My table shows the Budget's track record in forecasting public sector net borrowing one and two years ahead: for the 1999 Budget, for example, year 1 means 1999-00 and year 2 means 2000-01, and so on.
| BUDGET FORECASTS FOR PUBLIC SECTOR NET BORROWING | ||||||
| £ billions | Forecast for: | Out-turn: | Error | |||
| Budget | Year 1 | Year 2 | Year 1 | Year 2 | Year 1 | Year 2 |
| 1999 | 3.0 | 3.0 | -15.3 | -18.3 | -18.3 | -21.3 |
| 2000 | -6.0 | -5.0 | -18.3 | -0.2 | -12.3 | 4.8 |
| 2001 | -6.0 | 1.0 | -0.2 | 25.1 | 5.8 | 24.1 |
| 2002 | 11.0 | 13.0 | 25.1 | 33.2 | 14.1 | 20.2 |
| 2003 | 27.0 | 24.0 | 33.2 | 39.9 | 6.2 | 15.9 |
| 2004 | 33.0 | 31.0 | 39.9 | 37.8 | 6.9 | 6.8 |
| 2005 | 32.0 | 29.0 | 37.8 | 30.9 | 5.8 | 1.9 |
| 2006 | 36.0 | 30.0 | 30.9 | 34.5 | -5.1 | 4.5 |
| 2007 | 34.0 | 30.0 | 34.5 | 78.0 | 0.5 | 48.0 |
| 2008 | 43.0 | 38.0 | 78.0* | 118.0* | 35.0 | 80.0 |
| Average: | 14.8 | 22.8 | ||||
| (to 07): | 8.3 | 11.0 | ||||
| * Pre-Budget Report forecast. Average ignores sign. | ||||||
You can see that these errors are big. Even before the 2008 Budget, the average error in forecasts one year out was £8.3bn, and that for two years out was £14.8bn.
This track record suggests that the Chancellor will misrepresent his forecasts. He'll tell us in his speech that he expects net borrowing of (say) £160bn in 2009-10 and £190bn in 2010-11. What the record suggests, however, is that he should say that he expects there's a two-thirds chance of borrowing in 2009-10 being in the range £149-171bn, and a two-thirds chance of it being in the range £167-213bn for 2010-11.
Even these error margins, though, would grossly understate the uncertainty. For most of the last 10 years, the economy has been unusually stable, which has made forecasting easier. This stability has of course ceased. So past errors are a downwardly biased guide to future errors.
The brutal truth is that no-one knows how much the government will borrow, because it depends on how the credit crunch plays out.
The reason for this is simple. Think of the economy as comprising four sectors: government, firms, households and foreigners. Across all four, borrowing must equal lending. Right now, though, firms and households are huge lenders; so too are foreigners, though they have been for years. As a matter of arithmetic, therefore, the government must be a big borrower.
The question is: why are firms and households net lenders? The obvious possibility is that they are forced to be so, because the de facto closure of capital and mortgage markets means that many of those who would like to borrow cannot do so.
Insofar as this is the case, the course of government borrowing depends upon when, and how fast, the credit crunch ends. As it does so, firms and households will resume borrowing, so the sectors' net lending will fall, and so government borrowing will fall.
Another possibility, though, is that households have over-borrowed and will take years to pay down their debt. On this view, they'll remain net lenders even if financial markets unfreeze. If so, government borrowing could remain high for years.
For what it's worth, my hunch is that the former is more likely. So we could see government borrowing fall surprisingly quickly over the next five or so years.
But my hunch is worth nothing. The fact is that there is enormous uncertainty about the fiscal outlook.
This means that any policy measures Mr Darling announces tomorrow are likely to be teeny - a mere fraction of the error in his borrowing forecasts. And it means all the talking heads don't really know what's going to happen either. Knowledge of the future is a contradiction in terms.
