From the TUC

Alan Budd’s mysterious departure

07 Jul 2010, by in Economics

I have no idea why he went, though like most commentators I find the official explanations hard to believe. If he was always going to go now, you might think they would have had a successor lined up.

There is nothing wrong with bringing some genuinely independent scrutiny into public policy making, but Budd’s departure will make many more ask whether the OBR is truly independent.

The previous government got the National Audit Office – which does fulfil this independent role – to examine Treasury forecasts. But the new Chancellor did not extend NAO scrutiny to those prepared by the OBR.

This is how the NAO describe their changed role – rather waspishly for such an austere organisation I thought:

To reflect the interim arrangements, the Chancellor has requested that I undertake an examination with the following scope:

‘To consider whether key economic and fiscal assumptions underpinning the interim Office for Budget Responsibility’s forecasts were independently arrived at.’

This differs from requests by the previous Chancellors to examine the reasonableness and caution of specific assumptions underpinning projections of the public finances. The remit of this work does not include any review of the forecast itself or of specific underpinning assumptions. (our emphasis).

One difficulty the Chancellor will now face is that a new OBR Chair will presumably have to accept the unconvincing forecasts of his predecessor. Perhaps they did know he was going to go but have not found anyone prepared to do this.

In the “common-sense” of today’s media and political debate the deficit remains the great economic problem and austerity the only policy. But it is not just usual-suspect left-wing economists who disagree. Martin Wolf is again on fine form in today’s FT:

it is quite wrong to argue that the difficulties of a Greece or a Spain entail difficulties ahead for the US, or even the UK. The opposite is far more likely: flight from risk entails flight into something less risky. What is the least perilous asset for the investment of gigantic private financial surpluses? The only answer is the public debt of the big advanced countries …

Suppose there is no significant change in policy in emerging economies. Then if a fiscal contraction in advanced countries is not to cause a slowdown, even a second recession, it must be accompanied by an upsurge in private spending …

My conclusion, then, is that the advanced countries remain highly short of demand. In this environment, rapid cuts in fiscal support make sense if, and only if, monetary policy can be effective on its own and expanding the interest-elastic parts of the economy is the best way to climb out of the hole. There is reason to doubt both ideas.

At the summit of the Group of 20 countries in Canada, leaders pledged to “halve fiscal deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016”. It would make far better sense for governments to focus their efforts on altering the long-term trajectory of spending. They may hope that retrenchment now will spur on private spending. But what is their plan if it turns out that it does not?