The unelected body established by the Tories - the Office for Budget Responsibility (OBR) - is intended to provide "independent", reputable support for massive cuts in public services.
Economic forecasting is a black art. For all the sophisticated maths and apparent rigour, the models economists use to understand the world are very imperfect.
Most of the time, this doesn’t greatly matter. What happens tomorrow will be much the same as today. Economists’ models are good at predicting business as usual.
But in strange, new times, those models break down. And that’s when the assumptions economists make about the world really start to make a difference.
So when the new Office for Budget Responsibility (OBR) produces forecasts, we should look carefully at how they are constructed.
The Con Dem government has pledged to stick to the OBR’s predictions when implementing its own policies. They want to be able to show that this “independent” body is providing neutral, reputable support for its attack on public services.
The 1990s redux
George Osborne and David Cameron have repeatedly claimed that cutting public spending now will not create a new recession.
They even think that squeezing government out of the economy will create a space for the private sector to grow.
The picture the Tories appear to have in their head is the recovery of the 1990s. The pound was forced out of the European Exchange Rate Mechanism (ERM) on “Black Wednesday” in September 1992, leading to its immediate devaluation in the midst of a serious recession.
Cameron knows this story well. He was a special advisor to Chancellor Norman Lamont during the financial catastrophe. The Tories’ desperate mismanagement saw interest rates rise three times in a single day. £27bn was spent trying to maintain the high value of the pound to keep it in the ERM.
Once out of the ERM, however, the cheaper pound made UK goods and services cheaper abroad. With economies like the US slowly recovering from recession, demand for UK exports picked up. This, in turn, helped drive investment by businesses.
For the first time in a decade, manufacturing employment began to rise. The UK’s balance of trade moved into surplus.
At the same time, tight restrictions on government spending squeezed the public sector’s share of output. It was a recovery driven by the private sector.
This is not 1994
Those happy circumstances no longer exist. The OBR’s forecasts reflect this. They believe consumer spending will remain weak and that Britain’s major export markets in the advanced economies will stay pretty feeble. Growth overall will be lower than Labour’s forecasts.
But the OBR believe that recovery from this recession will rest on business investment. They think that once banks start lending again properly, businesses will go on a spending spree. Investment will recover, they predict, even faster than in the 1990s.
This is a good story for the government to tell. It means they can claim cutting public spending will not produce a “double dip” recession.
But it’s not plausible.
Signs are already pointing towards a potential new banking crisis. The threat of default by Greece, and turmoil in other southern European countries, has badly affected European banks who loaned heavily. The recent $1tr Eurozone bailout was aimed in no small part at assisting them.
The cost of borrowing for banks themselves has risen in recent months, market fears of further financial turmoil. Lending to British firms has continued to contract.
And if domestic consumption is flat, while exports are subject to substantial uncertainty: why would businesses choose to invest? No capitalist business will invest if it does not believe its goods will be sold. And as the OBR itself recognises, the signs point to a great deal of existing spare capacity in the UK economy.
Keeping the bankers happy
The forecasts reflect the Con Dem’s own optimistic beliefs about the prospects for private enterprise. They offer support for a programme of public spending cuts.
This should not be too surprising. At the head of the Office for Budget Responsibility is Alan Budd. Budd was, until very recently, a non-executive director of IG Index, specialists in financial spread betting. Before that, he headed up the Bank of England’s banker-friendly Monetary Policy Committee.
He is joined by Gordon Dicks who was, until early last year, UK chief economist for RBS. This committee of bankers and bankers’ maters have produced a report that will keep the City happy. The Con Dem government will use its predictions to justify unprecedented cuts in public spending.
They don’t care about the risk of a further, deeper recession. And they are prepared to ignore the misery that spending cuts will bring.
Stopping the Bankers’ Coalition is a priority. Can’t Pay, Won’t Pay will be joining others in protesting against Osborne’s Emergency Budget on 22 June. Building a political movement against the cuts is an absolute priority.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).