Why the OBR is annoyed with David Cameron

The Prime Minister gives hundreds of speeches, long and short, every year. He has appeared in countless press conferences and made numerous television appearances, and, given the time we’re living in, the dominant theme has inevitably been the economy.

But until today, none of his statements have provoked a reaction of any sort from the official assessor of Britain’s economic prospects, the Office for Budget Responsibility. That’s why this is a significant moment.

But why is the OBR quite so annoyed? It all comes down to David Cameron’s speech yesterday in West Yorkshire. Let’s start by pulling out the precise section of the PM’s speech OBR director Robert Chote was referring to in his letter:

As the Independent Office for Budget Responsibility has made clear, growth has been depressed by the financial crisis, by the problems in the eurozone and by a 60% rise in oil prices between August 2010 and April 2011.  They are absolutely clear, and they are absolutely independent.  They are absolutely clear that the deficit reduction plan is not responsible; in fact, quite the opposite. 

Essentially (and I’m saving you the trouble of reading Chote’s full letter, which you can find here) the OBR has three problems with statement.

1. It might give off the impression that spending cuts and tax rises have absolutely no impact on economic growth. On the contrary, says the OBR: we’ve always been clear that the Government’s planned cuts would knock a full 1.4 percentage points off Britain’s economic output.

Downing Street’s main response to this (and I’m paraphrasing) is that of course the PM has always acknowledged that austerity would reduce growth. What he was referring to was, specifically, the past year or so and the question of whether growth has been weaker than expected directly as a result of austerity. But, let’s say you give them the benefit of the doubt, this still leaves the OBR’s second concern:

2. The PM’s claim that the OBR is “absolutely clear that the deficit reduction plan is not responsible” for this lower-than-previously-forecast growth. The OBR did publish a report last October which concluded that the euro crisis, higher oil prices and a few other external economic factors were on balance responsible for that weaker-than-expected growth. But it did not “absolutely” rule out that austerity could be taking more of a toll than previously thought. Indeed, as the letter said: “it is clearly possible that [weaker growth] is in part because the fiscal consolidation measures have had a greater ‘multiplier’ effect [in other words have hit growth more] than we anticipated.

3. That line at the end: “in fact, quite the opposite”. This seems to imply that growth would have been even worse had it not been for the cuts. This is certainly not the OBR’s position, or indeed the position of any mainstream forecaster.

Now, some will look at this row and see it as a serious embarrassment for the PM. And it certainly undermines the impact of what was intended as an extremely significant speech: his big statement, in the wake of the credit rating downgrade, that Britain must not change economic course.

However, once the fuss has died down it may also be seen as a positive moment for the Government: the first time its new apparatus for buttressing its fiscal credibility has been properly tested. The OBR has asserted its independence, it has rapped the Prime Minister on the knuckles – perhaps this will ensure he will be clearer about the economics in the future and people will trust him and the OBR more as a result.