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The author is the author of “Growth: A Reckoning” and an economist at Oxford University and King’s College London
During normal times, forecasts on the UK’s finances for budgetary liability, expected later this month alongside the Prime Minister’s Spring Statement, will be a key moment. This time it’s from an earthquake. We have founded that institutions that were established to reduce bias in public financial forecasts now play a much more grand role. The ultimate arbitrator is the right thing to do with whether the government’s plan (more economic growth) to achieve its central mission.
This was by no means intended to be the purpose of the OBR. It was set in 2010 by George Osborne (then Prime Minister) and designed to solve different problems. This means that the UK’s official fiscal forecasts are unreliable. The Treasury had a strong incentive to massage these numbers into a better shape, whatever the government’s political composition. And the belief was that independent statistical authority would be free from its temptation. To that extent, OBR is a success story. The predictions seem to be less biased.
However, forecasts about the UK’s fiscal budget also require forecasts about the UK economy. Among these, this is what is expected to occur in growth. If the economy was willing to move, these numbers only play a supportive role. However, the economy has stagnated and the government has changed its main priorities and the Treasury under His is no longer generating its own formal growth forecasts. Therefore, the numbers in the OBR are pushed into the spotlight.
However, there is complexity here. OBRs don’t know what actually causes growth. In fact, no one does it. The true cause of growth is one of the major mysteries of economic thinking. From tax cuts to infrastructure spending, from frost days to newspaper readership levels, hundreds of possible causes have been identified. And today they remain hotly contested among schools of different mindsets, divided along deep political lines and dueling each other.
With that in mind, the idea that OBR knows enough enough to somehow incorporate the policies of the UK government and state its growth impact to a single decimal point is fantastical. But that’s what you’re going to do at the end of the month, with great practical results. For example, a 0.1 percentage point reduction in OBR’s potential productivity growth forecast is estimated to create a hole in the finances of between £7 billion and £8 billion.
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But don’t other countries have independent “fiscal watchdogs” like OBR? Yes, many do, but their roles tend to differ. It provides an alternative to assess or sit with the official government forecast. The OBR actually generates it. And Prime Minister Rachel Reeves went further, explicitly burning his OBR count into her new fiscal rules, making their predictions decisive.
So we find ourselves in a strange world. There, Reeves is best advised not to do what she believes to promote growth. Then, given her financial constraints, the forecast is better as she has to do as much of it as possible. In the Old World, HMTs were encouraged to mess with numbers. In the newest, HMT is incentivized to mess with policies.
Furthermore, if Reeves decides to challenge OBR’s predictions when it was published – perhaps if they say they felt that their internal models didn’t properly capture the promises of their growth strategy, then it doesn’t look like a legitimate intellectual disagreement about the true causes of growth. There is a risk of being seen as a shameful attempt to dodge the very rules she set to end her financial instability.
The OBR was established with good intentions. But it was a victim of its own success. One of the most contested economic questions, the difficult political judgments about what actually causes growth, have been reduced to technocratic calculations, which were mostly made invisible to the public.
What should we do? To begin with, the uncertainty in OBR’s growth forecasting needs to be more clearly recognized. Independence may reduce bias, but it doesn’t make them right. Politicians must be bold enough to say that. The OBR must be as modest as you agree.
Next, the Treasury should consider reintroducing its own growth forecast. This is not because they are likely to be more accurate than OBR, but because finding creative ways out of current economic lies requires more public discussion and disagreement in policymaking.
Finally, Reeves should revisit her financial rules and maintain her original spirit – the current budget balance, debt as a share of the economy.
