In her Spring Statement speech on Wednesday, Rachel Reeves mentioned the Office for Budget Responsibility (OBR) 19 times. It was supposed to be a speech about how well the Labour government was handling the economy; it was to a great extent a speech about how well the Treasury had managed to pass its exams. The Chancellor looked happiest when speaking about the government’s planning reforms, not in terms of the people who might get houses they can afford, but because they represent “the biggest positive growth impact that the OBR have ever reflected in their forecast”.
Partly this reflects the enduring political relevance of Liz Truss and Kwasi Kwarteng, who refused to publish the OBR’s forecast for their 2022 mini-Budget and were defenestrated by the ensuing market disruption. Kwarteng complained recently that the OBR is “too powerful”, which it really must be if it was able to end his career without even publishing its forecast. But Reeves’ devotion to OBR also comes from something we might think of as BBC Verify syndrome: an institution searching for credibility in this low-trust era by appealing to another institution to confirm that yes, it really is telling the truth.
I’m not sure this helps politically. My guess is that relatively few of the 50,000 children being pushed into poverty by the government’s welfare reforms will be happy to learn that their plight is considered fiscally credible by the OBR (by which I mean the OBR has said it will save money; it hasn’t said what impact this policy will have on labour supply). I do not think the 370,000 people who stand to lose their Personal Independence Payments by 2029 will be greatly cheered by the fact they’ve helped to keep the yield on a ten-year gilt under 5 per cent.
But the greater problem is that governments have begun justifying everything they do relative to its model – which is, like all models, wrong, and wrong to an extent that constantly varies. In doing so they have allowed the OBR’s model to appear more powerful than their convictions. They have recast difficult choices as necessities required by the spreadsheet – and forced the OBR to be the blamesponge, a de facto Department for Austerity.
[See also: The decade that growth forgot]
Critics of the OBR include the Office for Budget Responsibility, or OBR, which in 2023 published an analysis of its own performance. Perhaps the most important issue it identified was “our serial overestimation of productivity growth”. After it was set up by the newly elected Conservatives in 2010, the OBR spent five years predicting that productivity would return to its pre-crash growth rate of 2.1 per cent. The real rate was around 0.3 per cent. These might not sound like very large numbers but once you’ve extrapolated that to the size of the economy over five years, they become a forecasting gap of hundreds of billions.
To be fair, it doesn’t seem as if anyone else can forecast productivity growth well. “Economists just don’t have a good toolkit for forecasting productivity growth, and have a terrible track record of doing so,” explains Dominic White, a former Treasury adviser and head of economics at Absolute Strategy.
The OBR has also made some rather chunky assumptions about the amount of government bonds it expects the Bank of England to sell from the big pile of bonds it bought during the QE years. This affects the price that new debt will fetch in the market, and therefore the cost of government borrowing, and therefore the fiscal headroom Reeves has available for spending.
What really matters is not so much that the OBR is too optimistic here or too pessimistic there, but that as a forecaster it observes trends and extrapolates them into the future. A government’s job is to try to alter those trends, to stand up to forecasts. Reeves has acknowledged reality – in that she is very much ahead of some of her predecessors – but she is also supposed to do something about it. If you accept a glum but realistic productivity growth forecast as the only correct depiction of the economy, you are probably going to make some glum but realistic decisions about spending, and in time you will turn that depressing model into a depressing reality.
The other problem with a government putting too much significance on the OBR is that it has a mandate to publish two forecasts per year, and so the UK effectively ends up having two Budgets per year, despite Reeves’ declared intention to return to a single fiscal event. With the Chancellor having to respond to the mighty forecast more regularly, says White, the government is “forced to respond to what bond yields have done in the last three months, and what the latest productivity growth numbers have done, and how they may feed into [the] forecast… it feels like fiscal policy is now being fine-tuned according to whatever latest numbers that the OBR produces, and that doesn’t feel like a basis for stable policymaking.”
To be clear, this isn’t the OBR’s fault. Since it was established, it has remained true to its stated purpose of testing the government’s fiscal plans. But do we really think George Osborne wanted to give a group of government economists independent power to scrutinise him, because that was the right thing to do? Does that sound like George Osborne to you? A more cynical interpretation might be that David Cameron and Osborne, as they embarked upon years of radical economic policy, co-opted other institutions to make it seem as if what they were doing was reasonable. The Bank of England helped by suppressing the cost of debt, and the OBR helped by agreeing that the maths checked out. Neither was allowed to say if they agreed with the vandalism of the state – only that it could fit into a coherent model. Rachel Reeves has the hardest job of any chancellor for decades, but this could also give her greater licence to do things differently.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Rachel Reeves cannot disguise the pain to come]
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