The phrase “independent economic forecasting” can easily send you to sleep. But the chaos surrounding the budget, and the resignation of the chair of the Office for Budget Responsibility, has once again made economic forecasting interesting, and in a way that’s at least better for people’s mortgage rates than the Truss episode of 2022.
In an era of attacks on independent institutions, people from Maurice Glasman, the Labour life peer, to Liz Truss are more than happy to line up and criticise the OBR, but the fundamental truth is it’s better than the alternatives.
Consider the previous system: the Treasury making its own forecasts and Gordon Brown perpetually marking his own homework. Instead of the budget fitting the figures, the figures were made to fit the budget.
Chancellors from both parties were repeatedly accused of optimism bias: growth expectations that proved heroic, inflation assumptions that weren’t in touch with reality, and policy costings that were hugely uncertain. Of course, every chancellor thinks their bright policy ideas will lead to the next industrial revolution with no downsides whatsoever, and of course the Treasury officials who work for them are inclined to agree.
An analysis undertaken by the OBR found that its growth and borrowing forecasts “are more accurate and less biased than the previous UK official forecasts produced by the Treasury”. The Treasury itself has also admitted that the OBR’s performance is comparable to external forecasters.
When George Osborne wisely set up the OBR he said it was in order “to address past weaknesses in the credibility of economic and fiscal forecasting and, consequently, fiscal policy”. And it’s clear from the attention that markets pay to the OBR’s judgments that it has brought credibility.
These are the judgments of hard-nosed bond traders – people whose sympathy for chancellors is roughly on par with their sympathy for gilt yields. They are not sentimental. They do not care about the political arguments or the forecasting timetable. They care about credibility. Independent scrutiny is worth real money in borrowing costs. When a government is seen to be marking its own homework, the penalty is swift and brutal.
Part of the reason for the OBR becoming a punching bag is the poor performance of the UK economy as a whole
A persistent misunderstanding of the OBR’s role is that it somehow “controls” the economic policy of the government and takes on the role of chancellor. But there is nothing in statute that compels a chancellor to take the OBR’s advice. Politicians are entirely free to disregard their costings and pursue a different policy course.
The reason they don’t is that the credibility of the institution is respected by the financial markets. Look only to the Truss experiment and the swift judgment the markets made on it. That was not due to the actions of the OBR, but to the economic judgment of those who make trades based on their analysis of government policy.
Part of the reason for the OBR becoming a punching bag is the poor performance of the UK economy as a whole. That performance has meant tough decisions have been needed on tax and spend, and therefore brought the judgment of the OBR to the fore. In addition to this, governments, including the current one, have left themselves limited headroom, meaning they are at the mercy of minor forecasting changes. This is not the fault of the OBR. It’s a political choice. The fundamental point remains: economic policy-making remains in the gift of politicians, and they shouldn’t use the OBR to excuse themselves from taking the tough economic decisions that are needed in the national interest.
When I was in the Treasury there were plenty of disagreements with the OBR over its forecasts and costings. One can certainly see the case for refining the forecasting process, which has appeared chaotic at times, and also clarifying the way it communicates with the public so it cannot be characterised as a political actor. But the idea that officials working for the chancellor would simply produce their own forecasts, and would be more accurate and less prone to bias, seems fanciful.
The OBR will never produce perfect forecasts. It is often wrong. No institution is perfect. But it does offer something that the UK economy needs: an independent, transparent baseline against which fiscal policy can be judged.
It is a check on the temptation to over-promise. It curbs the urge to think wishfully on growth. And it gives markets confidence that the numbers are assessed in an independent and impartial way.
Yes, the OBR is imperfect. But undermining it would simply serve to weaken the economy.
The OBR remains what it has always been: an awkward, imperfect, often incorrect, but important institution. Yes, it’s easy to criticise and for politicians to blame it, but be careful what you wish for.
Simon Finkelstein is a former special adviser to Conservative chancellor Jeremy Hunt
Photograph by James Manning/PA Wire