Who watches the watchmen? In the Office for Budget Responsibility’s unfortunate case, the answer is Conservative MPs.
Forty-six of them have joined four peers in writing to Jeremy Hunt suggesting that forecasting errors by his official budget watchdog are holding back Britain’s economy. When they say Britain’s “success relies upon the OBR getting things right”, they suspect that it has not.
The letter coincides with a new report from Conservative Way Forward: The OBR: A Straightjacket of Failure. Both point toward the forecaster’s recent self-diagnosis of a tendency “to overestimate real GDP growth and underestimate government borrowing”.
According to the CWF’s calculations, the sum of these over and undershoots has been growth being £500 billion lower than predicted and public sector borrowing being £600 billion higher. Even if the pre-Covid forecasts of 2019 and 2020 are removed from the figures, the OBR has still been £138 billion out since its establishment in 2010. On this “deeply worrying” basis “sensible economic management cannot continue”.
A pre-election Budget looms. There is no time to waste. The OBR’s “centrality to economic decision-making makes it vital that its systemic issues are resolved as a matter of urgency”. Hunt must ensure these “errors are not holding back the country’s recovery”.
For those anxious that there aren’t enough groups of Tory MPs focused on fighting woke and promoting tax cuts, the three are linked to ‘Popular Conservatism’: a new policy initiative to “appeal to traditional Tory voters”, according to the Mail on Sunday. Helping them launch will be one Elizabeth Truss.
Asking Truss for advice on how to make conservatism popular is about as wise as going to Paula Vennells for tips on how best to treat your employees. But by raising the spectre of the ex-Prime Minister, we can better understand from where this antipathy to the OBR stems.
Truss refused an OBR forecast for her mini-Budget. The OBR is “one of the props of the current economic consensus” with which she disagrees: “a brake on competitiveness and a barrier to prosperity” because it refuses to account for the pro-growth impacts of low taxes and supply-side reforms. It is now the effective “driver of fiscal policy” in a high-tax, high-spend direction.
The Forty-Nine Days’ Queen is not one of the letter’s public signatories. But some of them, such as Simon Clarke and Jacob Rees-Mogg were in her Cabinet. As were fellow signatories Suella Braverman and Jake Berry. Iain Duncan Smith and John Redwood were two of her agenda’s loudest supporters from the backbenchers. Both have signed. Even if far from every member of the 46 is a card-carrying Trussite, all will be sympathetic to her tax-cutting ambitions.
All have therefore looked at the smoldering wreckage of her premiership and sought someone to blame. The CWF was founded in 1991 to keep the Thatcherite flame burning. Three decades of arguing for lower taxes and a smaller state would have been wasted if that work had been undone in only seven weeks by their own mistakes. A scapegoat is required.
Into the breach steps the OBR. You could call it “the paranoid style in Conservative politics”, but it’s rather more Scooby Doo. We would have gotten away with that mini-Budget too, if it weren’t for that pesky forecaster.
History is reworked. The OBR helped torpedo Trussonomics before it had a chance to work. It wasn’t that her agenda was unworkable. The forces of Treasury orthodoxy proved too strong. Surging interest rates and volatile energy markets be damned.
If MPs hope that by attacking the OBR they can vindicate a tax-cutting agenda then they are guilty of wishful thinking. Truss’s failure to run her sums past the OBR did not cause her premiership to implode.
The markets didn’t believe that her mini-Budget would produce the growth required to justify the increase in borrowing it demanded. Blaming the OBR is easier than acknowledging that the free-market right has had a central tenet of its thinking rejected. Tax cuts don’t always pay for themselves.
Economic forecasts are not perfect. Kenneth Galbraith once claimed that their only function was “to make astrology look respectable”. The OBR admits that it under-estimated inflation and over-estimated growth in 2021 and 2022. Predicting the economy’s course is difficult enough at the best of times. It is especially so through pandemics, wars, and three Prime Ministers.
But they are a necessary evil. We could not communicate the potential impacts of policies without them. Like weather forecasts, they are an imperfect but essential guide. And as with weather forecasts, we can all be guilty of picking which ones to believe based on what we want to hear. Truss happily quoted from those forecasters which bucked the trend to give her mini-Budget a thumbs up.
If Hunt ignored the OBR for the sake of a pre-election tax giveaway, he would receive no warmer a reception from the markets than Kwasi Kwarteng. That’s even before events in the Red Sea sends inflation surging again. This leaves three other options for the OBR’s critics: abolition, reform, or inaction.
Abolition would return us to the pre-2010 status quo: the Treasury marking its own homework. Forecasts would be produced in-house and then signed off by ministers. Under Gordon Brown, this meant over-optimism. The Iron Chancellor’s policies had an unfortunate habit of producing less revenue and requiring more borrowing than predicted for him on Budget day.
George Osborne established the OBR in 2010 to remove forecasting from the political fray. His choice has paid off. A recent self-assessment describes the OBR’s borrowing forecasts as “more accurate and less biased than the previous UK official forecasts by the Treasury”. The OECD has given it rave reviews for its quality and transparency.
MPs hoping to undermine the OBR’s credibility are thus fighting an uphill battle. They might switch to arguing that it doesn’t properly acknowledge the impacts of tax cuts or supply-side reforms. But this ignores the inconvenient truth that it does – if ministers provide it with sufficient evidence.
When Osborne wanted to drop the top rate of income tax from 50p to 45p, he had to justify to the OBR that it would effectively pay for itself. Last March, Hunt successfully argued that his welfare, childcare, and pension reforms would increase the labour supply, and received an updated forecast.
Would Truss now be singing the OBR’s praises if she had waited to see if she could receive a thumbs up for the mini-Budget? Unlikely. Without curbs on spending or supply-side reforms that could get past Tory MPs, she would still have faced political and market turmoil. Following the CWF’s logic, it might even have been even worse.
They are arguing the OBR shouldn’t be trusted for the same reason that the mini-Budget was rejected: it overestimates growth and underestimates borrowing. Intentionally or not, the CWF are making the case against Trussonomics. Physician, heal thyself.
The OBR could be improved. Labour’s pledge to strength the body by placing more of it on a statutory footing is performative. Nonetheless, more could be done to improve its independence and bolster its capacity for preparing for those Black Swans that have disrupted its work in recent years.
But any Tory MP hoping to see the back of the OBR should be careful what they wish for. Osborne was designed it as a check on fiscal irresponsibility and it has proven to be one. The OBR should not be made a scapegoat by those unwilling to own their own mistakes.