An article in the “Financial Times” on 18 January 2018 caught my eye. The editorial stance of the FT and most of its contributors are solidly pro-Remain. So it is hugely to the credit of the editorial team that they publish articles which go against the grain of the paper.
In this case, the article was by Paul Marshall who is chairman of Marshall Wace. Most people know all the Treasury predictions of dire consequences should Britain vote to leave the EU that were published during the referendum campaign. Paul Marshall however goes further and looks at the predictions of the Bank of England both before and after the referendum vote. It is well known that Mark Carney warned that Britain’s exit from the EU would spark a recession. But as Paul Marshall points out, the predictions post referendum by the Bank of England have been just as inaccurate.
In terms of exports, the Bank of England predicted that they would fall by 0.5%. In actual fact they are up by 8.3%. Business investment was predicted to be down by 2%. It is actually up by 1.7% housing investment was predicted to be down by 4.75% it is actually up 5%. Employment was predicted to be stagnant and actually it has gone up by 1%.
Given that this is the body charged with the control of inflation and setting interest rates one has to wonder what consequences this has for the economy in general and taxation in particular. This reverse “Monty Python”- “always look on the gloomy side of life” would be funny if it did not have potentially serious consequences for the economy. At the same time that the bank was issuing its gloomy post BREXIT forecasts, it cut interest rates from 0.5% to 0.25%. A cut which it has now reversed. It may be that the Bank of England has unnecessarily prolonged quantitative easing as well as prolonging artificially low interest rates.
The other effect of over gloomy economic forecasts is that the projections of public finances may indeed be over pessimistic. Government finances were marked down as a result of projections of gloomy productivity growth. Surprisingly (perhaps unsurprisingly!) productivity seems to have sharply accelerated since the gloomy forecasts were produced in November. Moreover a string of economists from Paul Krugman to Jim O’Neill have sharply revised up the prospects for world economic growth and therefore the prospects for the US and the UK as well.
Again, the majority of economists have fallen prey to groupthink. The vast majority were against BREXIT and, unsurprisingly, downgraded their forecasts as a result. One does however have to question, as Paul Marshall does, whether this is not just the operation of cognitive bias.
As economic growth or lack of it has a huge effect on the public finances, a more optimistic prognosis of the economy will probably mean a sharper narrowing of the deficit than predicted. Until recently the commentators have ignored the better than predicted public finances and have considered this to be a blip. If it is not a blip, then the government may have considerably more room to meet urgent public demands for money in areas such as the NHS and defence whilst still keeping public finances on course towards balance. Indeed, if the public finances do come close to balance, there would be a considerable political temptation to try and achieve this balance earlier than predicted. Moreover, if the economy is robust then the thinking would be that there could be a gentle fiscal squeeze which could meet additional public spending without negatively affecting the economy.
Jeremy Mindell is giving a series of talks on year end planning and the future outlook for the economy and taxes during the Spring of 2018.