APPENDIX
GOVERNMENT RESPONSE TO THE FIRST REPORT OF THE HOUSE
OF LORDS SELECT COMMITTEE ON ECONOMIC AFFAIRS, SESSION 2006-2007
Treasury GDP growth forecasts
1. The Committee's report states:
- "The evidence shows that
the Treasury's forecast of economic growth has been too high for
the last five years." (Paragraph 22)
- "… despite the increase in taxes, the
budgetary position has deteriorated over the year. The reason
for this seems to be a revision downward to the forecast rate
of GDP growth." (Paragraph 22)
- "… we are concerned that consistently
over-optimistic GDP growth forecasts have led to over-estimates
of tax revenues and hence to under-estimates of the budget deficit
and borrowing requirements … This is something that we think
the Government should take careful note of." (Paragraph 25)
2. It is not clear what evidence the Committee
has used to support these statements, especially given that the
Treasury uses the lower end of the published GDP forecast ranges
as the basis for projecting the public finances. As shown in the
table below, of the 60 Treasury GDP growth forecasts made for
individual years between 1997 and 2006, as published in Budget
and Pre-Budget Reports between Budget 1997 and Pre-Budget Report
2006, three-quarters (45) have proved to be lower than or equal
to the latest outturn data. In other words, latest outturn data
have mostly fallen within or exceeded the Treasury GDP growth
forecast ranges. Conversely, the lower end of the Treasury's forecast
range has exceeded the latest outturn data for only a quarter
of the forecasts. The average Treasury forecast error (mid-range
forecast less outturn) over this period is -0.2 percentage points,
implying that on average outturns have exceeded the Treasury's
forecasts. This compares with the independent consensus' average
forecast error of -0.5 percentage points[1],
indicating that Treasury forecasts have shown less bias.
3. The Committee's Report refers specifically
to the Treasury's forecasts "for the last five years".
Interpreting that to mean forecasts made for the years 2001 to
2005 inclusive (between PBR 1998 and PBR 2005), in almost two-thirds
of the cases (22 out of 35) the latest outturn data fall within
or exceed the Treasury's GDP growth forecast ranges. Alternatively,
just looking at the Treasury's GDP growth forecasts made for the
years 2001 to 2005 inclusive since Budget 2001, in over two-thirds
of the cases (18 out of 26) the latest outturn data fall within
or exceed the Treasury's GDP growth forecast ranges.
4. Thus the evidence cited in the table (below)
clearly indicates that Treasury GDP growth forecasts have typically
undershot the latest outturn data, contrary to the statements
in the Committee's Report.
5. Pre-Budget Report 2006 shows that the Government
is meeting its strict fiscal rules on the basis of cautious, audited
assumptions. The forecasts for the main fiscal aggregates are
broadly in line with the forecast at Budget time. Where there
are differences, these are largely due to areas unrelated to the
strength of the economy, most notably lower receipts from North
Sea revenues, as well as some higher spending as a result of high
oil prices feeding through to domestic inflation.
6. As the 2006 End of year fiscal report shows,
since the introduction of the new fiscal framework in 1997 outturn
public sector net borrowing has been lower on average than the
year-ahead forecast, whereas before the new framework outturns
tended to be higher than forecast. This is in line with the move
to using a cautious approach in projecting the public finances.
The UK's fiscal forecasting performance compares well with that
of other countries and international organisations, in terms of
both accuracy and caution.
TABLE 1
Treasury Budget and Pre-Budget Report
forecasts (Budget 1997-PBR 2006)
| |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
| 1997 July Budget | 3¼
| 2½
| | | |
| | | |
| | | |
| 1997 November PBR | 3½
| 2¼ to 2¾
| 1½ to 2
| 2¼ to 2¾
| | | |
| | | |
| |
| 1998 March Budget |
| 2 to 2½
| 1¾ to 2¼
| 2¼ to 2¾
| | | |
| | | |
| |
| 1998 November PBR |
| 2¾
| 1 to 1½
| 2¼ to 2¾
| 2¾ to 3¼
| | | |
| | | |
|
| 1999 March Budget |
| | 1 to 1½
| 2¼ to 2¾
| 2¾ to 3¼
| | | |
| | | |
|
| 1999 November PBR |
| | 1¾
| 2½ to 3
| 2¼ to 2¾
| 2¼ to 2¾
| | | |
| | | |
| 2000 March Budget |
| | | 2¾ to 3¼
| 2¼ to 2¾
| 2¼ to 2¾
| | | |
| | | |
| 2000 November PBR |
| | | 3
| 2¼ to 2¾
| 2¼ to 2¾
| 2¼ to 2¾
| | | |
| | |
| 2001 March Budget |
| | | | 2¼ to 2¾
| 2¼ to 2¾
| 2¼ to 2¾
| | | |
| | |
| 2001 November PBR |
| | | | 2¼
| 2 to 2½
| 2¾ to 3¼
| 2¼ to 2¾
| | | |
| |
| 2002 April Budget |
| | | |
| 2 to 2½
| 3 to 3½
| 2½ to 3
| | | |
| |
| 2002 November PBR |
| | | |
| 1½
| 2½ to 3
| 3 to 3½
| 2¾ to 3¼
| | | |
|
| 2003 April Budget |
| | | |
| | 2 to 2½
| 3 to 3½
| 3 to 3½
| | | |
|
| 2003 December PBR |
| | | |
| | 2
| 3 to 3½
| 3 to 3½
| 2½ to 3
| | | |
| 2004 March Budget |
| | | |
| | | 3 to 3½
| 3 to 3½
| 2½ to 3
| | | |
| 2004 December PBR |
| | | |
| | | 3¼
| 3 to 3½
| 2½ to 3
| 2¼ to 2¾
| | |
| 2005 March Budget |
| | | |
| | | | 3 to 3½
| 2½ to 3
| 2¼ to 2¾
| | |
| 2005 December PBR |
| | | |
| | | | 1¾
| 2 to 2½
| 2¾ to 3¼
| 2¾ to 3¼
| |
| 2006 March Budget |
| | | |
| | | |
| 2 to 2½
| 2¾ to 3¼
| 2¾ to 3¼
| |
| 2006 December PBR |
| | | |
| | | |
| 2¾
| 2¾ to 3¼
| 2½ to 3
| 2½ to 3
|
| | | |
| | | |
| | | |
| | |
| Outturn
| 3.0
| 3.3
| 3.0
| 3.8
| 2.4
| 2.1
| 2.7
| 3.3
| 1.9
| 2.7
| -
| -
| -
|
Source: Budget and Pre-Budget Reports, 1997-2006:
'Summary of economic prospects' table in Chapter B (The
Economy) in Budget Reports, and Annex A (The Economy) in
Pre-Budget Reports.
MPC Appointments
7. The Committee's report says:
- "… there is much to
be said in favour of a single term of four or five years for external
members". (Paragraph 30)
- "… at least two of the five external
members (should) have considerable prior knowledge of macro and
monetary economics, which is not the case at present". (Paragraph
30)
8. The Treasury welcomes constructive parliamentary
opinion on the monetary policy process and keeps the existing
Monetary Policy framework under review in order to ensure the
UK remains at the forefront of international best practice.
9. In the past ten years, the existing framework
has delivered an unprecedented period of growth and stability
in the UK. For example, inflation rates have averaged less than
half those between 1979 and 1997 while the UK continues to enjoy
the longest unbroken expansion of any G7 economy in the post-war
era.
HM Treasury
March 2007
1 Calculation based on equivalent current year and
year-ahead forecasts. Back
| 
