I’m aware Liz Truss has never actually used the phrase ‘left-wing economic establishment’ during her current comeback tour. Some over-zealous Daily Telegraph sub turned her sentiments into the phrase that launched a thousand memes. Still, the ex-Prime Minister has definitely taken aim at a “prevailing orthodoxy” with which she disagrees – and the Office for Budget Responsibility (OBR) has come in for some stick.
Her bugbear is with the “assumptions” on which the OBR’s economic models are based. Its forecasting, she argues, is not “sufficiently dynamic”. The positives of her tax cuts for growth and revenue were ignored. The “direct relationship” between the OBR forecast “and the markets” meant her challenge to the orthodoxy spooked the moneymen, ruined her plans, and forced her out of office.
Does she have a point? We should start by remembering why the OBR was set up. Trailed by George Osborne in 2008 following the financial crisis, it was formally created after he became Chancellor in 2010. It aims to provide independent assessments of the UK’s public finances, producing forecasts to accompany fiscal events. Like awkward teams photos outside Number 11, its reading of the Sibylline Books is part of the Budget Day routine.
The OBR was the target of some scepticism when Osborne first proposed it. Politically, he saw it as a useful shield for the Conservatives’ efforts to reduce spending – if the OBR, trusted to be independent, called for cuts to bring down the deficit, ‘austerity’ became the delivery of economic medicine, rather than the Tory zealotry for shrinking the state that the Left would paint it as.
Yet it wasn’t just an unhappy offspring of Osbourne’s triangulation. The body has had a clear economic benefit. Before 2010, Budget forecasts were produced by the Treasury. Naturally, those involved would endeavour for accuracy.
But this was under Gordon Brown. The Iron Chancellor’s forecasts had an uncanny knack of entirely vindicating his approach on Budget day, before coming unstuck. Brown could get away with this in the boom years, but not when the bust arrived in 2008.
As someone involved in the OBR’s creation told me, his unsubtle influence over the numbers had knocked market confidence in our forecasts, making our borrowing costs higher than they otherwise would have been, exacerbating the hit of the recession on our public finances, and making the need for spending restraint all the more necessary.
The OBR was designed to prevent a repeat of this. It aimed to ensure the public finances were sustainable by providing an independent check on the credibility of the Government’s plans. But even the best-laid plans of mice, men, and former Evening Standard editors were not prepared for Trussonomics.
In Truss’s defence, it’s worth remembering that Osborne’s approach represented a broader – sigh – orthodoxy. As our Editor has highlighted, the post-1979 consensus in fiscal and monetary policy circles has been for the public finances to match public spending to taxation. With the Bank of England taking control of inflation, the job of Chancellors was to ensure debt remained stable or fell as a proportion of GDP as the economy grew.
New Labour claimed to have signed up for this. Brown stuck to the Tories’ spending plans, ran a surplus for several years, and brought down government debt. But blessed with a second landslide in 2001, Brown began borrowing rather than balancing the books. He ran deficits between 2002 and 2008, masked by solid growth. It left us dangerously exposed when the crash arrived.
In response to the recession, he dusted down Keynes and doubled debt from 35.3 per cent of GDP to 66.3 per cent. It did little good for productivity – since 2008, it has grown at a paltry 0.4 per cent annually. Osborne’s cuts prevented the ratio from spiraling out of control. But slow growth, Covid, and our pudgy state mean that returning to 35 per cent any time soon is a fantasy.
By 2022, the OBR had long since successfully taken the politics out of economic forecasting. But Boris Johnson was caught with some cake, Chris Pincher had one too many sherries at the Carlton Club, and Tory party members ensured Liz Truss became our 55th Prime Minister. She quickly announced her energy bailout package, with little market backlash.
The Truss premiership unraveled after Kwasi Kwarteng announced their mini-Budget without an attendant OBR forecast, arguing that waiting for one would take too long. After a plummeting pound, soaring bond yields, a pensions crisis, Bank of England interventions, screeching U-turns, and her final defenestration, that appears to have been something of a faux pas.
But the OBR – or, more accurately, excessive market concern at the lack of a forecast from it – was not to blame for the market backlash to her Chancellor’s mini-Budget. The central reason was the markets’ lack of faith in Trussonomics itself.
The mini-Budget dumped the biggest “dash for growth” since the Barber Boom on a febrile market environment with monetary policy tightening and energy costs volatile – and did so without an accompanying policy of spending cuts. Indeed, Truss had maintained throughout the campaign and into office that spending would not be cut.
Like Brown in 2008, Truss broke with the post-1979 orthodoxy that tax cuts should be accompanied by spending cuts. Unlike Brown, Truss and Kwarteng were out on a limb – not swimming with an expansionist tide, but promising to borrow more just as doing so was becoming more expensive.
Or that is what the OBR would say. Trussonomics truthers would argue the ‘orthodoxy’ had under-estimated the extent to which her tax cuts would raise revenue – part of a broader failure to make forecasts sufficiently ‘dynamic’, and cognisant of the Laffer Curve. The only trouble with the assertion that the OBR doesn’t do ‘dynamic’ modelling is that it is simply not true.
When Osborne lowered the top rate of income tax in 2012, ‘static’ modelling suggested a big fall in revenue. But the then-Chancellor provided evidence to the contrary, and the OBR adjusted its forecast to suggest only a £100 million fall in revenue. Truss and Kwarteng chose not to do the same for their mini-Budget. Rather than make their case to the OBR, they ignored it in their rush to implement their agenda.
Some of their claims – that, for instance, removing the rise in Corporation Tax would produce more revenue – were simply not believed. Of course, the OBR’s metrics are decided by politicians. If Truss and Kwarteng had wanted to adjust these to suggest the Government was no longer interested in bringing down debt as a proportion of GDP, they could have done so. What they should not have done is claim that they could cut taxes, maintain public spending, and reduce debt all at once.
The markets are not fools. They take the OBR seriously because it takes them seriously. If the Government wants to borrow to spend, it has to acknowledge the market environment in which it does so. A decade of loose monetary policy has not changed that. The unhappiness with the absence of its forecasts shows the credibility it has built up over the last decade.
Economic models are not perfect. No effort to predict the future is. But the Government, markets, businesses, and households have to plan against something. An institution like the OBR has much more accumulated credibility in economic forecasting than Truss – or any sympathetic think-tank from which she might pick and choose her figures.
Why? Because it does not seek to have its cake and eat it. The OBR suggests choices actually have to be made in balancing borrowing, spending, debt, and taxes, even when politicians do not. That counts just as much as when the challenge comes from an attempt to kick-start a free-market revolution as it does from Brown’s fudging of boom and bust.