By Jaimie Kaffash
7 December 2010
The Office for Budget Responsibility failed to properly consider the consequences of major changes to the euro in its November forecast, MPs have said.
The head of the independent body, Robert Chote, appeared in front of the Treasury select committee yesterday along with the other members of the OBR, Graham Parker and Stephen Nickell, to discuss their forecast. While the report was being written, the Irish banking system collapsed, producing fears over the future of the eurozone.
Committee chair Andrew Tyrie, said: ‘There was very little about exchange rates in retrospect. Wasn’t that a bit of a lacuna?’
In response, Chote said: ‘When we were putting together the report, that was a reasonable thing to have done.
‘Obviously, we have had the Irish situation as we have been going through the forecasting process. The approach of taking uncovered interest rate parity as the central basis was a reasonable one.
‘If that seems a more sensible scenario to look at in the next forecast, that is something we will look at.’
Nickell was questioned about the possibility of the currency collapsing. He said: ‘At the moment, it is not something I assign a high sense of probability.
‘It’s quite dramatic to say “if the euro collapses” but there is a chance that growth in the euro is going to be very light, so clearly that will be part of our thinking when generating a forecast and I consider that to be a likely outcome. If outcomes move in that direction, it is possible we could look at that scenario.’
Tyrie said the performance of Chote and his OBR colleagues had been ‘indistinguishable from a chief economic adviser of the Treasury’. He added that: ‘The independence of the OBR depends on you being able to not only be independent of the Treasury but be seen to be. It is important to explore your relationship with the Treasury… Are you confident the people you are working with are independent of the Treasury?’
Chote said that he was, but this was irrelevant as the three members were ultimately responsible for the forecasts.
He added that there would be a stronger forecast on public sector employment figures in the new year.
‘By the time of the Budget, we should already be getting more disaggregated department by department information,’ he said.
