The title of this week’s contribution may induce you to have a second and third look. However, we need to remember that we are in the midst of the silly season. So anything that may sound odd may eventually make sense after all.

The title looks odd because one of the functions of government is to have a sound economic policy that would generate employment, increase wealth, contain inflation and reduce economic inequalities.

In the past there have been various approaches to achieve this, with efforts ranging from absolute State control to minimal State control. They have essentially all failed to deliver what they promised. And we know today that the best approach we have is a flawed approach.

We know that the market economy has been the model that has worked best in achieving the political objectives I mentioned. Yet left to its own, it does not work. As such political intervention is required in order to take corrective measures. This was, in fact, the subject of last week’s contribution.

So one may ask where politics and economics should not mix. Economic policy making is really never about the past. It is always about the future. Hence it relies extensively on economic forecasting.

American economist Ezra Solomon stated in the 1980s that, “the only function of economic forecasting is to make astrology look respectable”. This was a time when the rate of inflation in some countries was two per cent per month and not two per cent per year, as it is today. Running up public sector deficits was seen as something respectable and not something to be abhorred, as it is today. In the first half of the 1980s, Italy was running up deficits of around 15 per cent of the gross domestic product per year and was not tied to any obligations to contain its deficit, as it is today.

Economic forecasting should be based on what investors and consumers are likely to do

So if one were to revisit the economic forecast made three decades ago, one would find a totally different scenario. Even if one were to revisit the forecasts made in the 1990s and early 2000s one would find a totally different scenario to what we have today.

So plotting a country’s economic future is certainly not easy and several countries have no qualms about revisiting the forecasts they make. We could take Brexit as an example.

Most analysts predicted a disaster for Britain once it voted to exit the European Union. That disaster has not happened. Should we say “as yet”? On the other hand growth forecast for the UK economy are not rosy. Should we take them seriously since the expected negative impact of Brexit has not materialised?

Unfortunately what happens when forecasts are made is that the political context is given too much weight. The political context very often has a very short life. A week has been described as too long in politics, while economic forecasts must have a much longer time span. This is why politics and economics should not mix.

What is good for politics very often is not good for the economy. Politics is there to get someone elected, even if it may mean taking decisions that could be the wrong ones from a political perspective. Moreover certain sound economic decisions may not win many votes. I appreciate that I am generalising, and that there are many exceptions to what I have just written.

Economic forecasting should be based on what investors and consumers are likely to do. Time and time again, it has been shown that, irrespective of the political noise, investors and consumers take decisions on what they believe are the fundamentals of the economy.

Who can forecast what will happen between North Korea and the US or whether there will be a soft or a hard exit from the EU for Britain, or what relations there shall be between the EU and China; or how the situation in the Middle East will evolve? If political forecasting is so difficult why should we allow it to pollute economic forecasting?

So after all, economics and politics should not really mix, other than to make sure there are sound economic rules to regulate the market and that such rules are being adhered to.