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Forecasting is a mug’s game

Geoff Riley

21st April 2009

Budget day tomorrow and we prepare ourselves for another Treasury macroeconomic forecast that continues the a long series of back of the envelope calculations that turn out to be wildy optimistic. Stephen King throws a much needed bucket of cold water on the Treasury and Bank of England forecasts in his weekly column in the Independent:

“A sensible fiscal rule might be “the good times won’t last”, thereby emphasising the need to run healthy fiscal surpluses during periods of apparent economic good fortune. Yet few governments have been wise enough to deliver such outcomes (they’re mostly too focused on the next election). So when the economy suddenly and unexpectedly collapses, the fiscal situation is often not strong enough to offer sufficient cushioning…....Governments and central bankers like to give the impression that, somehow, they are in control. They can certainly make a difference but, ultimately, the UK economy is at the mercy of changes in the global economic weather conditions. Weather forecasters know that developments elsewhere have a huge impact on conditions in the UK. Economic forecasters, on the other hand, seem to think the UK is, economically, an island.”

More here

One of Stephen’s regular themes is that macro-economic policymakers are groping in the dark because they have lost control - the traditional instruments of macro demand management have (perhaps for the moment) developed an annoying fault and no longer seem to work in predictable ways.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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