It is folly to set store in forecaster whose record would make Michael Fish blush
‘Any organisation has the right to make predictions but why have the OBR’S become gospel?’
‘Bringing even more people into the top rate of tax discourages people from working extra hours as they keep less money’
Stanley Baldwin’s words may be harsh but they seem apt. He applied them to an irresponsible press but now they apply to those who determine economic policy without accountability – “power without responsibility – the prerogative of the harlot throughout the ages”.
The Office for Budget Responsibility (OBR) wields great authority but has let the nation down. Any organisation has the right to make predictions but why have the OBR’S become gospel?
Its forecasts would make Michael Fish blush. In October 2021 it said inflation this year would be 4 per cent, which made it only a little more complacent than the Bank of England, which put the figure at 3.4 per cent.
Not satisfied with this it went further, saying “in our central forecast CPI inflation peaks at 4.4 per cent in the second quarter of 2022… inflation then returns relatively quickly towards the Bank of England’s 2 per cent target”.
The OBR was similarly inaccurate in its expectations for the public sector net borrowing. Last October, with half the year already gone, it said 2021-2 would see a £183billion deficit which by the year end was in fact £133 billion. A £50 billion swing in just a few months.
This matters because the Autumn Statement is based on parameters set by the OBR. Its forecasts lead to decisions on taxing and spending that may not only be wrong but damaging. Moreover, while the OBR is not held to account for its decisions, the politicians who act under its auspices will be.
The OBR is at its weakest when making predictions well into the future and, as with all forecasters, it is hardest to be accurate when the situation is volatile.
Changes to the growth forecasts have a strong effect on the revenue and expenditure sides of the Government’s accounts, thus a geared effect on the deficit. This is where the Autumn Statement, in its effort to assuage the markets, has gone wrong.
Although £24billion seems a huge amount in tax rises, as a percentage of the economy it is only about 1 per cent. Its impact will be less on the deficit, which could swing by a similar amount in a few days, than on economic activity. It depresses incentives – businesses will eschew investment in the UK – while it penalises those who strive and work hard. Bringing even more people into the top rate of tax discourages people from working extra hours as they keep less money. So the damage is done by the tax hike but the benefit is swallowed up by forecasting error.
The only way to pay for all the services the nation wants is to grow the economy. This will never happen based on OBR forecasts. Nigel Lawson would not have cut income tax from 60 per cent to 40 per cent on official forecasts, for they suggested that revenue would fall, when in fact it rose. The Treasury expects to raise in 2024-5 £790million from the decrease in the high rate threshold and £275million from its penal raid on capital gains tax allowances. It probably will not raise these amounts.
People will change their behaviour. As capital gains tax is mainly voluntary they will sit on investments and accept a worse allocation of capital, to the overall detriment of the economy. The OBR’S partner in crime is the Bank of England which, since failing to spot the return of inflation, has been slow to catch up with other central banks.
Last year its own chief economist, Andy Haldane, warned of a resurgence of inflation, not surprising after the excessive quantitative easing added on during the pandemic. But he was ignored.
Even the day before Kwasi Kwartang’s mini-budget, the Bank fell behind the Federal Reserve by 0.25 per cent, exacerbating the weakness of the pound against the dollar and making inflation worse as many commodity prices are dollar based.
The Governor of the Bank of England avoids taking responsibility for this and mutters darkly about the need to restore the nation’s reputation. Yet it is his organisation, with its obligation based on statute law to keep inflation at 2 per cent, that has failed.
Governments are most successful when they set out a vision for the economy. Outsourcing fiscal and monetary policy to the above institutions will not work.