The OBR doesn’t get everything right – but it’s still one of Osborne’s most important innovations

By Peter Hoskin
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The Office for Budget Responsibility, what is it good for? “Absolutely nothing” seems to be the answer in Andrew Alexander’s column for the Daily Mail this morning. It surmises that George Osborne must regret establishing this independent institution for fiscal forecasts as “so far he is the only man it has bitten”. This is because the OBR’s predictions, which Mr Osborne must operate within, have “proved consistently wrong … and, worse, consistently in the wrong direction.”

There’s much to agree with in all this. After all, the OBR’s forecasts—most significantly, its growth forecasts—have often been undone by economic realities. In the ‘pre-Budget forecast’ it delivered in June 2010, the organisation foresaw growth of 1.3 per cent, 2.6 per cent and 2.8 per cent in 2010, 2011 and 2012, respectively. And the actual outcome? 1.8 per cent, 0.9 per cent and roughly zero. Given that the forecasts for tax receipts and borrowing and debt are largely built from these numbers, it’s rather a problem. As I said in a column of my own last year, we’ve had to learn a difficult lesson over the past few years: that there are few fiscal certainties.

But I still think Alexander is being a bit harsh here. For starters: if the OBR is to be attacked for dodgy predictions, then it’s worth pointing out that almost every forecasting body in town made—and has continued to make—similar errors. Indeed, the Treasury produces a useful document each month collecting the forecasts made by a range of independent organisations, from Citigroup to the IMF. In May 2010, the average growth forecasts made by these organisations were 1.1 per cent for 2010, 2.1 per cent for 2011, and 2.4 per cent for 2012. The OBR may have been slightly more optimistic than that average, but not by much. ‘Most everyone was underestimating the trauma to come.    

Besides, it’s not as though the Treasury had a great forecasting record itself, before the OBR was established. As I like to point out: if you compare the actual amounts borrowed in the five years to 2007 with the original forecasts made in Gordon Brown’s Budgets, New Labour exceeded their expectations by over £100 billion — and that was during the good times.

It’s not enough to defend the OBR by saying that others are just as bad – but, happily, there’s a positive story to tell, too. Having an independent forecaster attached to the Treasury is important for one particularly reason: it diminishes the Chancellor’s—any Chancellor’s—capacity to use his political power for ill. I mean, remember Gordon Brown’s fiscal rules? Until the financial crisis became too bad to pretend any different, forecast horizons and borrowing projections were consistently massaged just to make sure these rules weren’t broken. Debt was stuffed behind HMT filing cabinets. It was a charade. Whereas now, if George Osborne is to break his fiscal rules, the OBR will just say so – and already has. There’s less smoke and fewer mirrors.

And there are other joys afforded by the OBR, among them its annual “Fiscal Sustainability report”. Alexander dismisses this as a “waste of paper” – yet while I’d agree (and have agreed) that there’s something weird about a report which tries to make fiscal forecasts for fifty years hence, when The Jetsons is set, I wouldn’t say it’s a waste. What the OBR is trying to do is point out the long-term strains on our public finances, the effects of a growing and ageing population. That, in itself, is an important public service.

In any case, the OBR is here to stay – it would be politically toxic for any party to deliver less transparency and less independence in how the public finances are calculated, from now on. So while this forecasting body is biting George Osborne at the moment, it’s going to bite other Chancellors in future. And, after the excesses and deceptions of the Brown years, that ought to be a cause for gratitude.