The Treasury and the Bank of England’s decision to enter the forecasting arena, based on very specific, relatively short-term forecasts around such a politically sensitive subject, is unwise. The question that should be asked is how good have they been at forecasting currencies and economic outputs in the past? They now forecast a large devaluation on Brexit. The last time we had a really big devaluation of our currency was between the summer of 2008 and the early months of 2009. During that short period the pound fell 30 per cent against the dollar. The Treasury and Bank of England forecasts ahead of that event did not forecast any serious kind of devaluation whatsoever. So what can be learned from this?
Two important things stand out. First, that we can devalue, and we have had serious devaluations during our time in the European Union. The possibility of it falling outside the European Union would not be an experience unique to leaving the EU. The other thing that should be concluded is that the Treasury can make mistakes. Thus, we must ask, is this a one-off or do they regularly make mistakes? When it comes to the big changes and movements, they definitely do make mistakes.
One of the most important things forecasters had to forecast, in order to try and anticipate changes in the world economy and the British economy over the last two years, was the price of oil. The oil price more than halved to under $30 a barrel. The Treasury’s and the Bank of England’s forecasts in 2014 were for $100 a barrel for the following four years.
What matters far more however, was their dreadful forecast made at the time of the European Exchange Rate Mechanism in the late 1980s. As a member of the government which embarked on that hapless and unfortunate course I was one of the very few to argue against it. The full weight of the Treasury, the Bank of England and the European establishment reigned against me and others who argued against entering into the European Exchange Rate Mechanism. We foresaw that it would either cause a big inflation or a big recession. It caused both, one in succession of the other. The authorities were absolutely sure that the Exchange Rate Mechanism would add to our GDP, would cut inflation, and would be a thoroughly benign process. Instead it caused a very large recession damaging people’s jobs and businesses at the time.
The Treasury and the Bank of England are therefore in no moral or intellectual position to claim that they now have some unique insight into the future of our economy and trading patterns that make the British public want to listen and respect their view on this important question. This is especially so given their past experience and their forecast of the future of the euro, the future of the Exchange Rate Mechanism or the future of oil price and currencies. History seems to say that the Treasury will always assume the best when concerned with the European Union. History also seems to suggest that, unfortunately all too often, whether it be the Exchange Rate Mechanism, the euro itself or the pattern of regulation and banking control that has grown in the European Union, the worst usually happens.
*This blog is based on John Redwood’s new publication for Politeia; read the full text: Trading Truths? The Treasury, Trade and the City.