From the TUC

Office for Budget Responsiblity: Are the jobs forecasts credible?

02 Jul 2010, by Guest in Economics, Labour market

There has been a lot of debate this week about the Office for Budget Responsibility’s forecasts for employment over the next five years.  The debate has been compounded by the leak of Treasury documents dealing with the same issue.

There is also some confusion about whether the OBR is predicting jobs growth of 2 million or 2.5 million by 2015 and how this fits, if at all, with the HMT’s leaked forecast of 2.5 million new jobs.  The key point, however, is that either level of jobs growth could credibly create new work for all those who have lost their jobs since the recession began and those who are likely to lose their jobs as a result of the cuts announced in the Budget. An issue of some economic and political importance to say the least.

One can debate the OBR’s forecasts in a number of ways. One possible method is to compare it to the historical record on jobs growth.

For the sake of argument we can say that the OBR is predicting either 2 million or 2.5 million jobs growth over five years off the back of average annual GDP growth of 2.5% (as stated in the OBR Budget Forecast).  How does this compare to the experience after the 1980s and 1990s recessions?

Assuming that the OBR’s forecasts begin around the second quarter of positive growth after the end of the recession (which was roughly where we were at the beginning of this fiscal year), we can see the following:

After the recession of 1980/81, 2 million jobs were created in the economy over a period of seven years off the back of average annual GDP growth of 3.6%.  2.5 million jobs were created over eight years with GDP growth of 3.5%.

After the recession of 1991/92, 2 million jobs were created over a period of nine and a half years with average annual GDP growth at 3.2%.  Creation of 2.5 million jobs took eleven years with growth of 3.1%.

Against this experience, the OBR forecasts do look optimistic: it is predicting that post-recession employment will rise significantly faster than in the 1980s or 1990s on a slower growth rate.

It may be that the OBR has extremely good reasons to expect a much faster pick-up in employment.  In its Pre-Budget Forecast and Budget Forecast it suggested that demographic factors, low labour costs and early stabilisation in the labour market gave it cause for optimism. But all of these factors are only mentioned without any detailed account of their significance or impact.  Indeed, the Budget Forecast seems to give equal weight to other factors which might hold down a labour market recovery: a collapse in demand and a rise in labour costs.

This makes it very difficult to make any strong assessment of the OBR’s reasoning and hence its forecasts.  This might not matter if it wasn’t for the fact that the OBR’s work is clearly not only crucial to the decisions being taken by the Chancellor but have also become matters of intense political, market and public interest.

Usually we might be able to rely, to some extent, on the fact that the National Audit Office would provide independent scrutiny of the underlying assumptions as it does for the Budget itself.  But all we have had so far from the NAO is an assessment of whether the OBR is operating independently – nothing on the content of the OBR reports themselves.

Given how important the OBR has become and how much uncertainty both economically and about its own methods it is generating, I would have thought this should at least be an issue for an urgent inquiry by the Treasury Select Committee if not the Treasury itself.

UPDATE: This blog post has been covered in The Guardian today.

4 Responses to Office for Budget Responsiblity: Are the jobs forecasts credible?

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