Are glad tidings from the OBR angels overblown?

25 Nov 15

Will the Office for Budget Responsibility forecasts that underpin the Spending Review prove to be solid information or simply hot air?

This Spending Review and Autumn Statement will be seen as all about the OBR by economists. The rest was very political, responding to pressure from the public and MPs in reversing proposed tax credit cuts and pulling back from much trailed cuts in police budgets

The change in the forecasts made by the OBR are quite remarkable.  From not long ago – the July Budget – to now the OBR seems to have radically transformed its view of the way that the public finances will behave. Very little of this has anything to do with higher growth forecasts – indeed the growth projections for the next few years are pretty unimpressive in historical terms (especially given the loss of output after the 2008 crash).

Some of the change in circumstances is about expenditure: things like the debt interest being lower than forecast as forces in the world economy point to more sustained low inflation. But much more important are the receipts that will come in to the Exchequer. Some of the increased revenue, towards the end of the period, reflects tax increases (the new apprenticeship levy and larger rises in council tax to pay for social care), most is a consequence of the same set of taxes just raising more money. The big question in macro terms is: are the OBR projections right or not?

Whether right or wrong, the OBR action is what has allowed George Osborne to make what the OBR calls a “a net fiscal giveaway of £6.2 billion next year” and other giveaways in future  years. The OBR’s news must have felt like a visit from angels to the Chancellor. But in the longer run the glad tidings brought may prove to be less firm than he might hope.

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