The OECD just doesn’t get the UK economy

Economic forecasting is a terrific sport, for both players and spectators. Indeed, it’s frequently hard to tell which is which, since anyone can play, and the professionals are forever being tripped up by events. The oldest participants include the International Monetary Fund and the Organisation for Economic Co-operation and Development, which must explain why we pay so much attention to their forecasts, since their prognoses are no better than anyone else’s.

The IMF is, perhaps understandably given its role as economic rescuer of last resort, a perma-bear. This week it has discovered a £30bn black hole in the UK’s finances, thanks to public spending rising at twice the rate projected by the government, mostly due to the cost of welfare and healthcare. It urges reforms in VAT, inheritance tax, capital gains tax and road pricing. For reform, read increase. All this will merely stabilise the state’s finances, rather than improving them. Oh, and we can forget any silly ideas like scrapping National Insurance. Even the last cut was desperate politics rather than sensible economics.

Oddly, in the middle of this Eeyorian gloom, the IMF has marked up its forecast for the UK’s growth for this year, thus giving the Chancellor a straw to grasp in the countdown to our Independence Day of reckoning. The UK, it says, will grow by 0.7 per cent rather than 0.5 per cent previously estimated. Oh, and we seem to have inflation licked, after it has made us all poorer.

The IMF is like a little ray of sunshine compared to the OECD. The view from the tax-free Chateau de la Muette in Paris is that the UK economy is always doomed to disappoint. The Centre for Policy Studies has been studying their forecasts going back to 2012. Lockdown produces a massive discontinuity in forecasts, as it did with the real economy, but the conclusion is that the OECD just doesn’t get the UK economy.

The CPS looked at 189 forecasts (count ‘em) for the major economies from 2012 and calculated the error in the growth numbers for each one. The OECD was roughly right for France, Canada, US and Italy. It was too optimistic for Japan and Germany. It was massively too pessimistic for the UK, by over 0.2 per cent per annum.

It is possible that there is an element of post-Brexit sulk about this (although the error precedes the exit) but the CPS suggests that the OECD fails to understand the value of services in the economy. As Britain’s manufacturing base has faded away, tourism, finance, the law, medicine and technology have more than compensated. They provide different and often unexpected sources of employment and wealth. The trick for the next government will be to allow them to flourish without murdering them with regulations, suffocating processes or failing public services. Then the OECD experts might have to eat their words again.

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