Howe's little red book
Tim Congdon
With every Budget the government publishes a slim, but factual, volume called the Financial Statement and Budget Report. From the colour of its outside and the sententiousness of its contents, it deserves to become known as the Chancellor's Little Red Book.
,However, it is not designed for a mass readership and has so far failed to reach the best seller lists. Its authors are civil servants Whose intention is to inform rather than to entertain. They have been successful in this aim because, quite frankly, the FSBR does not make exciting reading. The style is flat, the vocabulary technical. This is a pity because every FSBR contains a forecast of what the government thinks is going to happen to the economy over the next eighteen months. The report is the joint product of a computer and Treasury officials and, even if the combination does not inspire much confidence, the forecast does describe the framework in Which economic policy decisions are expected to be taken. On this occasion the forecast has received some publicity, however, because, if the numbers it contains are even aPproximately correct, the outlook for Britain's economy is terrible indeed. Inflation, as measured by the retail price index, is predicted to reach 16 per cent by the third quarter of this year and to be still as high as 131 by the third quarter of 1980. National output will be 1 per cent lower in the first half of 1980 than in the first half of 1979. The current account of the balance of payments is expected to be zero in the first half of 1980 despite the attainment of selfsufficiency in oil. One point, then, should be made in favour of the forecast. It is honest. In this respect, it is a welcome departure from the precedent established by the Labour government of carefully doctoring the figures for public relations purposes. Mr. Healey always saw the inflation estimates as a method of moulding expectations about Wage bargaining and, consequently, as an integral part of the incomes policy exercise. No wonder that Mr. Callaghan, the warrior of E6 a week and 5 per cent, should have been alarmed at the outbreak of truthful economic statistics and said in the House that the government should be 'ashamed' of itself. Some cynics have suggested that Sir Geoffrey. Howe and his team have contrived the worst possible forecast. If it turns out rather better than they have predicted, they can earn the plaudits for skilful economic management. But incoming ministers do not have so much guile. It is more likely that Treasury civil servants simply published the numbers spewed up by the computer print-outs, while their political masters were either too busy with other concerns to impose a censored, more optimistic version or were genuinely eager to present the unvarnished truth.
The difficulty, though, is that the forecast is so bad it could reasonably be described as based upon unvarnished lies. No private sector forecasting body has inflation figure as high as 16 per cent in 1979 and 131 in 1980 — let alone the 171 per cent advanced by Mr Patrick Jenkin. There is, in fact, an irreconcilable conflict between the government's inflation forecasts and the recent performance of the pound. The pound has risen in value against other currencies by about 6 per cent since the beginning of the year, a movement which, on standard economic logic should imply that Britain's inflation rate will be lower than in other countries. If the government is right, it will be much higher. The anomaly could be removed if the pound were to collapse on the foreign exchanges in coming months — but does the government expect to have a sterling crisis to add to its woes?
That the Little Red Book should have " injected 15 per cent plus inflation forecasts into public debate has unquestionably damaged the outlook for wage negotiations and will make it harder for companies to persuade their employees to accept moderate pay awards. Moreover, if output does fall 1 per cent by early next year, as the forecast suggests, any tendency for workers to price themselves out of jobs can only make matters worse.
It is difficult to see what the government can gain from the economic forecast to which its name is attached. But what could have been done in its place? A pessimistic forecast intensifies the worst expectations: an optimistic forecast lacks credibility; and a compromise between an optimistic and a pessimistic forecast is a convenient Aunt Sally for the government's critics when, as is invariably the case, one or another economic variable behaves very differently from that envisaged. Until three years ago the government never made public the forecast intensifies the worst expectations; Although the Treasury has subsequently been praised for 'opening up' it is easy, with the benefit of hindsight, to understand the reasons for the former secrecy and to respect the veil of reticence in which the computer and economic model were shrouded.
The argument is given another complexity by newspaper reports that an official forecast of 20 per cent inflation and two million unemployed has been suppressed. Any forecast relies on assumptions — and must, to some extent, be determined by those assumptions. If the assumptions are gloomy, the forecast will also be gloomy. Now it is open to any civil servant involved with the Treasury's forecasting side to examine a particular case where everything 'exogenous' to the model (or, in plain language, which he has to guess) goes wrong. An outcome with 20 per cent inflation and 2 million unemployed — or, indeed, 50 per cent inflation and 5 million unemployed — could easily be generated. But whether it would have any relevance to economic policy formation is, for the time being anyway, rather hypothetical. There are at least half a dozen economic forecasts circulating in the official machine at present and I can disclose, without any inside information, that one of them foresees 8 per cent inflation and under one million unemployed by late 1980. Its only drawback, from a journalist's point of view, is that it happens not to be newsworthy. The newspaper reports were good journalism, but they may have been based on bad economics. Until we see the assumptions on which the forecasts were based, we just cannot know.
Does it follow that the Treasury should not construct economic forecasts? None were prepared in the Fifties — perhaps the most stable decade, in terms of prices, employment and output, that the British economy has ever experienced. Their absence seems to have, on average, been no hindrance to the right decision being taken. Would it really matter now if the government abandoned elaborate forecasting and the economically literate public had to rely instead on the National Institute, the London Business School and a few stockbroking firms?
The FSBR would still have to be published. But it could be confined to detailed estimates of tax revenues and public expenditure, as was for decades. It would then be dealing with subjects which the government can and should control rather than with the whole economy which, in general, it cannot. If next year's Little Red Book is more reluctant to pronounce on Britain's economic prospects, the government may find that the reaction to its Budget measures is a little less agitated.
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