George Osborne bequeathed a pretty good economic position and steadily improving public finances to his successor. But he also bequeathed to Philip Hammond the Office for Budget Responsibility (OBR).
This institution was supposed to constrain chancellors by preventing them from making blatantly over-optimistic economic forecasts.
The OBR has not acquired a stellar reputation as a forecaster. It has made its fair share of errors but at least they have been made in the way all economic forecasters fall short and not in order to secure more room for manoeuvre for the Chancellor.
Yet this year the constraints imposed by the OBR will bite painfully. True, on the previous set of projections, the Chancellor had some £26bn in hand. And this year’s borrowing looks likely to come in lower than previously forecast.
But most of this leeway is likely to be taken away by the OBR. It will probably revise down its forecast for this year’s GDP growth to about 1.6pc. Moreover, it will probably downgrade its forecasts for future growth, and hence the prospects for tax revenues.
This will not go down at all badly in HM Treasury which, while keeping its head down after last year’s forecasting debacle over the economic impact of the Brexit vote, is still pining for more austerity. From its point of view, the more pessimistic the OBR is, the better.
But for Hammond, wanting to do his bit to keep the Government together and prepare for the next election, this is less than helpful.
The public is suffering from austerity fatigue. Theresa May has recently announced more money for social housing and Hammond is being pressed to find more cash for the NHS, public sector pay, defence, tax cuts and reductions in stamp duty. His previous Budget went down like a lead balloon. Another dud and he will be given his P45 – without having to wait to be handed it at the next Conservative Party conference.
So, what to do? I think the economic outlook presented by the OBR will be much too pessimistic. Last week, Economists for Free Trade presented a very positive outlook which yielded Brexit dividends for the Chancellor. Still, it is not providing the official forecasts (more’s the pity.) In extremis, I suppose Hammond could dispense with the OBR, or at least override its forecasts. In practice, that would be received appallingly both within Parliament and in the markets. No, if he is to rescue something he has to work within the constraints imposed by the OBR.
To read Roger Bootle’s piece for the Daily Telegraph in full, click here.