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Field Mark Feb 2012Mark Field is the Member of Parliament for the Cities of London and Westminster and currently serves as a member of the Intelligence and Security Committee. Follow Mark on Twitter.

This year’s
Budget continued a hapless, unparalleled record of forecasting failure for the
Office of Budget Responsibility.

Sadly, what has
so undermined City commentators’ confidence is that the OBR’s independent
analysis has invariably veered in the direction of robust support for the
Treasury’s economic projections. At each succeeding Autumn Statement and Budget
since June 2010, the OBR has been forced to downgrade growth outturns, whilst
continuing to hold optimistically to the notion that the public finances will
be transformed by robust growth starting earnestly in two years’ time. It all
seems so reminiscent of the Brown Chancellorship’s discredited financial
projections that persuaded global investors to allow Britain to borrow well
beyond its means, with such disastrous consequences in the Noughties.


Few doubt that
economic forecasting is an especially dismal science, not least in these
turbulent times. However, the OBR’s intervention at last December’s Autumn
Statement proved essential in buying the Chancellor welcome breathing space (which
he has certainly exploited as the economic corner appears to have been turned
since). With most commentators assuming that the Xoalition’s plan to reduce the
deficit year-on-year had been flunked, their figures were a timely political
fillip. What now appears to critics a sleight-of-hand gave Osborne an easy
ride with the press in the aftermath of the Autumn Statement, but set the scene
for cynicism and deep disappointment as, a mere fourteen weeks later, aggregate
borrowing for the next four years was projected at an eye-watering £49 billion
higher.

The Treasury’s
decision to bring back onto the public balance sheet some £37bn as the profit,
or ‘coupon’ in the jargon, of Quantitative Easing interest payments, was not
without critics at the time. Indeed, if QE is eventually to be a success in its
own terms, its unravelling will require a markedly larger sum eventually to be
returned from the public accounts. Naturally this will be at some future date,
well beyond the next general election. Whilst this was an accounting device, it
also allowed the Treasury, at the time of the Autumn Statement, substantially to
reduce the headline figures of public borrowing. More controversially, despite
the 4G licence sale not having by then taken place, its estimated receipts were
included in the borrowing calculations. In fairness, the sale proceeded during
the 2012-13 tax year. However, the auction brought in barely two-thirds of
what had been accounted for (£2.3bn as opposed to £3.5bn).

Moreover, the
much vaunted Swiss tax repatriation agreement, still subject to a referendum
approval, was taken account of to the tune of £330m. Small beer, perhaps, but
critical in making the case for overall borrowing falling in 2012-13. The OBR
sanctioned this being included in the Autumn Statement, although not a penny
has yet reached the public coffers. Indeed, the projected receipts from the
entire Swiss repatriation programme of £5.5bn over the next two years is almost
universally – at least outside the hallowed halls of the OBR – regarded as
wildly optimistic. Even the mighty EU economic powerhouse, Germany, for
example, reckons it will only repatriate £2bn in this way.

This was the
backdrop to the OBR’s strong reaction to the Prime Minister’s speech in early
March over growth (when the OBR’s judgement was prayed in aid). Subsequently Robert
Chote (the OBR’s chairman) reasserted his institution’s independence. Perhaps
more serious still than accusations that the OBR is insufficiently at arm’s
length from the government of the day is the increasing realisation that the
Office for Budget Responsibility has, in its methodology, consistently failed to
understand the new reality of the squeezed private sector budgets in an era of
continued public sector profligacy.

Meanwhile, the proudly
unfettered Institute for Fiscal Studies (Mr Chote’s former employer) was
unimpressed at the way the Treasury appeared to have given "every indication
that [spending commitments] had been carefully managed with a close eye on the
headline borrowing figures for this year" by the wheeze of "exceptional
inter-period flexibility" (a practice which, in plain English, entails pushing
payments into the next financial year rather than spending the money now).
Indeed like-for-like comparison had the deficit rising to £123.2bn in 2012-13 – not falling from £121.0bn (2011-12)
to £120.9bn as published. If Gordon Brown had done this, we would rightly be
berating him for ‘fiddling the figures’.

Almost
comically, every single Brown Budget between 2001 and 2007 forecast that the
public finances would move back into surplus in about three or four years. As
time wore on, the debt and annual deficit rose inexorably as the Treasury
employed smoke and mirrors to conjure the illusion of fiscal stability. Those
rosy forecasts belatedly attracted ridicule from our Party and played their
part in making it easy for Britain to borrow money during the past decade. And
borrow we did, even in the good times: we all now know the disastrous
consequences.

Indeed. it was
this salutary experience which provided the genesis of the idea for an Office
for Budget Responsibility, which the Chancellor proposed in late 2008 when he
was the Shadow. While the principle of the OBR at that time seemed admirable, I
expressed concern about problems of practice. Surely, I suggested, the real
strains and potential limitations of any OBR would come at the point in the
economic cycle when we most needed prescient and instinctive judgement? At such
times of crisis in any economic phase, we would require a robust willingness to
stand up against the conventional wisdom of the day.

Do we really
believe that in the run-up to 2008’s financial crisis, the OBR, contrary to
every forecasting organisation, would not only have seen the crash coming but
have had the mettle to contradict the optimistic forecasts of other bodies and suggest
to the previous government that we were living well beyond our means? Equally,
might the perceived infallibility of a conventional OBR forecast have
restricted the ability of a Chancellor to act against common wisdom at that
time, had he have had the wherewithal to express concerns about our direction
of travel?

When the interim
OBR was eventually introduced after the 2010 election, it produced predictions
for growth that appeared far too optimistic. So it has proved, partly because
of some unavoidable conflicts in its operation. Organisational independence was
always vital to the OBR’s credibility. but it has had necessarily to rely upon a
close relationship with the Treasury in order to understand its methods and
have access to its data. Yet without the trust that stems from the OBR’s
autonomy, the organisation is nothing.

I also suggested
back in 2011 that part of the OBR’s continuing role ought to be constantly to
remind us all of its own fallibility and advise on a range of possible
outcomes, pointing out to politicians and financial markets the longer term
threats to our economy in the event that the markets prove too forgiving. Instead,
it has served to entrench rather than challenge conventional wisdom.

The
restoration of confidence to our economy was always going to depend largely on
rebuilding trust. The establishment of the OBR should have marked an important
milestone in encouraging us to place our faith once again in the financial and
political systems of our nation. The Bank of England’s notional independence
already stands in question – for some 40 consecutive months now its
inflation target has been surpassed. Yet the near-zero interest rate policy
first employed over four years ago by the erstwhile Labour administration and
continued with gusto since the coalition came into office has been adopted by
political complicity between the Bank and the Treasury. The economic case for
this can be robustly made, but it flies in the face of an ‘independent’ Bank of
England.

Unfortunately, the OBR has also appeared to have
become part of Britain’s national economic furniture, widely perceived as a
tool of the Chancellor of the day, rather than an impartial challenger of
facts, figures and strategy. This perception is one the OBR must urgently counter
if it is to prove a genuinely valuable part of the UK financial landscape.

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