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Errors in National Institute Forecasts of the Balance of Payments

Published online by Cambridge University Press:  26 March 2020

R. L. Major  and
M. J. C. Surrey
R. L. Major
Affiliation:
National Institute
M. J. C. Surrey
Affiliation:
National Institute
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Extract

A recent issue of the National Institute Economic Review contained an article in which errors in the National Institute's forecasts of the national income accounts were analysed. One of those who reviewed the article criticised it on the grounds that the author ‘does not make an assessment of the balance of payments forecasts, which really is like putting on Lear without the King’. On the strength of his own ‘fairly crude’ comparison between these forecasts of the balance of payments and the official estimates of what actually happened, he went on to suggest that the errors in the former in the ‘crucial’ years of 1960, 1967, and 1968 were ‘large enough to … make one doubt whether balance of payments forecasting, whether short- or medium-term, is really a possible or worthwhile exercise’. The present article, already planned when the earlier one appeared, is an attempt to fill the gap on the stage. It aims to provide a rather more refined basis for judging the worth of such forecasts, and perhaps at the same time to improve the prospect that some of the grosser errors of the past may be avoided in the future.

Type
Articles
Information
National Institute Economic Review , Volume 52 , May 1970 , pp. 35 - 45
Copyright
Copyright © 1970 National Institute of Economic and Social Research

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References

(1) M. C. Kennedy, How well does the National Institute forecast ?’, National Institute Economic Review no. 50, November 1969.

(2) S. Brittan, Forecasts and outcome—the National Institute's record’, Financial Times, 28 November 1969.

(1) See R. L. Major, ‘Forecasting exports and imports : introduction’, National Institute Economic Review no. 42, November 1967, page 33.

(1) ‘A further substantial revision to the 1967 figures cancels out within the invisibles account; new estimates on tanker transactions obtained from the Chamber of Shipping's sample inquiry for 1967 indicate that the earnings of United Kingdom- operated tankers for carrying oil to overseas destinations had previously been overstated (though they still rose sub stantially between 1966 and 1967) and that in consequence the figure included in ‘interest, profits and dividends’ repre senting the net surplus on the current overseas operations of the oil companies, other than shipping, had previously been understated’. (Economic Trends, September 1968, page xviii.)

(2) ‘… some part of the oil receipts recorded in 1969 may properly belong to 1968 (oil earnings at present being measured on the basis of cash flows), so that the underlying increase may have been somewhat smaller than the increase shown.’ (Economic Trends, March 1970, page xiii.)

(1) The average error in official forecasts, made around the time of the budget, of changes in the current balance over the ten years 1951-1960 has, however, been estimated at £150 million a year, with a favourable bias of £125. million. For 1959 the error is put at —£150 million and for 1960 at —£400 million. Again there is a marked tendency to under-predict imports. (See J. C. R. Dow,’ The Management of the British Economy, 1945-60’, Cambridge University Press, 1964, page 141.) In addition, there was, of course, quite a series of official targets proclaimed but not achieved over the period 1965-68.

(1) W. A. B. Hopkin and W. A. H. Godley, ‘An analysis of tax changes’, National Institute Economic Review no. 32, May 1965.

(2) J. R. Shepherd and M. J. C. Surrey, ‘The short-term effects of tax changes ’, National Institute Economic Review no. 46, November 1968.

(3) op. cit.

(1) See Kennedy, ibid, pages 50-51.