The OBR rebukes Cameron for claiming that austerity has not hit growth

"Tax increases and spending cuts reduce economic growth", Office for Budget Responsibility head tells Cameron in letter.

In his "there is no alternative" speech on the economy yesterday, David Cameron confidently declared that the Office for Budget Responsibility had shown that the coalition's austerity measures have not harmed growth.

As the independent Office for Budget Responsibility has made clear…

…growth has been depressed by the financial crisis…

…the problems in the Eurozone…

…and a 60 per cent rise in oil prices between August 2010 and April 2011.

They are absolutely clear that the deficit reduction plan is not responsible.

In fact, quite the opposite.

But it turns out that the OBR doesn't think that at all. In a notable assertion of his independence, Robert Chote, the watchdog's head, has just written to the Prime Minister correcting the record.

Chote writes:

For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.

He reminds Cameron that the OBR's multipliers assume that "every £100 of fiscal consolidation measures reduce GDP in that year by around £100 for capital spending cuts, £60 for welfare and public services, £35 for increases in the VAT rate and £30 for income tax and National Insurance increases". Fiscal consolidation is estimated to have reduced GDP by 1.4 per cent in 2011-12 alone.

Chote adds that the OBR believes that weaker-than-expected growth is most likely due to higher inflation, deteriorating export markets and the recession in the eurozone. But he emphasises that this doesn't mean Cameron can claim that austerity has not hit growth, let alone that it has had "the opposite" effect (does he still believe in expansionary fiscal contraction?)

The OBR's original forecasts were premised on the assumption that spending cuts and tax rises depress output, even if subsequent downgrades have been largely attributed to other factors. As Chote puts it, "we believe that fiscal consolidation measures have reduced economic growth over the past couple of years, but we are not yet persuaded that they have done so by more than the multipliers we use would suggest."

In other words, Cameron was wrong. And the independent (no scare quotes required) OBR deserves credit for pointing out as much. But if, in addition to making growth forecasts, the OBR is going to start fact-checking Cameron's speeches, it will have its work cut out.

Just a month ago, as Staggers readers will recall, the PM was rebuked by the UK Statistics Authority for falsely claiming in a Conservative Party political broadcast that the coalition "was paying down Britain’s debts".

You can read Chote's letter in full below.

Letter From Robert Chote to Prime Minister

David Cameron delivers his speech on the economy during a visit to precision grinding engineers Cinetic Landis Ltd on March 7, 2013 in Keighley. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty Images
Show Hide image

Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.