Office for Budget Responsibility

Lord Eatwell Excerpts

Monday 14th June 2010 Lords Chamber

[Lord Eatwell]

My Lords, I thank the Minister for repeating the Statement made by his right honourable friend in another place. This is a remarkable Statement, not only because so little of it relates to the concrete forecasts in the document that it purports to describe but also because it fails to note comments that the OBR makes on the earlier analysis of the economy presented by my right honourable friend Alistair Darling.

During the past few weeks, since the formation of the coalition Government, we have been subject to a barrage of statements from the Prime Minister claiming that the underlying position of the economy is far worse than that laid out by Mr Darling in his March Budget. For example, the Prime Minister said on 7 June:

“The overall scale of the problem is even worse than we thought”.

Yet what does the OBR report argue? I quote the OBR’s press notice:

“The nominal figures for the deficit and net borrowing are better in all years than in the March Budget”.

On numerous occasions, the Chancellor of the Exchequer has cast doubt on his predecessor’s integrity in presenting economic forecasts—he could not even resist the odd snide remark today. Yet the OBR report states:

“The forecast is based on a range of possible outcomes around a central view … This differs from previous practice under which some assumptions were designed to add caution to the fiscal forecast”.

As the official press notice puts it, the methodology of the OBR replaces,

“in some cases, deliberately cautious assumptions”.

So not only have things turned out better than Mr Darling argued in March but the reason is probably that he was so persistently cautious. Mr Darling is owed a formal apology. I hope the noble Lord will make that apology which the OBR report demonstrates in all common decency to be necessary.

The general forecast in the OBR report is for a lower trend rate of growth than was presented in the March Budget. What is not made clear is how the assumptions made by the authors of the OBR report differ from those on which the earlier forecast was made. It is the variation in the assumptions that is the source of the different forecasts.

In the limited time available, I have managed to unearth the fact—and it took some unearthing—that the assumed rate of growth of the eurozone is significantly lower, which, given what has happened since March, is perfectly reasonable. Will the Minister tell us what other key assumptions have been changed, and why? How has the assumed rate of growth of consumer expenditure been changed, and why? How has the assumed rate of the growth of business investment been changed, and why?

There is but one key element in the OBR report which might be deemed critical of the previous Government, and on which Mr Osborne focused in the Statement. It is the so-called structural budget deficit—not the actual budget deficit—which the report shows to be worse than was reported in the March Budget. I hope that your Lordships will forgive me if I spend a few moments unpicking this disagreement.

The structural budget deficit is an estimated deficit when the economy is operating at an estimated normal level. The OBR finds that this is worse than was reported in the March Budget. Why? The problem is estimating what is the normal level of the economy and how far below it we are now. The OBR makes a crucial assumption: that instead of the economy operating 6 per cent below normal in 2009, it was operating only 4 per cent below normal. Everything hangs on that single, crucial assumption. For if we are nearer normal operation than we thought, then the deficit under normal circumstances would be bigger than we thought. But what about this assumption? The OBR admits that it is “very tentative”. It says:

“Estimates of the underlying supply potential of the economy and the amount of spare capacity are uncertain at the best of times. In the aftermath of the financial crisis, which is likely to have had an adverse effect on the supply potential of the economy, such estimates are subject to greater uncertainty than usual”.

This—a figure subject to great uncertainty—is described by Mr Osborne in the Statement as,

“the most important figure in the report”.

He is grasping at straws. The key case for his deficit hysteria is based on an estimate,

“subject to greater uncertainty than usual”.

Then we have the debt interest figures, of which Mr Osborne makes so much. But again he cannot resist fiddling the figures by giving the total of debt interest, not the increase in debt interest due to the recession, including amounts that would have had to be paid anyway.

The Statement also makes much of the independence of the OBR—an independence which we applaud. When the Minister replies, will he confirm that all the assumptions in the forecast for Mr Darling’s March Budget were audited independently by the National Audit Office, and that the assumptions in the OBR report have not been so independently audited? Would he also confirm that it is normal practice that ONS statistics are seen by Ministers just 24 hours before their release? Would he tell the House when Ministers had sight of the OBR report? What is remarkable about the OBR is that it demonstrates how damaging would be the substantial cuts that the Government declare that they plan to make in public expenditure. The report demonstrates that the measures taken by the previous Government have set the economy on a path of steady deficit reduction, halving the deficit in three years, and setting the economy on a path of fiscal stability. All that will be threatened by the deficit hysteria of the coalition. The OBR report demonstrates with unerring clarity that their masochistic desire for an age of austerity is not only bizarre but unnecessary.

--- Later in debate ---

[Lord Sassoon]

I am grateful to the noble Lord, Lord Barnett. He enables me to confirm the nature of the independence of the OBR. To call into question the independence of Sir Alan Budd and his committee—as he went on to say, that is not the most important thing, so perhaps I should pass over it and move on.

I also rather resent, on behalf of the Treasury officials with whom I work every day, the thought either that they were in some way party to some conspiracy before or that they are not capable of doing work, then or now, of the highest quality. The difference now is that the OBR has set out critical fan charts to show central forecasts and probability distributions around those forecasts. Noble Lords may tut-tut, but this is a practice that has been adopted by the Bank of England in its forecasts for many years.

[Lord Eatwell]

And they were wrong.

[Lord Sassoon]

The forecasts are transparent; people have been able to see how it has formed its views on all its forecasts. As for Treasury Ministers in the past, they have plucked numbers out and it has been non-transparent. Here we have a degree of transparency by which you can hold the Treasury to account, going forward. The noble Lord also asked whether the five-year forecasts will be amended very regularly. Certainly, the OBR will be publishing in conjunction with the Budget again, and, as it said in its document and terms of reference, it will be publishing its forecasts regularly.