Looking the other way on the lip of the abyss

WE ARE approaching an economic event horizon. “Almost anything could happen in the next few months,” says Paul Tucker, deputy governor of the Bank of England, advising banks to prepare to withstand the worst. The exceptional coordinated action of central banks on Wednesday has been widely seen not just as offering temporary relief to the embattled Eurozone, but as a recognition that the global economy is on the lip of the catastrophe curve.

It is extraordinary then that the Office for Budget Responsibility (OBR) refused to peer into the abyss in its economic and fiscal outlook this week. If it is good advice for banks to think about these nightmare scenarios, as Hector Sants of the Financial Services Authority has apparently also told them, one would hope that the same might be said for governments.

Yet apparently not: while the OBR acknowledged the “significant downside risk” of a disorderly euro breakup, it claimed that it could not be quantified meaningfully. As a result, while George Osborne spoke of doing “whatever it takes to protect Britain from this debt storm,” that apparently didn’t extend to getting ready for really bad weather. Perhaps he felt the nation would be staggered enough by the huge downward revisions in growth forecasts offered, but a time of danger is hardly the moment for pusillanimity.

So while the chancellor’s words were spoken of in hushed tones as predicting a bleak economic future for Britain, no one seemed to want to contemplate the honest truth that Osborne was speaking of a best case scenario.

Moreover, Osborne was looking on the bright side using data that is almost certainly badly wrong – for how else should we think of a statement that begins by acknowledging that the last set of forecasts for growth need to be cut in half (2011’s forecast is down from 1.7 per cent to 0.9 per cent) or reduced to a third (2012’s forecast is down from 2.5 per cent to 0.7 per cent)? The OBR acknowledged as much. While it stands by its central forecast as the most likely outcome, it points out that if things go off piste, a drastic collapse is far more likely than a huge improvement. “Suffice to say, the probability of an outcome much worse than our central forecast is greater than the probability of an outcome much better than our central forecast.”

That is a gloomy prospect, which may be why people don’t want to look at it. But as others acknowledge, only by facing the possibility of the worst can we be ready to survive its reality. Instead, this was a delusional mini-Budget, that neatly corrected for the predictive failure of the last effort without considering the likelihood of further uncertainties ahead.

It was right, of course, to maintain plans for austerity, but the truth is there are no massive cuts in Osborne’s plan, as this budget, with its increased state benefits and handouts to assorted pet projects made clear. From April to August this year, state spending was up in real terms by 0.84 per cent compared to the same period in 2010. Hardly a savage reduction.

This was a moment to be radical, to announce in the absence of any other options a commitment to growth by reining back an unaffordable state. But as Pascal wrote in his Pensees, “We run heedlessly into the abyss after putting something in front of us to stop us seeing it.”

First published: City A.M., 2/12/11

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Filed under Economics, Finance, Politics

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