This box summarises the key findings of our recent Forecast evaluation report (FER). The report considers two key questions. First, why we, and others, significantly over-estimated economic growth over the past two years. And second, why, despite this, public sector borrowing has fallen broadly as we expected it would.
In June 2010 we forecast a slow but steady recovery for the UK economy. Instead there has been little more than stagnation over the past two years. Between the first quarter of 2010 and the second quarter of 2012 real GDP increased by just 0.9 per cent against our forecast of 5.7 per cent. This error is split fairly evenly between: weaker private consumption (reflecting higher-than-expected inflation rather than weaker nominal spending); weaker private investment (reflecting demand uncertainty and credit conditions), and; weaker net trade (concentrated in the first half of 2012).
Despite real GDP growth being significantly slower than we forecast, public sector borrowing has fallen broadly as we expected. There are three main reasons for this:
- first, the labour market has shown surprising strength given the weakness of GDP. Total employment is above our June 2010 forecast as the private sector has created over 600,000 more jobs than we expected. This is not simply the result of more part-time working, as total hours are also above our June 2010 forecast. This has supported income tax and NICs receipts;
- second, inflation has been higher than expected. This means our nominal GDP forecast has not fallen as far short as our real GDP forecast. Indeed, nominal consumption growth, a key fiscal determinant, has been in line with our forecast. This has supported VAT and other consumption taxes; and
- third, there has been under-spending by both local and central government. In the fiscal years 2010-11 and 2011-12, taken together, spending has been £17.5 billion lower than we expected at the time of our June 2010 forecast.