This year’s Budget continued a hapless, unparalleled record of forecasting failure for the OBR.
Sadly what has so undermined City commentators’ confidence is that the OBR’s independent analysis has invariably veered in the direction of robust support for the Treasury’s economic projections. At each succeeding Autumn Statement and Budget since June 2010, the OBR has been forced to downgrade growth outturns, whilst continuing to hold optimistically to the notion that the public finances will be transformed by robust growth starting earnestly in two years’ time. It all seems so reminiscent of the Brown Chancellorship’s discredited financial projections that persuaded global investors to allow Britain to borrow well beyond its means with such disastrous consequences in the Noughties.
Few doubt that economic forecasting is an especially dismal science, not least in these turbulent times. However, the OBR’s intervention at last December’s Autumn Statement proved essential in buying the Chancellor welcome breathing space (which he has certainly exploited as the economic corner appears to have been turned since). With most commentators assuming that the coalition’s plan to reduce the deficit year-on-year had been flunked, their figures were a timely political fillip. What now appears to critics a sleight-of-hand gave Mr Osborne an easy ride with the press in the aftermath of the Autumn Statement, but set the scene for cynicism and deep disappointment as a mere fourteen weeks later, aggregate borrowing for the next four years was projected at an eye-watering £49 billion higher.
The Treasury’s decision to bring back onto the public balance sheet some £37bn as the profit, or ‘coupon’ in the jargon, of Quantitative Easing interest payments, was not without critics at the time. Indeed if QE is eventually to be a success in its own terms, its unravelling will require a markedly larger sum eventually to be returned from the public accounts. Naturally this will be at some future date, well beyond the next General Election. Whilst this was an accounting device, it also allowed the Treasury at the time of the Autumn Statement substantially to reduce the headline figures of public borrowing. More controversially despite the 4G licence sale not having by then taken place, its estimated receipts were included in the borrowing calculations. In fairness the sale proceeded during the 2012-13 tax year – however, the auction brought in barely two-thirds of what had been accounted for (£2.3bn as opposed to £3.5bn).
Moreover, the much vaunted Swiss tax repatriation agreement, still subject to a referendum approval, was taken account of to the tune of £330m. Small beer, perhaps, but critical in making the case for overall borrowing falling in 2012-13. The OBR sanctioned this being included in the Autumn Statement, although not a penny has yet reached the public coffers. Indeed the projected receipts from the entire Swiss repatriation programme of £5.5bn over the next two years is almost universally – at least outside the hallowed halls of the OBR – regarded as wildly optimistic. Even the mighty EU economic powerhouse, Germany, for example, reckons it will only repatriate £2bn in this way.
This was the backdrop to the OBR’s strong reaction to the Prime Minister’s speech in early March over growth (when the OBR’s judgement was prayed in aid). Subsequently Robert Chote (the OBR’s chairman) reasserted his institution’s independence. Perhaps more serious still than accusations that the OBR is insufficiently at arm’s length from the government of the day, is the increasing realisation that the Office for Budget Responsibility has in its methodology consistently failed to understand the new reality of the squeezed private sector budgets in an era of continued public sector profligacy.
Meanwhile the proudly unfettered Institute for Fiscal Studies (Mr Chote’s former employer) was unimpressed at the way the Treasury appeared to have given ‘every indication that [spending commitments] had been carefully managed with a close eye on the headline borrowing figures for this year’ by the wheeze of ‘exceptional inter-period flexibility’ (a practice which, in plain English, entails pushing payments into the next financial year rather than spending the money now). Indeed like-for-like comparison had the deficit rising to £123.2bn in 2012-13, not falling from £121.0bn (2011-12) to £120.9bn as published. If Gordon Brown had done this we would rightly be berating him for ‘fiddling the figures’.
Almost comically, every single Brown Budget between 2001 and 2007 forecast that the public finances would move back into surplus in about three or four years. As time wore on, the debt and annual deficit rose inexorably as the Treasury employed smoke and mirrors to conjure the illusion of fiscal stability. Those rosy forecasts belatedly attracted ridicule from our Party and played their part in making it easy for Britain to borrow money during the past decade. And borrow we did, even in the good times – we all now know the disastrous consequences.
Indeed it was this salutary experience which provided the genesis of the idea for an Office for Budget Responsibility, which the Chancellor proposed in late 2008 when he was the Shadow. While the principle of the OBR at that time seemed admirable, I expressed concern about problems of practice. Surely, I suggested, the real strains and potential limitations of any OBR would come at the point in the economic cycle when we most needed prescient and instinctive judgement? At such times of crisis in any economic phase, we would require a robust willingness to stand up against the conventional wisdom of the day.
Do we really believe that in the run-up to 2008’s financial crisis, the OBR, contrary to every forecasting organisation, would not only have seen the crash coming but have had the mettle to contradict the optimistic forecasts of other bodies and suggest to the previous government that we were living well beyond our means? Equally, might the perceived infallibility of a conventional OBR forecast have restricted the ability of a Chancellor to act against common wisdom at that time, had he have had the wherewithal to express concerns about our direction of travel?
When the interim OBR was eventually introduced after the 2010 election, it produced predictions for growth that appeared far too optimistic. So it has proved, partly because of some unavoidable conflicts in its operation. Organisational independence was always vital to the OBR’s credibility but it has had necessarily to rely upon a close relationship with the Treasury in order to understand its methods and have access to its data. Yet without the trust that stems from the OBR’s autonomy, the organisation is nothing.
I also suggested back in 2011 that part of the OBR’s continuing role ought to be constantly to remind us all of its own fallibility and advise on a range of possible outcomes, pointing out to politicians and financial markets the longer term threats to our economy in the event that the markets prove too forgiving. Instead it has served to entrench rather than challenge conventional wisdom.
The restoration of confidence to our economy was always going to depend largely on rebuilding trust. The establishment of the OBR should have marked an important milestone in encouraging us to place our faith once again in the financial and political systems of our nation. The Bank of England’s notional independence already stands in question – for some forty consecutive months now its inflation target has been surpassed. Yet the near-zero interest rate policy first employed over four years ago by the erstwhile Labour administration and continued with gusto since the coalition came into office has been adopted by political complicity between the Bank and the Treasury. The economic case for this can be robustly made, but it flies in the face of an ‘independent’ Bank of England.
Unfortunately, the OBR has also appeared to have become part of Britain’s national economic furniture, widely perceived as a tool of the Chancellor of the day, rather than an impartial challenger of facts, figures and strategy. This perception is one the OBR must urgently counter if it is to prove a genuinely valuable part of the UK financial landscape.