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Uncertainty in the forecasts

Uncertainty in the forecasts. Carl Emmerson. Previous HMT forecasting errors. Source: HM Treasury (2003). Previous HMT forecasting errors. Source: HM Treasury (2003). Errors in borrowing forecasts. % of GDP. Source: HM Treasury (2003); Emmerson, Frayne and Love (2004).

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Uncertainty in the forecasts

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  1. Uncertainty in the forecasts Carl Emmerson

  2. Previous HMT forecasting errors Source: HM Treasury (2003)

  3. Previous HMT forecasting errors Source: HM Treasury (2003)

  4. Errors in borrowing forecasts % of GDP Source: HM Treasury (2003); Emmerson, Frayne and Love (2004)

  5. Errors in borrowing forecasts % of GDP Source: HM Treasury (2003); Emmerson, Frayne and Love (2004)

  6. Uncertainty over path of PSNB • Forecast errors are normally distributed • Average error is zero • But forecasts are based on ‘cautious assumptions’ • Accuracy is the same as past • This will understate true forecasting errors as previous errors not adjusted for subsequent policy changes

  7. Uncertainty over path of PSNB Source: IFS calculations

  8. Uncertainty over path of PSNB Source: IFS calculations

  9. Uncertainty over path of PSNB Source: IFS calculations

  10. Uncertainty over path of PSNB Source: IFS calculations

  11. Uncertainty over path of PSNB Source: IFS calculations

  12. Uncertainty over path of CBS • Forecast errors are normally distributed • Average error is zero • But forecasts are based on ‘cautious assumptions’ • Accuracy is the same as past • This will understate true forecasting errors as previous errors not adjusted for subsequent policy changes • Assume similar errors in forecasting current budget surplus and net borrowing • Account for correlation in errors from all forecasts made at the same time

  13. Will the golden rule be met? Source: Emmerson, Frayne and Love (2004)

  14. Will the golden rule be met? Source: Emmerson, Frayne and Love (2004)

  15. Will the golden rule be met? Source: Emmerson, Frayne and Love (2004)

  16. Will the golden rule be met? Source: Emmerson, Frayne and Love (2004)

  17. Will the golden rule be met? Source: Emmerson, Frayne and Love (2004)

  18. Will the golden rule be met? Source: IFS Calculations

  19. Conclusions • Over the current economic cycle: • Treasury forecast for Golden rule to be met • At best a 62% chance of success • Relies on stronger growth in receipts and slower growth in spending • Looking forwards • Treasury forecast for Golden rule to be met • Relies on strong growth in tax receipts • Not expected to be met under ‘cautious case’

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