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8 March 2013

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.

By George Eaton

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.

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

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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