has a very large impact in our projections – would be required?  In order to deal with this, we’ve appointed an independent arbiter – Chris Giles of the Financial Times, who will if necessary rule on this question in due course.

The final result won’t be in until March 2023 (when the Households Below Average Income statistics for 2021-22) are published. But the first indications will come on Thursday, when the statistics for 2016-17 – the first year of the benefit freeze – are published. 

Christopher Snowdon adds:

I am not betting against Jonathan because his child poverty forecast is the worst prediction ever made, only that it is the latest. I am getting tired of them. We have had eight years of gloomy predictions about rising poverty and spiralling inequality from the ‘independent’ (from whom?) Institute of Fiscal Studies and the relentlessly Eeyorish Resolution Foundation. These predictions invariably receive more media coverage than the real figures do when they are eventually published.

By the time Office for National Statistics’ data exposes these predictions as being wildly off base, people have moved on. No one seems to notice, no one takes the blame and new predictions from the same organisations are given the same credulous reception. As a result, millions of people - perhaps the majority - genuinely believe that the poor have got poorer, inequality has risen, and every measure of poverty has gone up in the age of ‘austerity’.

New figures are published on Thursday but, as of 2015/16, the rate of child poverty is slightly lower than it was before the 2008 crash. This is true in absolute terms, in relative terms and regardless of whether you measure it before or after housing costs. It also happens to be a fact that the incomes of the bottom quintile have risen more than those of richer groups, and income inequality is lower than it was ten years ago. None of this had made the front pages.

The thousand pound question is will it be different this time? It is true that when measured in relative terms, child poverty has risen since hitting a low in 2012/13 and I am less comfortable betting on relative poverty than on incomes or ‘absolute’ poverty (the latter is actually a relative measure that uses 2010/11 as the benchmark). I am generally optimistic about people’s incomes, but with relative poverty it is not clear what optimism implies. Relative poverty tends to fall when the economy is doing badly and rise when it is doing well.

If I thought that the economy was going to be stellar in the next few years while benefits are frozen, I would not take the bet. But I suspect that GDP and wages will, at best, trundle gradually upwards. I don’t share the IFS’s belief that average wages will not return to pre-crash levels until 2022, but it will take at least a year or two.

It is, I think, probable that the next five years will see at least two of the following three: an unspectacular rise in median earnings, fairly low inflation, and rising incomes for those in the bottom deciles who are employed. The government also intends to raise the minimum wage so that it equates to 60 per cent of median earnings, meaning that nobody on the minimum wage full-time will be in relative poverty, and the income tax threshold is due to rise further. This all works in my favour, but it is not the main reason I accepted the bet.

The main reasons are threefold. Firstly, Jonathan was prepared to wager, which is more than can be said for those who make obesity predictions. More academics and pundits should put skin in the game. Incidentally, if any of the people who believe the NHS is going to be privatised want to put money on it, you know where to find me.

Secondly, while I accept that freezing benefits is likely to lead to a rise in relative poverty, the rate being predicted is extremely high. In the last 25 years, it has always been between 27 and 34 per cent. 41.3 per cent by 2021/22 would be one hell of a jump and even the lower rate of 37 per cent that is the basis of our bet would, as Jonathan says above, be unprecedented. That doesn’t make it impossible, but an extraordinary outcome requires extraordinary policies. I’m not convinced that May’s benefit reforms fit the bill.

Thirdly, every previous forecast I can recall has been wrong - and wrong in the same direction. They have all overestimated the rate of future poverty, inequality and, in the case of Danny Blanchflower, unemployment. It would be Sod’s Law if a prediction finally came true when I have money against it, but I don’t think the earlier predictions were wrong because of a run of bad luck. I think they suffered from the same systemic flaw. Leaving aside the possibility that they they are deliberately biased upwards to draw public attention to policies of which the authors disapprove, they tend to be based on what people’s income would be if they did not respond to economic incentives. But people change their behaviour to maximise financial returns. One reason why incomes have risen so much in the bottom fifth since the crash is that people have moved into the labour market - or, if already in the labour market, have worked more hours. We now have the lowest unemployment rate in forty years, but it could go lower.

I haven’t read Jonathan’s report and I claim no expertise. I am just some chump who distrusts gloomy economic forecasts. Do bear that in mind if I win the bet. But I have to say that this is probably all academic. The most likely outcome of this bet is that it is invalidated by a change in policy. The Tories have developed a peculiar habit of shouting loudly about big, unpopular spending cuts and then whispering quietly when they deliver the inevitable U-turn, thereby ensuring the worst possible publicity for the least possible benefit to the public finances. I expect these reforms to be watered down or ended prematurely for political reasons, so we will probably never know if Jonathan’s model was right.

Wednesday 27 December 2017

Marking myself to market: my forecasts for 2017, evaluated

Every year the Financial Times asks, just before Christmas, 100-odd UK economists for their predictions for the year to come.  And in recent years, in the spirit of Brad Delong’s call for economists to “mark their beliefs to market”, I’ve looked back at what I said last year.  So here are my responses from December 2016 (the whole FT survey is here) with some ex post self-assessment.  

1. Economic prospects

How much, if at all, do you expect UK economic growth to slow in 2017? Please explain your answer.

I would expect it to slow somewhat in the first half of the year. What happens in the second half depends very much on developments with the Brexit negotiations (as well as events in the US and elsewhere in Europe). We could see reasonable if not spectacular growth, but downside risks are large

Assessment: Accurate. Growth did slow significantly in the first half of the year, but there was no recession.

2. Brexit

Compared to what you thought 12 months ago about the UK's long-term economic prospects outside the EU, are you now more optimistic or more pessimistic than you were?

Please explain your answer.

The strong consensus amongst economists is that Brexit will make the UK significantly worse off in the medium to long term - not disastrously so, but significantly. This is backed up by a considerable body of theoretical and empirical evidence. Of course, this evidence is based on historical data, and past is not necessarily prologue; there is a high degree of uncertainty. But the probability must be that Brexit will make us worse off. It is also important to note that while economic developments since the referendum have certainly not borne out the pessimistic forecasts of some institutions, that really tells us almost nothing about long-term impacts - short-term forecasts are made using very different methodologies to those used to estimate long-term impacts, and (paradoxically) are much less reliable.

Assessment: not much new evidence on this.  It still seems a reasonable assessment to me.

3. Inflation

Inflation has started to increase in recent months. To what extent do you expect inflation to rise in 2017?

If the exchange rate stays where it is to about 3%. However, if it falls a lot farther inflation could rise more (or conversely)

Assessment: Accurate. It is currently at 3.1%, which is likely to be the peak.

4. Monetary policy

In December, the Monetary Policy Committee said the next interest rate move could as easily be up as down. Will there be a shift in this monetary policy stance by the end of 2017? Please explain your answer.

It is difficult at the moment to see the next move being down, even if the economy worsens. Barring negative shocks (which are quite possible) I'd expect the next move to be up.

Assessment: Accurate.  The Bank of England raised interest rates in November.

5. Immigration

Immigration is likely to be central to the Brexit negotiations in 2017. How much do you think immigration will change and what effect do you think this will have on the UK economy?

My recent research suggested that EU migration to the UK could fall by well over half over the period from now to 2020, resulting in net EU migration falling by more than 100,000. Both the state of the economy and the existence of free movement of workers are significant determinants of migration flows. In particular, free movement with the UK results in an increase of almost 500% - that is, by a factor of six. It follows any significant restrictions on free movement will reduce those flows. I also used the existing empirical research on the impact of migration on productivity, growth and wages to estimate the broader economic impacts of such a reduction. Over the period to 2020, the resulting reduction in GDP would be about 0.7 to 1.3%, with a GDP per capita reduction of 0.3 to 0.8%. By contrast, the increase in low-skilled wages resulting from reduced migration is expected to be relatively modest.

Assessment: Accurate up to now. As I predicted, migration, especially from the EU, has already fallen substantially, even before any changes to free movement or immigration policy, and this is likely to be part of the reason growth has weakened. 

6. Fiscal policy

Philip Hammond is expecting government borrowing to fall in 2017. His new fiscal rules provide headroom for more borrowing than currently forecast. To what extent will he need to use it and why?

The OBR's fiscal forecasts look relatively pessimistic; however the economic ones may be too optimistic. Moreover, current spending plans for health and social care (and perhaps education) look unrealistic. The NHS is clearly significantly underfunded (it is basic economics that a richer, older society should, from the point of view of overall welfare or wellbeing, spend a greater proportion of GDP on health over time - the reverse has been the case over the past few years.) It is not clear that such spending increases should be financed by borrowing, but the government is unfortunately committed to a set of tax cuts that have little economic rationale and will mostly benefit the relatively better off. Some discretionary increase therefore seems likely.

Assessment: Accurate.  It has become abundantly clear (if it wasn’t already) that the NHS is underfunded, and, as I suspected, the government does not have the political will to raise taxes. There has therefore been some discretionary fiscal loosening, although current plans still look unrealistic and the current government is still intent on changes to the tax and benefit system that will redistribute from the poor to the better off.

7. Donald Trump

How do you think Donald Trump's presidency will affect the UK economy in 2017?

This is exceptionally uncertain, for obvious reasons. However, it does look likely that US interest rates may now begin to rise steadily. This will put some downward pressure on the pound and upward pressure on UK long-term rates, which may well be unwelcome.

Assessment: Mixed at best.  Interest rates have risen, but not steadily, and sterling has risen against the dollar rather than fallen over the year. Not particularly insightful (though I did say that it was highly uncertain).

Overall assessment: Broadly accurate. I got most things broadly right: growth, inflation, interest rates, fiscal policy, and – reassuringly, given that this was based on my research rather than just educated guessing – immigration.  Indeed, it’s notable that while lots of economists got individual things wrong, overall and on average we were pretty accurate, especially on the UK’s headline growth performance. I don’t think any of us said anything terribly useful about Trump, however, certainly not me.

Finally, since Patrick Minford, of Economists for Brexit, recently claimed, falsely, that I’d predicted a recession after the Brexit vote, it’s worth noting what he said last year: 
The Cardiff/Liverpool forecasting group does not expect a slowdown but rather that growth will continue in the 2-3% corridor of 2016.   The reasons are that a) the Brexit long run effect should be positive due to the opening up of free trade globally and the return of regulation to the UK from the EU, while we expect migration control to be exerted on unskilled labour where taxpayer costs are high, leaving skilled labour lin its current liberal regime. b) ‘uncertainty’ is mild, since it spans a range from a status quo ‘soft’ Brexit to a ‘clean’ Brexit with effects as in a)- uncertainty therefore about the upside.

More (even more embarrassing) detail here, via Chris Giles. 

The FT Economists survey for 2018 will be published early in the New Year.

Friday 22 September 2017

Citizens' rights: will Theresa May keep her promise?

Did Theresa May just commit the UK to keeping a key Vote Leave promise? No, not the £350 million – we may be getting back full control over our own laws, but not the laws of arithmetic. I mean this one, signed by three current members of the Cabinet, Boris Johnson, Priti Patel, and Michael Gove:
There will be no change for EU citizens already lawfully resident in the UK. These EU citizens will automatically be granted indefinite leave to remain in the UK and will be treated no less favourably than they are at present
In fact, when the UK belatedly produced its counterproposals on the rights of UK citizens in the EU and EU citizens here, they were considerably less generous than the offer made by the EU27, and in particular they explicitly removed a number of important rights.  Perhaps most obviously, the UK proposes that EU citizens in the UK will no longer have the same rights to be joined by family members, but instead will be subject to the considerably more restrictive rules applied to UK nationals:
Future family members of those EU citizens who arrived before the specified date – for example a future spouse – who come to the UK after we leave the EU, will be subject to the same rules that apply to non-EU nationals joining British citizens
Now, some might argue that this is “fair”, because it brings to an end a position where EU nationals in the UK (and indeed UK nationals elsewhere in the EU) have, in some respects, more rights than Britons here. On the other hand, EU nationals who moved here exercising their free movement rights did so on the basis that they had these rights, which the UK signed up to in various Directives. 

Moreover – and this is my view – if anyone is really worried about the “unfairness” to British citizens, then that unfairness could be ended tomorrow by the UK government, which could simply give us the same rights EU citizens have. The fact that most of those who make this argument are unprepared to contemplate this solution carries more than a whiff of hypocrisy.  Nor are these the only rights EU nationals will lose, as Dr Mike Ward explains.

Some commentators – in particular, Migration Watch and Daniel Hannan – continue to attempt to mislead the public about this: for example, Daniel Hannan recently claimed that “EU citizens will have all the same rights as now”, while Migration Watch argue that when they said that “EU citizens will keep their existing rights” they didn’t mean all their existing rights.  But no one senior in government has made such an obviously false claim; indeed, David Davis explicitly recognised that EU nationals would lose some of their current rights, saying “we agonised” over the issue.

That is, until today, when in response to a question from an Italian journalist, the Prime Minister did just that (video – at about 1.13):
Q.  As you said, 600,000 Italians now live in the UK.  You said that you want them to remain.  What is going to change for them – I guess something is going to change?
A. (the Prime Minister).  We set out that for those EU citizens currently living in the UK who have made the UK their home, including those 600, 000 Italians who are in the UK, we want them to be able to stay and to have the same rights as they have at the moment.
That is unequivocal.  The same rights they have now.  Now, of course, the Prime Minister’s statement is technically untrue – the UK has set out no such thing.

But that’s not really the point, because what matters is not what we’ve said so far, but what we do next – and in particular, what David Davis and Ollie Robbins, our lead representatives, say at the negotiations next week.  Monsieur Barnier has already signalled very clearly in his response to the speech that he expects them to make good on the Prime Minister’s promise. 

So do they say that the Prime Minister didn’t really mean it, or didn’t understand what she was saying, and that the UK’s position remains unchanged – we have no intention of giving EU citizens “the same rights as they have at the moment”?  In that case, why on earth should anyone in the rest of the EU27 take anything she, or the UK government says, seriously? Such a course would be deeply damaging to the Prime Minister’s credibility (especially in Italy, where her comments have been widely, and accurately, reported).  Or do they, belatedly, do the right thing, and change the UK’s approach -  a course of action which would generate a huge amount of goodwill?  Three million EU citizens here and a million Britons elsewhere in the EU are waiting to hear. 

Wednesday 5 April 2017

The contradictions of Fraser Nelson

Fraser Nelson is upset with this passage, from my blog about statistics yesterday:
A similar, but even more toxic, disjunction from reality is seen in those who claim that poverty is not about money. For example, Fraser Nelson frequently claims that the Labour government saw poverty solely through the lens of numbers, and that the Brown strategy of attacking child poverty by redistributing money to the poor via tax credits was simply manipulating numbers on a spreadsheet. 
Fraser says:
You quote me saying “poverty is not about money”. I’ve never said that. My point: it’s not JUST about money. Please correct.
Fraser can read and isn’t stupid, so he knows perfectly well I didn’t “quote” him directly saying “poverty is not about money”; rather, I attributed that view to him (among others). And I linked to his Telegraph article, in which he says this:
At the heart of the Child Poverty Act lies an agenda which has arguably done more damage to Britain’s social fabric than any idea in modern history. It is based on the Eurostat definition of poverty: an income 40 per cent below the national average....instead of fighting poverty, the Labour government spent billions manipulating a spreadsheet – to catastrophic effect.
Tax credits boosted the incomes of low income families and reduced poverty as measured by low income.  It is therefore, as a matter of simple logic, impossible for Fraser to admit that, as he did yesterday, that “low income is the most important measure of poverty”, and at the same time stand by his earlier view that billions were spent on tax credits “instead of fighting poverty”. 
If Fraser’s point was that at least some of the money spent on tax credits could have been spent more efficiently on addressing poverty in other ways – that is, that what Labour did was not necessarily the best way of fighting poverty - then he could have said that. But he didn’t. Instead, he claimed that money spent on tax credits made absolutely no difference to poverty – and indeed, in some undefined sense, had a “catastrophic” impact.  And just in case anyone thinks I’m quoting him selectively, nowhere in his entire article is there anything remotely consistent with his admission yesterday that low income is indeed the most important measure of poverty..

Now it may be that the obvious contradiction between Fraser’s article and what he said yesterday means he’s changed his mind. In that case he should say so. Or maybe he never really meant what he wrote, but went over the top in his hyperbole, Again, he should say so. What he shouldn’t do is try to pretend he never made an argument he – rightly – describes as “repugnant”. 

Finally, Fraser decided to invoke the Independent Press Standards Organisation, resulting in this exchange:

He has declined to take me up on it. The offer remains open.