Dr Alan Budd should explain why the OBR has got its forecasts so wrong

Instead of being a critic of the Prime Minister, Dr Budd should tell us why the OBR forecast faster and rising growth from 2010 onwards in each of its forecasts. Why did they have to constantly scale them back? They knew the plans for spending and taxing and did not think they got in the way of good growth. Tomorrow on www.johnredwood.com I will  be offering one of the main reasons the OBR has been so off target. It’s nothing to do with deficit reduction. The OBR in Mr Chote’s letter accept that they took into account Labour’s tax rises and capital project cuts, and the further measures the Coalition took in June 2010, and still came up with forecasts of rapid growth for most of the Parliament. They have subsequently revised these down for reasons unconnected  with the policy.

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20 Comments

  1. Posted March 8, 2013 at 6:38 pm | Permalink

    Exactly.

  2. Posted March 8, 2013 at 7:10 pm | Permalink

    I do not want to steal your thunder but its probably to do with the OBR being staffed with people on secondment from the Treasury which is a place not know for its accuracy

  3. Posted March 8, 2013 at 7:34 pm | Permalink

    Forecasts are just forecasts and it is silly to rely on them as we do and get excited if they do not pan out. We should rely on GDP as it is now (and even that is dodgy) with growth being very nice TVM but only when we know it has happened. Our efforts at guessing, sorry prediction, are laughable.

    I have just read that Nigel Farage has made it plain(er) that he would be willing to negotiate a pact with the Conservatives and Why not? given that the two parties to such a coalition would be pulling at least roughly in the right direction and would sweep the board and get us out of the wretched EU. However, Farage won’t deal with Cameron because he doesn’t trust him. No fool that Farage. Why doesn’t Cameron win our respect for once and resign in the interest of the country?

    • Posted March 9, 2013 at 1:50 pm | Permalink

      Given the current tory party with only about 100 or so who are not pro EU socialists there is really no alternative to Cameron who could command Tory support.

      UKIP is clearly right not to trust ratter Cameron or IHT ratter Osborne one inch but even with a pact I suspect the Tories will still probably lose after this government’s dismal performance so far.

  4. Posted March 8, 2013 at 7:42 pm | Permalink

    The main reason is quite simple. The OBR, like many other institutions, got its estimate of the fiscal multiplier wrong. Had it built in the right fiscal multipler then it would more accurately have predicted growth given the changes in fiscal policy – those ones that you deny existed.

    Reply It got its view of the impact of broken banks and tax rises on the private sector wrong. It correctly forecast the positive contribution to GDP made by increasing public spending.

    • Posted March 9, 2013 at 11:30 am | Permalink

      Ok, give me some evidence of your assertion.

      And try and refute the findings of this paper by IMF economists looking at the forecasts of various economic institutions: http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

      Once again, we have a correlation of events, and you are asserting a causal chain which appears to be rather partial at best.

      Undoubtedly the banks did create problems, but there is little reason to believe your assertion regarding fiscal policy.

      Fiscal policy, as measured by the cyclical balance, has been contractionary – yes, we haven’t suddenly ended up with a surplus but neither should we expect one immediately when over 2m people are unemployed and growth hasn’t started yet since the downturn.

      Fiscal policy does affect economic outcomes, and hence if fiscal policy is less expansionary (which is has been), then economic growth will be lower. That’s a clear causal chain which makes use of standard and basic economics – in particular the fiscal multiplier.

      Yes there is reason to believe that the size of a deficit can influence economic growth negatively, but the primary route for this is crowding out – yet the route through which crowding out operates is the interest rate, and interest rates are rock bottom despite the government’s deficit. Hence your assertion regarding causality appears to have little empirical backing – despite how much you try and argue it.

      However, I and many better qualified than me (e.g. Jonathan Portes) have been over this endless times with you.

      Reply A country can tax and borrow itself to povrty, as several Euro countries are demonstrating.

      • Posted March 11, 2013 at 10:33 am | Permalink

        That really misses the point I was making John.

        I’m talking about structures inherent in any economy, and providing me with a few supposed counter examples really doesn’t change the likely structure of any economy.

        A structure you seem keen to wilfully misrepresent for what gain I can’t understand.

        I’ve now seen Chote’s letter, and the hilarious thing is that his point was that Cameron totally misrepresented what the OBR said. You’re no better than he is in that regard in the way you “debated” with Jonathan Portes. Ignore vast swathes of evidence that contradict your position, zero in on the tiny bits that support your position.

    • Posted March 10, 2013 at 3:02 am | Permalink

      “positive contribution to GDP made by increasing public spending. ”

      Public spending is not growth. Growth only comes from private spending.

      • Posted March 11, 2013 at 10:31 am | Permalink

        Erm, that clearly depends on whether you decide to be restrictive in your definition of what growth is. Most people aren’t.

        You totally close yourself to the possibility that fully free markets might just lead to an inefficient outcome. While fully free markets can do some wonderful things, they are not perfect.

  5. Posted March 8, 2013 at 7:54 pm | Permalink

    They say increasing tax and cutting government expenditure decreases growth indeed but they neglect to point out that cutting government expenditure and putting that money back into the the private sector with tax cuts increases growth hugely. That is the way to go, paying people to dig pointless holes fill them in again and/or inconvenience the productive is not.

  6. Posted March 8, 2013 at 9:28 pm | Permalink

    http://www.cityam.com/article/why-cameron-s-no-turning-back-speech-makes-me-despair

    If I am not mistaken, I suspect that these views are not a million miles from your own…..

    With regards to the OBR, I seem to recall that they are a creature of the Coalition. Perhaps they actually put some credence in the government’s stated intention to properly implement Plan A……Thankfully, they now seem to have been cured of that…… Perhaps their forecasts might be more accurate now….?

    zorro

    • Posted March 9, 2013 at 11:42 pm | Permalink

      Indeed an excellent link and on the same link Patrick Minford (professor of applied economics at Cardiff Business School) has it exactly right to:-

      What this adds up to is that the chancellor is making two big mistakes over monetary policy. First, he is excessively regulating the banks so that the credit channel is blocked. Second, he is urging monetary policies to boost growth which, if they worked, would only raise inflation. He is being saved from more inflation by the fact that the first mistake cancels out the second. Unfortunately, the first is blocking growth and the second is ruining savers.

      These problems may be beginning to dawn on the Bank of England at last. But it is time the chancellor also understood these monetary problems, instead of worsening them.”

  7. Posted March 8, 2013 at 10:47 pm | Permalink

    Alan Budd is not head of the OBR, Robert Chote is.

    And Chote has written to Cameron: “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.”

    And also: “Economic growth has been much weaker since the end of 2010 than we and most other forecasters expected in June 2010 and it is clearly possible that this is in part because the fiscal consolidation measures have had a greater ‘multiplier’ effect than we anticipated. But, in the Forecast Evaluation Report, we concluded from an explanation of the subsequent outturn data that the impact of external inflation shocks, deteriorating export markets, and financial sector and eurozone difficulties were more likely explanations.”

    Rerply I did not suggest Dr Budd is Head of the OBR, but he was the first one reported criticising the PM’s speech to which I responded. The OBR always said the Labour cuts to capital and their tax increases, followed by the Coalition tax increase and slowing of current spending growth would have a negative impact on growth in the first year. They also forecast strogn growth thereafter, not thinking the “cuts” would stop that.

    http://budgetresponsibility.independent.gov.uk/wordpress/docs/Letter-from-Robert-Chote-to-Prime-Minister.pdf

    • Posted March 9, 2013 at 5:11 pm | Permalink

      It’s always seemed obvious to me that if the government was borrowing less to spend into the economy, especially borrowing less from overseas, then that would have a depressing effect.

      That doesn’t mean to say that higher taxes and lower public spending would be the wrong thing to do, because you cannot in the long term have an economy which is only sustained by ever increasing government borrowing.

      Even when the government avoids tapping increasingly wary private investors for their money, and instead indirectly borrows new money from the Bank of England, that is not something which can carry on forever.

      What concerns me more is that the coalition government has actually made little progress in cutting the budget deficit and is still borrowing vast sums to spend into the economy to keep it going, and yet nonetheless we have the downside of only a slow recovery in economic activity as if the government had in fact been imposing real austerity rather than the largely fictitious austerity constantly talked about in the media.

  8. Posted March 9, 2013 at 12:48 am | Permalink

    The situation inherited by this government combined the worst fiscal deficit to GDP ratio, a very high average household debt to average household income, two very large banks incapable of lending, other banks unwilling to lend, and a European Union tellng the banks to increase their capital reserves.

    It’s small wonder that there is no economic growth.

  9. Posted March 9, 2013 at 4:55 am | Permalink

    What really causes a lack of growth in the UK is a state sector that is about 50% too large, 50% over paid/pensioned and 50% doing little of any real value to the economy. That and the lack of vision to even start to address this position. Also the expensive renewable energy religion, the lack of banking and the endless damaging regulations from both the EU and the UK.

  10. Posted March 9, 2013 at 1:42 pm | Permalink

    Given that the OBR was created by Osborne I suspect that their forecasts were so optimistic because it was what certain Conservatives wanted to hear about their economic plans. It also allowed them to justify everything they did by claiming that it would result in huge amounts of growth.

  11. Posted March 9, 2013 at 2:19 pm | Permalink

    What a pity more Conservative MPs are not capable as you are of understanding and setting out these sort of issues in clear and simple language. Perhaps Linton Crosby should make reading of your website compulsory before any Conservative MP pronounces on a current subject. The BBCs Any Questions this week provided another depressing example. Obviously it was massively biased to the left – Maria Eagle (Labour – left), Peter Tatchell (Green – far left), Ed Davey (LibDem – centre left) & Andrea Leadsome (Conservative but failed to make the points on this issue as you do, probably not grasping them properly), audience – overwhelmingly left, hysterical cheers for Tatchell’s Chavez-style socialistic nonsense, not a single clap for Andrea Leadsome. Perhaps the Conservative Party should boycott this programme until the BBC agrees to make it balanced?

  12. Posted March 9, 2013 at 11:27 pm | Permalink

    Cut MPs salary to 5ok
    Cap all public and council saleries to 50k
    Cap all public and council pensions to 50k pa
    I see the Mr Hume will get £12k exit pay even if going to jail.
    Cut the wasters pay asap.

  13. Posted March 10, 2013 at 6:54 am | Permalink

    The issue is not that the forecasts are wrong but that government refuses to adust its expenditure downwards when reality doesn’t match wishful thinking.

    What is the point of forecasting if the public sector refuses to live within our means and simply borrows to cover the perceived shortfall?

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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