Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 8 March 2013

The government and the OBR: why I was very pleased to be wrong

Yesterday, I commented on the Prime Minister’s ‘there is no alternative’ speech, which included the following:

They [the OBR] are absolutely clear that the deficit reduction plan is not responsible [for depressed growth]. In fact, quite the opposite.”

I wrote this:

“So this statement deliberately misrepresents what the OBR has been saying, to imply that the OBR believes in expansionary austerity. But the Prime Minister knows that the OBR will let this misrepresentation of its views pass – which is a shame.”

I was wrong. Today the OBR published on its website a letter from its director Robert Chote to the PM. It is very polite: after reproducing the same part of the speech that I highlighted, it said

“For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.”

Actually, I think Robert had to do something like this. I wrote what I did because this was no isolated incident - no momentary piece of over enthusiasm by a speech writer. Just read the first part of the Chancellor’s autumn statement. He milks the ‘look the independent OBR agrees with us’ line all he can. In particular he says:

“One of the advantages of the creation of the OBR is that not only do we get independent forecasts, we also get an independent explanation of why the forecasts are as they are. If, for instance, lower growth was the result of the Government’s fiscal policy, they would say so. But they do not.”

Now the Chancellor was a little more careful. By saying lower growth rather than low growth, he could argue that he meant ‘lower than expected’ growth, rather than the actual growth number, even if this subtlety might have been lost on his audience. For that reason, I can imagine the OBR holding back from complaining at that time. But yesterday the Prime Minister went too far. Robert Chote needed to respond, and in doing so will have done the OBR no harm whatsoever.

When the OBR was established, I and others were concerned that its inevitably close relationship with the Treasury and other government departments (inevitable, because it produces the fiscal forecast) might lead some to question its independence. I was also concerned that its limited remit - it is not allowed to look at alternative policies - would mean that its reputation was too closely tied to its forecasts. And I knew that macro forecasting is a mugs game: as forecasts are only slightly more accurate than guess work, getting things right was largely down to luck. So its own fortunes could become too linked to the governments, which might mean it lost influence elsewhere and might not even survive a change of government. For just one example of this tendency, see this recent perceptive piece by Colin Talbot.

Given its restricted remit, the OBR has done what it can to make links with government as transparent as possible, and argued (convincingly in my view) that these contacts with government do not make it into a puppet of the government. Indeed, one could justifiably argue that the OBR has been pulling the government’s strings. While some have been critical of its forecasting methods, I think its actions have been perfectly defensible, as I argued here. I was however worried about the way the government was misusing the OBR’s analysis. With any luck, the OBR with its actions today has called time on that, and the government will be more careful in future.

In the onward march of fiscal councils, Robert’s letter is just one minor skirmish in one particular battle, but lets celebrate it none the less.

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