From the TUC

The OBR on Osborne’s growth strategy – very little effect

29 Nov 2011, by Guest in Economics

The Chancellor was keen today to push his latest plans for growth:

Increasing the supply of credit and money to pass those low rates on to families and businesses.
Rebalancing our economy with an active enterprise policy and new infrastructure.
Help with the cost of living on fuel duty and rail fares.
All this takes Britain in the right direction. It cannot transform our economic situation overnight.

He also urged people to listen to the OBR:

Their forecast today demonstrates beyond any doubt that their independence is unquestioned. But if we accept their numbers we must also pay heed to their analysis.

Not mentioned by George Osborne in his statement was box 3.2 of the OBR’s report in which they assess the policies he announced today.

I’m not surprised he shied away from discussing this as the results are pretty damaging.

Their assessment was as follows:

  • On the increases in capital spending offset by cuts elsewhere (a large part of Osborne’s grand infrastructure plan) – “Given the overall fiscal impact of policy in these years is neutral, we have not made any explicit adjustment to our economic forecast.”  I.e. no assumed effect on growth or unemployment.
  • On ‘credit easing’ “So, given these uncertainties, we have not adjusted our forecast at this time to reflect the impact of these policies, but we will consider them again at the time of our spring forecast when they are clearer.” I.e. Too uncertain to say at this point.
  •  On the new build indemnity scheme (designed to help revive the housing market and help first time buyers) – “The scheme is limited to 100,000 mortgages and we have assumed this will translate into around 30,000 more property transactions than would otherwise have taken place over the forecast period.” I.e. it will only increase transactions by 30,000 and 70% of it will be a dead weight loss.
  • On the delayed rise in Fuel Duty – it will reduce CPI by 0.1% in 2012.
  • On the ‘Youth Contract’ scheme to combat youth unemployment“We have not assumed that the Youth Contract will have any effect on the overall level of
    employment”. I.e. any extra youth jobs will simply be offset by less older people in work.

This is a pretty damning report – 5 high profile measures will result in 30,000 more housing transactions and 0.1% reduction in inflation with the rest subject to uncertainty.

The OBR really is proving its independence today.

4 Responses to The OBR on Osborne’s growth strategy – very little effect

  1. Does the OBR believe the Bank will keep control of inflation? | ToUChstone blog: A public policy blog from the TUC
    Nov 29th 2011, 4:53 pm

    […] expect – straying upwards somewhat. CPI remains miraculously at 2.0 per cent in each year. Duncan has already noted how the OBR has implicitly said that the Chancellor’s growth strategy will […]

  2. jonathan
    Nov 29th 2011, 6:00 pm

    Are lenders in Britain constrained now by lack of funds? Or are they busily hanging to funds? It’s the latter in the US so I assume that’s true in the UK.

    And the issue on the borrower side is business isn’t good enough to qualify under tighter lending standards, not because money costs too much.

    There is also a negative: lower rates can lead to lower profits for lenders because they aren’t lending, meaning they aren’t making that income, and now they’re squeezed by the spread. This weakens their balance sheets and forces them to cut back more on lending. They also can’t make it up on trading as the investment houses were doing in the first years after the crisis.

  3. George Osborne’s autumn statement 2011: live coverage | Business News Today
    Nov 29th 2011, 6:19 pm

    […] • Duncan Weldon at the TUC’s Touchstone blog says the Office for Budget Responsibility does …• Coffee House has five charts with what it considers the key data from the autumn statement.• The Guardian’s Comment is free has the verdict from Labour’s Chuka Umunna, Politeia’s Sheila Lawlor and David Blanchflower, the former member of the Bank of England’s monetary policy committee. […]

  4. Gareth
    Nov 29th 2011, 9:53 pm

    Pertinent quote on the long-term growth prospects:

    “we would expect looser monetary policy to fully offset the effects of a pre-announced fiscal tightening of this size, leaving our forecast for overall GDP growth unchanged as a result of this measure.”

    i.e. monetary policy sets the level of aggregate demand. They would say EXACTLY the same thing had Osborne announced a massive loosening of fiscal policy: monetary policy would have to be tightened to compensate, ceteris paribus.

    It’s a pretty damning report for those who think fiscal policy is able to affect the level of aggregate demand in the long term. Yup.