Poor quality but headline-grabbing analysis by the OBR and uncritical reporting may force yet more destructive austerity

It is clear that we need a change in direction from the economic policies of the last 40 years. Since we began the journey of ‘rolling back the frontiers of the state’ – i.e. cutting public services – economic growth has been in decline.

But the Office for Budget Responsibility (OBR) suggests the responsible thing for the government to do now is to cut health and welfare spending.

Can that really be responsible?

No, the OBR’s systemic failures of analysis have led it to a dangerously irresponsible recommendation of vast fiscal tightening which would accelerate the UK’s decline – that is not responsible, and it must be dealt with:

• The OBR has made systemic errors in its analysis;
• These have led to a recommendation which would accelerate our long-run decline; so
• The new government must act swiftly to make the OBR truly responsible.

The OBR makes systemic errors in its analysis

There are fundamental failings in the way the OBR addresses the issue of Budget responsibility: they pay no heed to the fact that we run a fiat currency system, they distort the facts around debt in a way which is unprofessional, and they do not analyse future scenarios reasonably. All of these errors lead it to suggest – as it almost always does – further austerity.

Failure to take into account that we run a fiat currency system

The OBR’s analysis is based around the idea of debt sustainability – the risk that at some point, the UK will no longer have enough money to service its debt. This is the ‘crisis’ that the newspapers dutifully report.

For well over half a century, the UK has run a fiat currency system which means that the government can create money at will. And it does so whenever it considers that there is an emergency (like needing to bail-out the banking system). This is self-evidently an important factor in looking at debt sustainability, so it is more than slightly surprising that there is no mention the word fiat in the entire report (nor of money creation nor quantitative easing). This glaring omission alone is enough to make the report highly suspect.

99% member and former bond trader, Vince Gomez, has built a reality checker for articles and reports covering the UK’s monetary system. About this OBR report, it said, giving it an overall rating of ‘E’,

“This official report says UK government debt could balloon to about 300 per cent of the size of the economy by 2075 unless taxes rise or spending falls, … and it assumes the government must hit a specific debt target the way a household must repay a loan — when in reality, a government that issues its own currency (pounds) faces limits on available workers, materials and services, not on the money itself.”

This implicit use of the household analogy is something we have debunked before in the article Twaddle and Illiteracy. It is a rhetorically powerful (though completely fallacious) way of arguing for austerity.

Failure to reflect facts

Even on basic issues of fact, the report is unreliable. On historical debt ratios, the OBR states,

“Debt at 95 per cent of GDP is high by historical standards and so we also show the required tightening to return debt to a pre-financial crisis level of around 40 per cent of GDP.”

The clear implication is that our current level of debt to GDP is an historical anomaly, and 40% would be a much more ‘normal’ level to aim for. A reader would be justified in hoping that, coming from the OBR, they could safely rely on that comment.

The facts show an entirely different story.

Either the OBR is unaware of the facts or they are aware of them but nevertheless wrote the paragraph above – in a report focussing on debt, either explanation is unacceptable.

An honest summary of the data would instead say, ‘debt at 95 percent of GDP is marginally below our long-run historical average. Nevertheless, we felt it appropriate to consider the adjustment needed to make a dramatic reduction to around 40 percent, a level which has been reached only in 43 of the last 300 years.’

But that would not make a convincing case for more austerity.

Failure to analyse future scenarios reasonably

Most of their report focuses on their scenarios for the future trajectory of the debt:GDP ratio. This requires them to forecast future GDP and future borrowing. Future GDP growth depends on the size of the healthy working population, how fully employed they are and the GDP per hour worked (which is called productivity). Calling it ‘productivity’ sounds as if it has a lot to do with how hard people work, but in fact it is much more to do with factors like technology, skills, economies of scale, quality of infrastructure, etc.

To take an obvious example, productivity in ploughing a field is largely down to technology and skills. Even a very strong man using a spade cannot hope to compete with one driving a tractor.

Their baseline scenario for productivity is crucial in determining the future scenario for GDP. This graph is taken from their report. It shows the average annual real GDP per person growth over 50-year periods, starting in the year shown on the horizontal axis.

The green bars show historical data from the Bank of England; the orange bars are hypothetical, based on the OBR’s own scenarios. So the facts are green. And what the green bars show is that, over the last century we have not seen a 50-year period with productivity growth as low as 1.5%. The average has been closer to 2%.

In the next 50 years, we would expect that AI and other technologies will make a significant difference to productivity, so what would be a reasonable average for the next 50 years – 2% like the 20^th century, 2.5% to reflect a transformation in productivity driven by technology, or somewhere in between?

No, as the graph shows, the OBR base case is below 1.5%. This single dubious assumption is enough to drive the scary ratios in their forecasts for debt:GDP.

The other key thing they need to forecast is, of course, borrowing. A couple of years ago they analysed their own forecast accuracy. And this is what they found.

The thick red line is what actually happened – how much the government actually borrowed in each year. All the other lines represent the forecasts made at different dates by the OBR.

The first thing you may notice is how large many of the errors are: in several cases the size of the error is greater than the actual borrowing itself: more than 100% error. The second thing you may notice is that under austerity, when the government was reducing its borrowing year on year, the OBR forecasts were consistently over-optimistic. But when, during COVID, government borrowing unexpectedly shot up, the OBR forecast was over-pessimistic. There are reasons to believe this may be a systematic pattern: a result of the way in which the OBR assesses the impact of government spending. If so, this means that the OBR is hard-wired to regard an austerity budget as more responsible than an expansionary budget.

If the OBR cannot forecast borrowing 10 years ahead, what chance do they have of producing a meaningful forecast over 50 years?

Nevertheless, as the headlines show, most of our media report these forecasts as if they are reliable and should drive action, however painful and damaging to the UK population as a whole.

These have led to a recommendation which would accelerate our long-run decline

The OBR does not officially make recommendations, but they hint. This is how the Financial Times interpreted the hints.

Specific areas the OBR hinted at were healthcare spending, and benefits.

We can already see the impact of long-term underfunding of the NHS on waiting lists, and on the number of people who drop out of the workforce due to long-term ill-health.

So further underfunding would have huge economic costs.

The biggest area of benefits is pensions, the second largest is Universal Credit (~40% of which goes to people in work, but not earning enough to live) and disability benefits.

Reducing the benefits to these groups will weaken household finances – and drive down household spending: the largest component of GDP. That in turn reduces the demand for business and reduces the need for them to invest in adding capacity.

In short, if you were looking for a way to constrain economic growth, following the OBR’s hints would be a good way to do it.

The new government must make the OBR truly responsible

The Office for Budget Responsibility (OBR) was created by George Osborne when he wished to introduce austerity. At that time, many leading UK economists were saying, and 57 wrote to the FT saying so, that to recover from the Global Financial Crisis, ensuring growth was the key – that austerity would weaken the recovery.

So, to make his austerity appear respectable, Osborne set up the OBR with a brief to focus on debt:GDP as a key measure of ‘Budget responsibility’ and an assessment framework that assumes that government spending crowds out the private sector – thus ensuring that any expansionary Budget would be ‘irresponsible.’ On the other hand, a Budget which weakened public services, constrained growth and impoverished many of the UK population would be deemed ‘responsible.’

After 15 years of this, we have seen that the 57 economists were right, and  Osborne was wrong.

It is time to redefine Budget responsibility. Here is a (relatively) simple framework for doing that.

In contrast to what we are normally told:

• A government deficit equals stimulus to the economy (spending more money into it than we take out in tax), something which has been inadequate for the last 14 years – a deficit is not something to be eliminated;
• Public services are a critical part of being a civilised country, not a profligate indulgence;
• The private sector needs risk-free ways to save (eg for pensions) and the UK financial system is also dependent on gilts as risk-free collateral and these are provided by the government issuing bonds – there is no real substitute.

We are in an extraordinary situation where the OBR’s remit obliges it to call out a ‘risk’ that in 50-years’ time our debt:GDP might be higher than we would ideally like, while not calling out the real risk of rising poverty, failing universities, failing NHS, crumbling infrastructure and a stagnant economy right now. We cannot continue down this path.

Our Working Paper on rewiring our economic institutions sets out in more detail how Andy Burnham should address this problem, before the institutions force him to adopt an economic policy which is Starmer 2.0.

If you think this is important, and you have a Labour MP, write to them today, and ask them to get this message to Andy Burnham.

And take a look at 99% and join us.