FORECASTS:THE CREDIBILITY of any budget depends to a great extent on the credibility of the economic assumptions underpinning it. Despite this, governments everywhere are often tempted to make rosy forecasts for such fundamentals as economic growth and the numbers in employment.
By so doing, they can claim that their revenues will be higher than under more subdued scenarios, allowing them dispense more largesse, buy off interest groups and avoid measures that get people’s dander up.
Yesterday’s medium term fiscal statement cannot be faulted on its forecasting fundamentals, mainly because the Government has not succumbed to the temptation to project overly optimistic economic outcomes for the years ahead.
The single most important economic indicator is growth in gross domestic product (GDP).
It is the widest measure of economic activity and, as the rate of economic growth will determine whether Ireland can avoid default, it is crucial.
As the table above shows, in the years 2013-2015, the Government’s figures for GDP growth are identical to those of the European Commission and almost identical to those of the IMF – the two troika members that publish forecasts.
This year, the Government is more upbeat than these two institutions, but this reflects the non-inclusion in their forecasts of the most recent GDP figures, which were published on September 22nd and which showed considerably stronger growth than anticipated in the first half of 2011.
Prudently, the Government is more downbeat than all official forecasters for 2012.
Another important indicator is the labour market, most notably the rate of job creation/ destruction and the rate of unemployment. While these are closely corelated to economic growth (the demand side), other factors affecting incentives to work (the supply side) matter too.
Given the number of factors that determine future developments in labour markets, forecasting them accurately is even more difficult than getting GDP forecasts right.
Again, the Government yesterday resisted the temptation to talk up the jobs market (despite its strong and persistent emphasis on encouraging consumers and business to be more confident).
Next year, it sees yet another decline in the total numbers at work in the economy, albeit a small one.
The average projection among 15 public and private sectors forecasters, compiled by consultants DKM, is for a slight increase.
On employment, as with GDP, the Government’s forecasts most closely approximate those of the European Commission, arguably the most important member of the troika.
By 2015 – a likely election year – both Government and commission are among the most pessimistic on joblessness, expecting the rate of unemployment to be stuck at a depressingly high 11.5/11.6 per cent.