An independent audit that could come to haunt George Osborne
This ‘Sir Alan’ is unlikely to crow ‘You’re Fired’, but tens of thousands of people will be affected by the audit of Britain’s public finances that officially started today.
George Osborne is to be congratulated for, as one of his first acts as Chancellor, eschewing the right to author government forecasts. It is a power vested in him by the 1974 Industry Act. And he has now ceded that power to a trio headed by the eminent economist Sir Alan Budd at the Office of Budget Responsibility.
The new chancellor wanted this to feel as revolutionary as the 1997 decision by Gordon Brown to offer the Bank of England independence to set interest rates. Sir Alan Budd served on that inaugural Monetary Policy Committee, and claimed today’s news was the ‘most remarkable innovation; in Britain’s economic policymaking.
Right now, Sir Alan will be pushing the forecasts in the same direction desired by the Government: down. Capital Economics calculated last week that downgrading 2011-2014 growth from 3.25 /3.5 per cent down 1 per centage point per year, would increase forecast borrowing by £50bn per year after 5 years.
The new government would clearly blame an adjustment such as this on Labour, and use the combined cover of the OBR and the last government to enact large tax rises, or massive benefit cuts, as well as already planned spending cuts.
But what happens when the opposite is true? If this new apparatus works, it will be permanently more difficult for any government to spend more by using economics to fudge the borrowing numbers. If the coalition had giveaways planned late in the parliament, then think again.
There are two other areas of caution on this framework.
Just how ‘dodgy’ were Labour’s fiscal numbers? Though there can be no doubt that on occasions you could hear the heavy stench of fudge being stirred on Great George Street (fiddling the fiscal rules, changing the dates of the economic cycle etc), it seems a brave avenue of attack against a relatively popular ex-chancellor, such as Alistair Darling.
Clearly, it would be absurd to suggest that the overarching cause of Britain’s current fiscal stress is dysfunctional or routinely-biased forecasting. The budget 2008 projected deficit for 2009 was 3 per cent of GDP, and ended up at 13 per cent of GDP. Yet that was predominantly down to the financial collapse and haemorrhaging of tax revenues.
Furthermore, while I understand the political imperative to blame everything on the previous government, the coalition would be wise to study the example of Greece.
The Greek crisis was not simply sparked by high borrowing. Doubts about its economy were hugely accelerated by the Socialist government incessantly casting doubt on the validity of Greek statistics, revealing a much-higher than feared deficit.
Yes the Chancellor wants some Labour fall guys for the pain to come, but at some point around now the markets will start to treat George Osborne as the chancellor of the exchequer of a country that needs a few hundreds of billions of pounds, as well as a politician seeking votes for the 2015 election.
Lastly, the economic consensus is clearly with the £6bn cuts this year, but there are many reasonable detractors. So what price a double dip recession? It must be the coalition’s nightmare.
A new Labour leader bashing Osborne and Laws for early cuts that are associated with, even if they did not actually cause, a relapse in the UK economy. No wonder they’re getting the scapegoats in early.