Once upon a time, there was a common experience for newly appointed Treasury ministers following a change of government. Officials would sit them down and take them through the state of the public finances and the prospects for the future – spending, tax receipts, growth and so on. These would be the same officials who had worked on the pre-election Budget delivered by the previous chancellor only a few months previously. Mysteriously, the forecasts would have taken a turn for the worse. It was certainly the experience of those of us who were part of the new Treasury ministerial team in 2010.
There are, to be fair, advantages to an incoming government in being able to say that it has now been able to look at the books and discovered that the fiscal situation is even worse than previously thought. Such a revelation can justify taking tougher action than was promised in a general election campaign. (“Oh dear me, things are worse than we thought, we are going to have to put up VAT,” was our response.)
A situation in which ministers get the final say on Treasury forecasts – as was the case until 2010 – is, however, far from ideal. Particularly at moments when market credibility really matters, it is far better that forecasts are perceived as being produced in good faith by independent experts. This is not the same as saying that forecasts will be wholly accurate because economic forecasts rarely are. But the aspiration for accuracy should prevail over political expediency.
This, in essence, is the argument for the Office for Budget Responsibility, created in 2010 by George Osborne to ensure that the forecasts for the public finances and economic growth are independent of ministers.
For most economic observers, it has been a very welcome innovation and the OBR quickly established itself as an important part of our economic institutional infrastructure. But for some on the Conservative right, it is also a source of suspicion.
This became apparent in the run-up to the notorious “mini-Budget” of September 2022. The OBR was prevented from producing forecasts for what was very far from “mini”, presumably because the borrowing forecasts would have been too embarrassing for the government. I am told that ministers even had to be talked out of scrapping the OBR altogether by officials arguing, in true Sir Humphrey style, that this was a measure best pursued at a later date.
Even the OBR’s exclusion from the process, however, contributed to market concerns that the Truss government was breaking all institutional constraints on its own discretion. The ensuing market meltdown meant that an attempt to marginalise the OBR only strengthened it.
Or so one would have thought. In recent days, another attempt has emerged to undermine the OBR, largely from the people who brought us Prime Minister Truss (and, while we are at it, the economic triumph that is Brexit).
Ahead of the March Budget, 46 Conservative MPs and four peers have written to the Chancellor criticising the OBR for its performance as an economic forecaster. The letter, whose signatories include Priti Patel, Jacob Rees-Mogg and Suella Braverman, points to analysis done by the OBR itself evaluating its own record of accuracy. This analysis shows that the OBR has demonstrated a tendency to misestimate both government borrowing and GDP growth, although in the latter case the inaccuracies are similar to other external forecasters and in both cases the OBR’s record is an improvement on that of the Treasury.
Aha, say the MPs. Look, even the OBR acknowledges its errors and given that it is an important economic institution these errors are hampering the British economy. What is not included within the letter, but is a widely held view among these MPs, is that the OBR is emblematic of an overly-cautious, statist mindset that is preventing a radical tax-cutting agenda.
It is, therefore, worth looking again at the OBR’s evaluation of its forecasts’ accuracy. Yes, the OBR has a tendency to be inaccurate in its borrowing forecasts by underestimating borrowing. This is because, as the evaluation states, “we have to condition our forecasts on the government’s stated plans for departmental spending on public services” and those plans consistently underestimate what the government subsequently decides to spend. And on GDP growth, the OBR tends to overestimate it.
Both the overestimation of GDP growth and the underestimation of government borrowing suggest that the Chancellor will have less scope for tax cuts than the OBR’s March forecasts will suggest, undermining the bigger tax-cutting argument that the Conservative MPs are trying to make. It is almost as if they have not thought this through.
The letter also reveals a second point. For some on the Conservative benches, there remains hostility to independent economic institutions, on the basis that they (the OBR, the Treasury and the Bank of England) are seen as ideological enemies (“lefty panjandrums” as Rees-Mogg puts it). On both economic and political grounds, this is a very bad place to be. A lesson from the Truss government is that an antagonistic approach to such institutions by a government can spook the markets with disastrous economic and political consequences. Labour is keen to demonstrate that it understands this (Darren Jones, the shadow chief secretary to the Treasury, wasted no time in defending the OBR). But, in contrast, for some Tories it is a lesson that remains stubbornly unlearnt.