The fallout from Rishi Sunak’s car-crash Spring Statement last week continues. With the Chancellor’s much-trumpeted but tokenistic 5p off petrol doing little for families facing £700 energy bill increases, the statement crumbled almost as soon as the Chancellor returned to his seat. By the weekend Sunak was suggesting that further measures to address the cost of living were being planned. But in a classic example of shooting the messenger, Sunak was reported by the Times to “viscerally hate” the Office for Budget Responsibility, the government body charged with providing economic forecasts, for its supposed doom-mongering.
It wasn’t supposed to be like this. When established in June 2010 by George Osborne, the “independent” OBR gave every impression of being little more than a gimmicky extension of the Treasury, based in the same building and staffed by Treasury civil servants. Its first set of forecasts did nothing to dispel the impression, laughably projecting an extraordinary recovery in business investment and exports that would drive a boom in gross domestic product and real wages. This turned out to be spectacularly wrong: business investment grew weakly, exports fell, GDP barely moved and real wages, instead of rising 7 per cent, fell by 2 per cent. The farcical projections served a political purpose, however. By insisting that, despite dramatic cuts to government spending, the private sector would continue to drive overall growth, the forecasts could be used to support the coalition’s austerity programme.
The OBR has spent the decade and more since then recovering from this shaky start, steadily producing forecasts and reports that more accurately reflect economic reality. Under its heads Robert Chote and, since 2020, Richard Hughes, it has won respect for its independence and the quality of its output. The International Monetary Fund has described it as offering a “best practice” that “could be used as a benchmark by other advanced economies”. The Organisation for Economic Co-operation and Development, in a recent review, said the OBR has a “solid reputation for independent, credible, high-quality analysis” and, outside the UK, “is considered by many as a model independent fiscal institution”.
The result, overall, has been to improve the quality of discussion of macroeconomics in Britain, which had become dominated by the unwarranted authority of the Institute of Fiscal Studies. The IFS’s fixation on fiscal issues — which it defined narrowly as being about reducing the government’s debt and deficit — and its media-friendly director helped to poison discussion of economic policy for a decade, contributing directly to the calamity of austerity. But with the OBR and, increasingly, the independent-minded Resolution Foundation providing timely, detailed and comprehensible analysis of the probable impacts of government decisions, the chances of a British government committing so doggedly to a damaging macroeconomic policy like austerity have, perhaps, been reduced.
Unfortunately, the economic problems we face now are far worse and more intractable than a Conservative Party bent on spending cuts. Productivity growth has stagnated but our conventional economic models, of the kind used by the OBR, have not coped well. The result has been that far from being the doomsayers that Sunak so loathes, the OBR has continually been excessively sanguine about the near future.
As a 2018 paper for the Centre for Business Research at the University of Cambridge by Ken Coutts, Graham Gudgin and Jordan Buchanan shows, the OBR’s forecasts for productivity growth, measured as output per hour worked, from 2010 to 2017, have suffered from a tremendous optimism bias, confidently expecting productivity to grow much more than it did. Like other developed economies, Britain’s productivity growth since the 2008 crash has been extremely weak by historical standards, which helps to explain the shockingly poor performance of wages over the same period. The OBR, later in 2017, bent to the new reality and revised its medium-term estimate of Britain’s productivity growth down to just 1.2 per cent, compared with 2.1 per cent average growth for the twentieth century. Productivity growth has, historically, been the key to capitalism’s growth and expansion in general. For it to be fading away suggests grave difficulties at the heart of the system.
Anaemic productivity growth promises a poorer future than we expected but not necessarily one that is materially worse than life today. The environmental instability we are now subject to threatens exactly this.
The OBR, to its credit, has begun to think about some of these impacts. Its 2021 “Fiscal Risks Report” correctly notes that “advanced economies may be increasingly exposed to large, and potentially catastrophic, risks”, from pandemic disease to crop failure, as ecological breakdown continues. Its estimates for Covid-19 suggested a permanent 3 per cent loss in output; the impacts of climate change, without mitigation, could push government debt up to 289 per cent of GDP by the end of the century.
The challenge for the OBR, like macroeconomic forecasters in general, is integrating these valuable but ad hoc predictions about our worsening probable future into its standard macroeconomic modelling. The insights of the burgeoning field of ecological macroeconomics, which seeks to systematically integrate an understanding of the physical impacts of economic activity — on resource use, say — with more conventional economic concerns around growth and the distribution of income, could prove invaluable. Such models tend to point towards the difficulties of relying on future economic growth to create improvements in society’s welfare, and the instability of an economic system based on high inequality and high resource use. This is hardly what the current Chancellor wants to hear, of course. But we are approaching the point, in a more unstable world, where an honest attempt at economic forecasting will mean facing some hard truths.