George Osborne began his Autumn Statement with a claim at odds with the reality that most of us perceive. He told us that “the British economy is healing”. His assertion was based on the Office for Budget Responsibility’s latest GDP growth forecast, which predicts steady growth for the next few years. He said, “The OBR forecast the economy will grow by 1.2% next year, then 2.0% in 2014, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017. So the economy is recovering.”
It is particularly difficult to give credence to Osborne’s confidence in the OBR’s figures this year. A day before the Autumn Statement, the OBR revised its prediction for growth in 2012 to -0.1% from a forecast made in March this year of 0.8%. Yet that forecast of 0.8% was itself a greatly revised prediction. Osborne did not mention, with good reason, that in June 2010 the OBR predicted that GDP growth for 2012 would be 2.8%.
A prediction of 2.8% growth compared with a reality of 0.1% shrinkage is a hair-raising miscalculation. But it is more hair-raising to consider that the OBR’s forecast of healthy growth by 2012 formed the basis for George Osborne’s austerity budgets and Conservative fiscal policy.
The OBR should be judged by its record. In 2010, it predicted 2.8% GDP growth for 2012, with the deficit down to £60 billion; in 2011, it predicted 2.5% GDP growth, with the deficit at £70 billion; in March 2012, it estimated that the year’s growth would be 0.8% and the deficit £89 billion. Its predictions for all other years have been equally inaccurate.
The OBR’s predictions have been so consistently wrong that it should by now be thoroughly discredited, as any other body that claimed to be intellectually rigorous and objective – say a scientific or medical research institute – would have been. But economists are judged by different standards.
That the OBR still forms the basis both of Osborne’s budgets and the means by which they are judged tells us as much about political thinking as it does the press that holds the government to account. Its figures are as uncritically accepted by Tory, Lib Dem and Labour MPs as they are by the tabloids, broadsheets and broadcasters.
The OBR was created by George Osborne when the coalition came to power in 2010 to provide economic forecasts and to assess the government’s performance on its fiscal targets. It was intended to be entirely independent of government influence, and was designed to end an era in which Labour had supposedly fiddled the Treasury’s economic forecasts.
Treasury Secretary Danny Alexander said:
“We set up an independent Office for Budget Responsibility because we did not want forecasts that could be interfered with by politicians, as they were in the past. We make our judgments on the back of those things.”
One factor that goes some way to explaining its resolute failure to produce accurate predictions is its size. A body providing economic advice for national policy is based would require a huge staff of experts. Colin Talbot, professor of public policy and management at Manchester Business School said, “I would have thought an organisation with somewhere between 50 and 100 staff would be needed to produce detailed forecasts.”
The OBR consists of “three independent members of the OBR’s Budget Responsibility Committee” supported “by the full-time staff of the OBR.” That staff, when it was created, consisted of only 11 civil servants, 8 of whom were seconded from the Treasury. That number has now been increased to 17.
The OBR’s staff is hopelessly small compared with the enormous task it has been given. It is entirely understandable therefore that its forecasts miss vast, crucial data.
In the Autumn Statement, Osborne excused the OBR’s incorrect forecasting by saying, “The OBR had previously assumed that the eurozone would begin to recover in the second half of this year.” Such an error is barely credible, but it is easy to understand how a staff of 17 would be forced to work with vastly simplified models. However, that means its predictions are little more than educated guesses.
It is argued in favour of the OBR that it is at least independent of the influence of the government. It is far better that an independent body produces predictions than for the Treasury to police itself. The problem is that it is not independent.
First, the claim that the members of the Budget Responsibility Committee are independent is false. The chair, currently Robert Chote, is appointed by the Chancellor. Add the eight Treasury civil servants, and nearly half its staff is affiliated with the Treasury.
More importantly, because it has too few staff to produce its own research, it relies on data from other sources. Its true independence can be gauged by a quick glance at those sources. It tells us that for the December 2012 “Economic and Fiscal Outlook”, it drew on data from, “HM Revenue and Customs, the Department for Work and Pensions, HM Treasury, the Department for Communities and Local Government, the Department for Business, Innovation and Skills, the Department of Energy and Climate Change, the Office for National Statistics, the UK Debt Management Office, and the various public sector pension schemes.” In other words, the vast majority of its data is recycled from other government departments.
The OBR is run by a Treasury appointee. It is staffed by civil servants mostly from the Treasury and produces forecasts based on government data. It receives Treasury funding and is located in a former Treasury office, in a building it shares with the Attorney General. It even buys “administrative support services from the Treasury”. The truth is that the OBR is an office of the Treasury in all but name.
These criticisms of the OBR’s independence are secondary. Its predictions are little more than fantasies, but they have been used, since 2010, as a crutch by the Treasury to justify Osborne’s austerity budgets. In reality, with the world in an uncertain state we have no accurate predictions about what the UK’s economy will look like in the next few years. That is a disturbing fact, but it is important that we admit it.
The government has a narrative, but it is crumbling. George Osborne believes that austerity will work because his figures tell him that it will, but his figures are increasingly being shown to be spurious. We should no longer take seriously anybody who claims that the OBR’s figures bear any relation to reality. The only safe prediction is that the OBR’s forecast will be wrong.
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