The Telegraph: We must not be enslaved by the OBR’s anti-Brexit instincts

The story of this strangely positive Budget from our previously gloomy Chancellor, ‘Spreadsheet Phil’, is that of how the Office of Budget Responsibility, the OBR, suddenly doffed its terrifying persona as the Wicked Witch, damning the future as miserable and utterly cursed by Brexit; and became Mr Hammond’s Good Fairy, donating him an improvement in the public Finances of £13 billion a year from the current year 2018-19 to as far as the eye could see, even after Brexit.

What on earth has been going on to effect such a transformation?

John Maynard Keynes once famously said, when criticised for changing his mind, ‘When the facts change, I change my mind; what do you do?’ For the OBR too the facts have changed dramatically, forcing it to give the Chancellor more headroom; but unfortunately, it still has not changed its pessimistic mind.

Where it foresaw the public finances as improving only marginally from the vantage point of 2017 and then probably taking a hit from Brexit, the facts since then have shown a sharp improvement, beginning in 2017-18 and continuing powerfully through the current year. But the OBR still sees hardly any improvement as one goes forward.

At this point, 2015-16 was known and 2016-17 pretty close to known. The OBR thought the PSBR would get worse in 2017-18 before improving at the rate of just under £20 billion a year by 2019-20 and then basically getting no better. The projection of public sector net debt as a per cent of GDP was accordingly dire, with virtually no improvement in prospect. At EFT, we said at the time these forecasts were far too pessimistic and so they have proved.

By November 2017 the OBR had not changed its mind, even though by then it was becoming apparent that the PSBR would drop well below their projection in that year, 2017-18. Now as we get towards the middle of 2018-19, we know that it came out at just under £40 billion and that the current year is moving towards about £25 billion. So the OBR’s errors were £18 billion for last year and £15 billion for this year.

Another point is that the OBR is using the wrong debt ratio. The correct one would leave out all Bank of England operations with government debt and money creation: for the very simple reason that all the Bank’s operations to create money by ‘Quantitative Easing’ are due to be reversed as monetary policy gets back to normal, in order to liquidate that extra money which otherwise might create an unsustainable boom in bank credit and fuel a dreadful inflation. It follows that the eventual debt will be the one excluding these operations; this is what we should be targeting for sustainable long term government debt. If we strip out the Bank’s operations completely we get a debt series (net debt, excluding Bank of England) that by end of 2015-16 was 80.1pc of GDP, not 83.6pc.

The picture is now obviously transformed, even with the OBR’s continued refusal to build proper growth into their forecasts. Instead of a government mired in debt well above the safe ratio of 60pc, we have one that by 2012-22 is well on the way to meeting this target.

Furthermore, it is pretty obvious that the OBR is greatly underestimating future progress in reducing the PSBR under present policies. The recent fall each year in the PSBR has been of the order of £15 billion a year. The OBR projects future falls, before the Budget changes, at around £5 billion a year. On our post-Brexit forecasts we would have had a surplus on borrowing (i.e paying back of debt) of £7 billion by 2021-22. That means that in our view the OBR is £17 billion too pessimistic for that year.

Why has the OBR been so dreadfully off course and continues in much the same vein?

To read the piece in full, click here.

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