# On 20 March George Osborne, the UK’s Chancellor, will present his budget. So far he has made a valiant attempt to cap public sector spending, particularly when compared with other finance ministers who were slow to adopt austerity. He has reduced public sector spending from what it would otherwise be, but has not managed to cut the total figure. His strategy now for controlling the budget deficit increasingly depends on higher tax revenues from a combination of forecast economic growth and more aggressive tax collection.
He may be unaware that this is too optimistic. He is advised by a Treasury staffed by economists who believe that through a process of economic modelling and continual refinement of method their control over the desired outcome will be improved. Errors of the past are therefore less likely to be repeated in the future. This approach is the key to understanding the forecasting method upon which Osborne’s budget assumptions are based, and it is completely wrong.
Keynesians and monetarists share a belief that mathematical models are a valuable forecasting tool. For this to be true individual consumer and capital transactions in the future as well as the prices at which they occur have to be calculable: this is obviously not the case. The economic effect of future technological and other relevant developments has to…
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Author: Alasdair Macleod, GoldMoney