The OBR vs David Cameron
As Chote writes, the PM claimed yesterday that:
As the independent Office for Budget Responsibility has made clear… growth has been depressed by the financial crisis … the problems in the Eurozone … and a 60 per cent rise in oil prices between August 2010 and April 2011.
They are absolutely clear that the deficit reduction plan is not responsible. In fact, quite the opposite.
But Chote points out that this is simply not the case.
For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.
Specifically Chote writes that austerity measures in 2011/12, by the OBR’s estimate, reduced growth by 1.4%. None of which is to claim that other factors (rising commodity prices/the Eurozone/etc) did not impact on growth.
This is a welcome intervention from Robert Chote. If we are going to have a serious debate about the economy we at least need to get the facts straight. As Simon Wren-Lewis wrote yesterday:
the OBR has never said that austerity has had no impact on growth. What they have talked about is why growth has been lower than they expected back in 2010. As they had austerity built in to their forecasts of 2010, then they have naturally looked elsewhere for events they were not expecting. [b] So this statement deliberately misrepresents what the OBR has been saying, to imply that the OBR believes in expansionary austerity. But the Prime Minister knows that the OBR will let this misrepresentation of its views pass – which is a shame. I guess you can robustly misrepresent.
The OBR have not let this ‘misrepresentation of their views’ pass.
I think the key line from Cameron that has caused him problems is actually, ‘They are absolutely clear that the deficit reduction plan is not responsible. In fact, quite the opposite”. What exactly did he mean by the opposite being true? I read this a claim that fiscal contraction actually increased growth – something for which there is obviously no evidence at all.
The OBR do reiterate their own (low) estimates of the fiscal multiplier (the ratio of how changes in fiscal policy impact on the wider economy) in the letter. I think (along with Jonathan Portes) that these estimates can be challenged, that the OBR in common with many other forecasters under-estimated the impact of austerity on an already depressed economy. Notably though Chote keeps open the option for revising the OBR estimates in his letter today.
But this debate on the size of the multipliers is beside the point, the real story today is that the PM made a speech claiming that austerity was not a cause of weak growth and that the OBR agreed with him. The OBR have very rightly pointed out that this is not true.
Almost unbelievably, Downing Street have responded by saying:
The OBR has today again highlighted external inflation shocks, the eurozone and financial sector difficulties as the reasons why their forecasts have come in lower than expected. That is precisely the point the prime minister was underlining.
The OBR write to the Prime Minister rebuking him for misquoting them and he responds that this underlines the very point he was making. That is almost as bad as losing an AAA rating and then arguing that this proves that your plan to retain the AAA rating was correct along.