Economics and economists seek to assume away uncertainty, talking instead about calculable risks. Yet, economic forecasting always faces significant uncertainties, and those uncertainties are increased in the current climate.
What is at stake in how the OBR and others deal with this such uncertainty through modelling assumptions and techniques?
UK economic policy since the GFC, and in the context of Brexit – is characterised by profound and pervasive uncertainty. Ironically, just as interpreting future growth and output gaps became much harder to gauge, they have increasingly taken centre stage in managing the public finances.
Authoritative bodies have highlighted sizeable margins of error and measurement problems involved in UK economic forecasting, with variation between different respected assessments as high as 2% of GDP. Previous studies noted the existence of uncertainty in economic policy-making, the task is now to explore how policy economists and fiscal authorities deal with pervasive uncertainty, and with what consequences.
The research unearths how potential growth and output gap assessment is incorporated into the practice of OBR, economic forecasting to explore broader how policy economists conduct policy in the face of uncertainty. This was tricky enough before Brexit. OBR recently noted of the post-Brexit ‘prospective path for potential output’ that ‘There is always considerable uncertainty around this judgement, to which uncertainties associated with the UK’s exit from the EU are likely to add’ (OBR 2017: 38)
Impacts of Brexit on investment, inward immigration, trade, FDI and productivity are deemed likely to reduce potential output, but the OBR note ‘the precise impact will remain highly uncertain, even in hindsight.’ The UK economy’s trade and other relations with the wider global economy are not known, indeed not knowable, in the short-term.
The project explores how expert bodies execute their remit to judge UK economic policy in such conditions. What are the consequences for economic policy and the UK political debate of OBR assumptions made to reduce uncertainty?