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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the author of ‘Growth: A Reckoning’ and an economist at Oxford university and King’s College London
In normal times, forecasts on the UK public finances from the Office for Budget Responsibility, expected this month alongside the chancellor’s Spring Statement, would be a significant moment. This time, it is a seismic one. An institution that was established to reduce bias in public finance forecasting now finds itself with a far grander role: the ultimate arbiter of whether the government’s plan to achieve its central mission — more economic growth — is the right one.
This was never meant to be the OBR’s purpose. Set up in 2010 by George Osborne, then chancellor, it was designed to solve a different problem: that the official UK public finance forecasts were not credible. The Treasury had a strong incentive to massage these numbers into better shape, whatever the political make-up of the government. And the belief was that an independent statistical authority would be free of that temptation. To that extent, the OBR is a success story: its forecasts do appear to be less biased.
However, forecasts about the UK public finances also require forecasts about the UK economy — among them, what is expected to happen to growth. If the economy were happily trundling along, these numbers would be playing only a supporting role. But this economy is stagnant, the government has made changing that its main priority and His Majesty’s Treasury no longer produces its own official growth forecasts. So the OBR’s numbers have been thrust into the spotlight.
Here, though, is the complication: the OBR does not actually know what causes growth. In fact, no one does. The true causes of growth are one of the great mysteries of economic thought. Hundreds of possible causes have been identified: everything from tax cuts to infrastructure spending, the number of frost days to the level of newspaper readership. And today they remain hotly contested among various schools of thought, divided along deeply political lines and duelling with one another.
With that in mind, the idea that the OBR somehow knows enough to take each UK government policy and state its impact on growth to a single decimal point is fanciful. Yet that is what it will attempt to do at the end of the month, with immense practical consequence. A reduction of 0.1 percentage point in the OBR’s potential productivity growth forecast, for instance, is estimated to create a hole of £7bn-£8bn in the public finances — that is the equivalent of the entire budget of Defra.
But do other countries not also have independent “fiscal watchdogs”, like the OBR? Yes, many do but their role tends to be different. Most simply assess the official government forecast or provide an alternative to sit alongside it. The OBR actually produces it. And chancellor Rachel Reeves has gone further, explicitly baking the OBR numbers into her new fiscal rules, making their forecasts definitive.
So we find ourselves in a strange world, where Reeves is best advised not to do what she believes will drive growth, but to look instead at what the OBR assumes drives growth. Then she must simply do as much of that as she can, given her fiscal constraints, so the forecasts are better. In the old world, HMT was incentivised to fiddle the numbers; in the new one, HMT is incentivised to fiddle the policy.
What’s more, if Reeves decided to challenge the OBR forecasts in public when they are published — perhaps saying she felt their internal model did not properly capture the promise of her growth strategy — that would not look like a legitimate intellectual disagreement about the true causes of growth. It would risk being seen as a shameful attempt to dodge the very rules she set up to bring an end to fiscal profligacy.
The OBR was established with good intentions. But it has been a victim of its own success. A difficult political judgment about one of the most contested economic questions — what actually causes growth — has been reduced to a technocratic calculation performed largely out of sight of the public.
What should we do? To begin with, the uncertainty in the OBR’s growth forecasts must be more explicitly recognised: independence might reduce their bias, but it does not make them correct. Politicians must be bold enough to say it; the OBR must be modest enough to agree.
In turn, the Treasury must consider reintroducing its own growth forecasts. This is not because they are likely to be more accurate than the OBR’s, but because we need more public debate and disagreement in policymaking, not less of it, if we are to find creative ways out of our current economic malaise.
Finally, Reeves ought to revisit her fiscal rules, maintaining their original spirit — current budget in balance, debt falling as a share of the economy — while tweaking the substance so they are not so tightly tethered to a set of calculations that, like all forecasts, will probably turn out to be wrong.
