The one good thing Osborne has done IMO is bringing in the OBR to be an independent body that makes economic forecasts. However, the line of "well the forecast was wrong" is a cheap one because you have to understand any economic forecast of the future in the context it is made: it is based on making a model out of past information, with all the information available to the forecasters at the time. You know there will be events in the future ('random shocks') that you can't foresee, that will affect the economy for better or for worse - so a forecast aims to make it so the prediction isn't biased either on the upside or the downside, ie there is as much chance of a positive random shock, as a negative random shock.

If a forecaster is doing their job well, then over time, they should get it wrong as much by overestimating, as by underestimating. If they are persistently overestimating, then they aren't estimating accurately, there is something wrong in their model.

But also some people have unrealistic expectations of an economic forecast. You can no more see into the future than Mystic Meg - all you can do is give a best projection based on all the information available at the current time, so that it can guide policymakers. Firms do the same when they forecast their sales and margins through the year - if a firm was to forecast £10 million profits for the year, and then two months down the line, a scandal breaks where their product is shown to be unsafe, their profits will be smashed....but there would be no point blaming the forecasters for getting it wrong, they should blame the product control unit.

The OBR made its first forecast in June 2010 just after the election, and their view in the light of all the information available at the time, was that the UK economy would grow 2.6% in 2011 and 2.8% in 2012. The actual growth rates were 0.9% in 2011 and 0.0% in 2012.

The government's spin can be "well the forecasters got it wrong" but if they actually believe the OBR to be unfit for purpose they should close it down and stop spending tax payers money on it. The alternative explanation is that, the UK's performance should have been more in line with that forecast by the OBR in 2010, and the government's policy decisions are related to why it has been so disappointing.

Yes that analogy is exactly right. Another observation from underachieving on those forecasts is that it shows the problem is one of demand in the economy and not supply. Those forecasts were based on an estimate of the 'output gap', ie what the UK economy is currently producing and consuming, compared to what it could produce and consume if all its resources were being used. If the problem was one of supply, ie we were not able to produce enough to meet the things people demanded, then you would see high inflation, as all the firms trying to meet the demand were fighting over having enough workers, access to capital, land etc and would be bidding each other up and driving up the prices of all those input resources. But inflation has this last year been fairly low, 2.7%. The reality is we could easily absorb a stimulus to demand and start producing more just by using unutilised resources. But its a chicken and egg situation: firms see consumers aren't spending so they are worried about investing to expand production, in case there isn't enough demand for their products. Even if they do want to take the risk and expand production, they probably need access to finance and the banks see the situation the same way and are anxious about lending. Once there was a kickstart to the economy though it becomes self-maintaining as those problems would be released once firms saw evidence of some demand. This is where government can make a difference as the first mover - some carefully targeted infrastructure spends that would increase demand for private sector goods and services, would start giving the economy some momentum. Also note that Jim O'Neill from Goldman Sachs has come out and said Osborne faces sending the UK into a lost decade. Note - not a left wing commentator, but a senior investment banker: www.guardian.co.uk/politics/2013 ... -austerity

Yes that analogy is exactly right. Another observation from underachieving on those forecasts is that it shows the problem is one of demand in the economy and not supply. Those forecasts were based on an estimate of the 'output gap', ie what the UK economy is currently producing and consuming, compared to what it could produce and consume if all its resources were being used. If the problem was one of supply, ie we were not able to produce enough to meet the things people demanded, then you would see high inflation, as all the firms trying to meet the demand were fighting over having enough workers, access to capital, land etc and would be bidding each other up and driving up the prices of all those input resources. But inflation has this last year been fairly low, 2.7%. The reality is we could easily absorb a stimulus to demand and start producing more just by using unutilised resources. But its a chicken and egg situation: firms see consumers aren't spending so they are worried about investing to expand production, in case there isn't enough demand for their products. Even if they do want to take the risk and expand production, they probably need access to finance and the banks see the situation the same way and are anxious about lending. Once there was a kickstart to the economy though it becomes self-maintaining as those problems would be released once firms saw evidence of some demand. This is where government can make a difference as the first mover - some carefully targeted infrastructure spends that would increase demand for private sector goods and services, would start giving the economy some momentum. Also note that Jim O'Neill from Goldman Sachs has come out and said Osborne faces sending the UK into a lost decade. Note - not a left wing commentator, but a senior investment banker: www.guardian.co.uk/politics/2013 ... -austerity

What's wrong with building more houses? There is obviously a massive demand for truly affordable housing

I've previously sketched out a way to build affordable rented homes that would cost rhe exchequer precisely buggerall and would then lead to stimulus in employment and a reduction in housing benefit.

and yet, people vote for 'em time after time. i know, just look at capita, fingers in so many public sector pies, their website is a feast of the great work they're doing in the public sector. all down to that fella aldridge (he builds schools too, well academies). but it's all a swizz, he gave pots of cash to the tories...oh, wait, sorry, it wasn't the tories, but blair and his chums. i must have been thinking of bernie ecclestone and the whole peddling cancer for cash affair....no, wait, he was giving cash to the labour party too.

i'm sure which ever marginal political party you give your vote to has firm views on this sort of thing, and i'm sure you'll agree that anyone decrying the tories for being in bed with big business while voting labour is nothing more than a hypocritical oaf.

Its exactly what is needed actually and it was a solution that The Thatcher employed from European money in the late 1970s, I should know, the company Iwas working for as a surveyor virtually built the whole of Washington New Town on European money, plus the Tyneside Metro, one involved several phases of private and council house building (and you thought the Tories never built council houses) plus a huge network of roads, and the other one of the biggest public transport infrastucture spends in our lifetime.

The building trades still involve large numbers of manual workers, skilled and unskilled, there are no machines that build houses or lay roads while one or two people stand machine minding and any decent house building project will involve dozens of private companies employing hundreds of workers, on each site, all of them taking home income, paying tax and spending money in shops.

I can't think of a quicker way to get government investment into employment and into increased retail spending within the UK economy, and end up with substantial infrastructure benefits.

The only investment that government would be required to make, in my housebuilding scenario, is time and will. No money ever need change hands. It may require government guarantees but it wouldn't necessarily cost them a single brass farthing.

In fact the only thing that I can think of that's preventing them from initiating such a scheme is that no f[iu[/icker will get rich from doing it

How is anyone going to get the money to buy them - banks are requiring deposits that are beyond what most first time buyers especially those looking to buy 'affordable' houses can muster.

Or are you suggesting these as an alternative local authority housing?

How many additional people with this employ? The government needs to find a way of stimulating manufacturing - turn raw materials into finished product is both people hungry and if run properly very profitable.

Roads don't use huge numbers of people - the majority is done by large machines - houses yes but it is a long term investment that takes years to see any benefit. The demand for affordable housing is mainly in and around London an area of dense population - where is the money going to come from? The government will have borrow huge amounts if you believe in Keynesian theory.

Yes thats because there is a shortage of the supply of housing. If you build more houses the price will fall.

depends where you build them

No, it depends more on what quantity they are built in.

A couple of thousand houses dotted around the south east won't change much in great scheme of things, building them in the tens of thousands country wide just might.

The demand for affordable housing is all around the country and as the parent of a child who is looking for an affordable house of her own I can see the evidence myself.

Truth of the matter is that there is a small government backed scheme to make new housing affordable to first time buyers called NewBuy which offers guarantees to lenders to allow those lenders to offer 95% mortgages.

Unfortunately its only available on a very limited number of developments and properties although I understand (and correct me if I'm wrong) that its actually doesn't cost HM Gov anything in hard cash, they just act as guarantors to the lending company.

Most new developments have a legal requirement as part of their planning authority to build a small percentage of houses which will qualify for NewBuy and these properties are ALWAYS sold off plan and immediately in the first few weeks of release - this indicates the huge demand for such properties.

As an example a development near here has two bed houses starting at £160k, which, if you can get in on the NewBuy scheme will require a deposit of £8k, if not then you'll need a minimum of £16k.

It may surprise you but £8k is not an unsurmountable obstacle to first time buyers, for a couple looking to spend upwards of £800 to £1000 a month on their first mortgage then a years worth of saving and getting used to putting that amount of money aside every month will generate their deposit, if not then some parents would consider stumping up that sort of money too - bump it up to £16k and you're now talking about saving for several years or lending your offspring some substantial amounts of cash and suddenly the option to rent becomes the only option.

Not that there is anything wrong with renting, other than the fact that its not going to stimulate the building trade very much, but a big push on schemes such as NewBuy and the previous HomeBuy scheme, would be popular, would stimulate the building trade (a HUGE business), would solve an imminent housing problem, would boost every allied business associated with having a home (DIY, Garden Centres, Furnishing Retail etc), and would not cost very much at all other than set-aside guarantees.



And I'll chuck another one into the mix for you - back in the recession of the early 90s the big saviour was 100% tax allowances for business asset purchases, and if no-one is modernising at the moment (and they aren't) then there is no tax income to lose by re-invoking this.

The government can borrow money at record low interest rates (during the last year it was borrowing at negative real interest rates). A fiscal stimulus would be very effective at delivering increased economic growth, because the economy is currently struggling and we are in a liquidity trap.

Its not a case of borrow money for a stimulus vs save money by cuts. Its a case of borrow money to fund much needed economic growth (which reduces debt as a percentage of gdp), or make cuts which devastate the economy, kill off growth and thus lead to higher borrowing anyway.

Remember, because the cuts have damaged growth to such a larger extent than planned, Osborne is actually borrowing more than Alastair Darling was going to.