When the Chancellor of the Exchequer stands up in the House of Commons to forecast Britain’s economic performance for the next 18 months, history suggests the figures he releases in his Autumn Statement will turn out to be wrong. The implications go beyond the theoretical: forecasting errors have led to policy mistakes which have, in turn, contributed to the collapse of thousands of businesses since 1990 and more than two years of relentlessly lengthening dole queues.
Norman Lamont’s economic predictions were already the stuff of satire, even before he misjudged the foreign exchange markets and was forced to devalue the pound last month. For two years, beginning in December 1990, when he told the Commons that ‘there is reason to think the recession will be relatively shallow and short-lived’, he had forecast that recovery was at hand. But the economy is still sliding deeper into recession.
Not all the blame lies with Lamont, however. Often he has simply repeated what the economists of Her Majesty’s Treasury told him. There are 75 of them, more than 20 directly involved in the forecasting process. On the fourth floor of the Treasury’s gloomy Whitehall home lurks an IBM 4381 mainframe which runs one of the most sophisticated computer models of the economy in Britain. It was first developed in 1968, though its results were kept secret even from the Cabinet until 1977. Then an Act of Parliament forced it into the open.
DETERIORATING PERFORMANCE
After almost 25 years’ experience of working with its evolving model, the Treasury’s performance has become less and less encouraging. Since the mid-1980s, it has failed to predict both the sharpest spurt in economic…
