OECD, spending cuts and the problems of forecasting
The OECD published its latest UK economic survey today and the TUC thinks the Paris-based think-tank has got it wrong. The top line from the OECD report – one that the Government will no doubt latch on to – is that the Coalition is right to go ahead with its spending cuts programme. The TUC’s General Secretary, Brendan Barber, has described the OECD report as far too complacent about the very real risks that deep, early spending cuts pose for the UK economy.
I couldn’t resist chuckle when I read the Guardian website’s first report of the OECD survey. This report has the headline, ‘Interest rates must stay low to protect recovery, OECD says’. To the right of the Guardian website report, in a column entitled ‘Related’, there is a link to a Guardian website report from last May, just a couple of weeks into the Coalition’s term of office. This report has the headline, ‘UK must raise interest rates, says OECD’!
I shouldn’t really laugh. Forecasting, like backing the horses, is a mugs-game. No-one really knows what is going to happen to the economy in the future. Experts simply try to use economic theory and past experience to make the best estimates they can. But their advice also depends on what economic outcomes are most important to achieve, or most urgent to avoid. The TUC doesn’t predict a double-dip recession, for example. In fact, we expect, along with most observers, that growth will return in the first quarter of 2011. But we note in our Budget Submission, to be published shortly, that the Institute for Fiscal Studies’ ‘Green Budget’ thinks there is a one-in-five chance of a double-dip and that is too great a risk for us. And even if a double-dip is avoided, we expect, as do most experts, a long period of sluggish growth. It doesn’t have to be that way. We can pursue an active growth strategy and reduce the deficit, albeit at a slower pace than the one the Government is pursuing. Not to do that risks slow economic growth and, with the pain the cuts will undoubtedly cause, real social harm. That’s why the OECD got it so very wrong today.