Tomorrow sees the revival of an unwelcome tradition. Those killjoys at the Treasury have again fixed the date of their little theatrical event to coincide with the Champion Hurdle at Cheltenham. Mind you, this year there is a big difference. Tomorrow’s rival attraction is no longer called the Budget. It is referred to by the modest title of the Spring Statement. And if you believe the advance billing, it is going to be so empty of substantive content that, even if you are normally an aficionado, you need not feel guilty if you go to Cheltenham instead.
In recent years, the Budget in March and the Autumn Statement in November (or December) have been roughly equal in status. Last year the Chancellor, Philip Hammond, decided to have only one major financial statement, to be delivered in the autumn, leaving the Spring Statement as essentially a forecast update.
Nevertheless, in today’s circumstances, even a mere forecasting exercise may be interesting. Last November, the Office for Budget Responsibility (OBR) radically revised down its forecast for the British economy. For years, it had stuck to the view that productivity growth, which had slumped to virtually zero after the financial crisis, would rebound to somewhere near its former rate of 2pc per annum. After repeatedly being proved wrong, last November it substantially downgraded future productivity growth to 1.2pc.
This change may seem arcane but it had a major impact on official forecasts for the public finances. For the year 2020-21, the forecast structural budget deficit was increased by £10bn, and this sharply reduced the Chancellor’s room for fiscal manoeuvre. The implication seemed to be that if the Government was to deliver any increases in public spending and/or reductions in taxes before the next election then it would have to abandon the attempt to restore the public finances to health.
Gallingly for the OBR, since it made its momentous revisions the figure for productivity growth in quarter three of 2017 has come out as 0.9pc, and it looks as though Q4 may turn out as 0.7pc, annualising to growth of more than 3pc, giving easily the best productivity performance since the financial crisis. It is early days yet, but with investment strengthening and the period since the Great Recession lengthening, I suspect we will continue to see decent productivity growth.
Not only that, but the other day it was announced that in 2017 the UK had registered a surplus on current, ie day-to-day, spending, the first since 2002. Admittedly, if you add in borrowing for capital expenditure, then the government finances are still in deficit, but only to the tune of 2pc. Remember that at the worst point in 2009-10 the deficit was running at 10pc of GDP.
Let us be clear: the OBR is not a uniquely bad forecaster. Forecasting the economy is as much art as science. I said at the time of the OBR’s revisions that I suspected it had thrown in the towel at precisely the wrong moment. It was rather like an investor who, thinking that the stock market is overvalued, refrains from buying as it goes up and up, but then experiences a failure of nerve that persuades him to buy, just at the point when the market starts to turn down.
This is exactly what happened to Sir Isaac Newton in 1720 when he bought shares in the South Sea Company – and lost his shirt. Whatever its mistakes, the OBR is in good company.
Yet what is it to do now? I cannot see the Chancellor, acting as the OBR’s mouthpiece, doing a complete about-face tomorrow and returning to the previous more optimistic forecasts.
To read Roger Bootle’s piece for the Daily Telegraph in full, click here.