Friday, October 15, 2010

Prophecy and the Spending Review

I was intrigued to see a firm advertising for a “Prophet Modeler”. Apparently Prophet is a liability forecasting system. Nevertheless, at this time there is a need for foresight.

While double-dip fears seem to have receded, no one can tell what a huge fiscal retrenchment (significant public spending cuts and maybe a step change in pension contributions for public sector workers) will do to consumer confidence. The optimists promise a "choppy recovery".

These concerns plus the practical issues with cutting spending and contracts in the short-term explain speculation about some re-profiling (aka delay) in the fiscal squeeze. Likewise, Chris Huhne's suggestion of Plan B from within the Cabinet.

Looking for a silver lining, the ferocity on fiscal policy is likely to be offset on the monetary policy. (While the bankers to a college that I work with love to send me terrifying articles from the Daily Telegraph warning of 8% base rates, I suspect that base rates will say low for a couple more years. Of course they can only go in one direction but I am less worried about interest rate risk than six months ago. There are plenty of other things to worry about and highlight on the risk register.)

I will be interested to see the Office for Budget Responsibility's forecast next week - the first under its new chair, the respected former head of the Institute for Fiscal Studies, Robert Chote. It may be overshadowed by the cuts but it will give some clues to the whole economy impact.

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