U.K. Treasury Too Optimistic on Growth Under Labour, Study Says

The U.K. Treasury was too optimistic about economic growth under the previous Labour government and forecasting errors were magnified during the financial crisis, a research group said.

In the first six years of the decade, the average forecast of growth one year ahead was 0.3 percentage point higher than the eventual outturn, the London-based Centre for Policy Studies said in an analysis published today. Between 2007 and 2010, the Treasury was too optimistic by 1.6 points. The average error over the whole period was 0.75 point.

Chancellor of the Exchequer George Osborne created the Office for Budget Responsibility after the Conservative-led government took office a year ago, saying he wanted to rid forecasting of political interference. The watchdog, which produces forecasts for the Treasury and monitors fiscal policy, expects the economy to expand 1.7 percent this year, below a 2.6 percent prediction made in June.

“At best, this evidence shows the difficulty of accurate macroeconomic growth forecasting,” Ryan Bourne, who compiled the figures, said in the report. “At worst, it provides strong justification for setting up the independent Office for Budget Responsibility.”

Between 2000 and 2006, the average error of forecasts made two years ahead was 0.5 point and it was 2.8 points during the crisis, according to his calculations. The average error was 1.3 points over the decade.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net

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