What is the point of the obsession with economic forecasts?

Michael Portillo used to say that when he was a Treasury minister he could never get officials to tell him definitively what had happened in recent years in the economy, never mind what was about to happen. Forecasting is difficult. Look at how individual companies employing large finance teams find it incredibly difficult to forecast what their revenues and costs will be three or four years down the line. Imagine trying something similar with an economy the size of the UK, with tens of millions of individuals making tens of millions of individual decisions, all subject to powerful, unpredictable forces.

Just because it is difficult is not a reason for economists to stop trying, of course, to calmly create useful information that might warn us of problems and shape better decision making. Even so, the obsession with economic forecasts at the time of Budgets and Autumn Statements in the UK has got completely out of hand, to the extent that it may skew sentiment in the real economy and hamper sensible thinking.

Much of what is out there in terms of today’s Autumn Statement is rooted in the fetish of forecast fixation. We will be £220bn worse off by 2020 thanks to Brexit, it is reported. We are doomed, in remarkably precise terms, even before we know what the Brexit deal will be. We are going to be poorer by… this much. “Thanks Brexit,” tweeted one distinguished economics editor.

What is the point of this obsession with forecasts? They should have some limited role, but we are approaching the end of a year in which the forecasts were of almost no practical use to anyone. Brexit, the post-referendum economics of Brexit, the markets missing Trump, are only the half of it. Six months ago perpetual low rates were factored in as a given stretching on years over the horizon. Now the pressure is upwards. After an even worse year of predictions and forecasts than last year we are now encouraged to beat ourselves up over the grim latest forecasts for 2020.

It is at this point that an economist politely raises his hand and says: “Ah… a forecast is not a prediction. It is an assessment based on a study of the available evidence at the time.”

Sure. Unfortunately, that valid distinction tends to get lost when the forecasts on national debt, lost growth, and so on, are produced and then turned into newspaper front-pages, columns and pieces to camera.

The expectation game involving confirmation bias is played on all parts of the ideological span, I admit, although it is unclear exactly why and when the forecast obsession took hold. In 1981 – when the Tories and the UK were in the soup – it is not as though the big story was 1986 and the likely outlook then. Such calculations were undertaken and published, of course, but they were not centre stage according to accounts of those early 1980s budgets.

Under Ken Clarke, if I remember correctly, the Treasury understandably started to place more emphasis on this field of activity, perhaps in response to what had happened in the recession and the ERM crisis, presumably to send the message that the government knew what it was doing. The media liked it because, I suspect, it looked proper and imposing and helped fill the vast Budget supplements that were becoming popular (with newspapers if not readers).

Under Gordon Brown things got really out of hand, as he used forecasts as a weapon to project and promote his claims of prudence. Those of us who had an instinct that Brown was going to spend all the money and help cause a disaster eventually used to scour the numbers. He’s hidden an extra £4.5bn in a raid on pensions in 1999-2001! His borrowing ticks up in three years time, look!

The great commentator Bill Jamieson would join me when I was Scotsman editor and on the smoking balcony after a Budget we would marvel, infuriated, at Brown’s machine-gun use of projections on what life would be like five years down the line in 2007 or 2008. It felt wrong, but year after year it kept going right. And then it didn’t. The forecasts and the screeds of pro-Brown analysis that flowed from half of Fleet Street based on Broon’s sums during the boom years had turned out in the end to be as much use as a chocolate teapot. But I was playing the game too, along with other Brown critics, just with different instincts or biases from his supporters. George Osborne’s critics reversed the game, attacking him – and now Hammond – based on forecasts gone awry.

The financial crisis of 2008 should have been the end of this fixation. It was another reminder of the great lesson from history about the dangers of hubris and excessive confidence. Brown, an instinctively cautious man, originally worried it would all fall apart, gradually became so fixated on getting to Number 10 that he could not afford for those numbers to be wrong or turn out to be wrong later. The numbers, testaments to prosperity and prudent policy, forecasts of ever increasing munificence, had taken over, fooling Brown himself and millions of people.

History has always played variations of this trick on leaders and the rest of us. It makes fools of us, upsetting our assumption that we are superior to our ancestors and know more because it is now. At the start of 1912, not only was the Titanic a wonder of engineering yet to set sail, but with open capital markets and trade, all was set fair for the world. It should have been a golden decade. Wrong. Another example is George W. Bush. Remember that in January 2001, when he was sworn in, Bush was going to be a compassionate conservative focussed very much on domestic policy. And then 9/11 hit.

Happily, we are often surprised on the upside. In 1986 who could have predicted that within five years the Berlin Wall would fall, Communism would be defeated and Germany would be on the way to reunification?

I hope we are surprised on the upside again, and that even though it is Trump in charge the US gets a burst of investment and growth. That the EU reforms itself and does a sensible deal with its neighbour, the UK, or that it will turn out not to make as much difference as the doom-mongers claim. Either way, no matter what the outcome, do we really think – with everything that is happening, with the tremors in European bond markets for example – that forecasts delivered today for 2020 are likely to be much use?