With 40 members of staff and an annual budget of £3.9 million, the Office of Budgetary Responsibility is one of our smaller Quangos, yet among the most powerful. Mere politicians are expected to defer to it – a brief episode of insubordination from Kwasi Kwarteng led to dire retribution. Invariably the OBR is described as “impartial” – though Guido Fawkes has noted it is run by protégés of Torsten Bell, who was Labour’s Director of Policy under Ed Miliband. Though the OBR’s economic forecasts are treated with great deference they often turn out to be wildly wrong.
One of the well-publicised claims from the OBR is that Brexit will result in the UK economy being four per cent smaller “in the medium term” than it otherwise would have been. Given there are so many other factors involved, these claims are impossible to fully prove or disprove. The dire warnings from The Treasury during the referendum did not transpire. Sarah Beament, writing on this site, has pointed out that since 2016 “the UK economy has grown as much as, or more than, all G7 European peers.” The IMF forecasts that this will continue. “That’s despite Brexit,” the remainers quickly retort.
The Centre for European Reform put out a report last year estimating that UK GDP is 5.2 per cent lower due to Brexit. Dr Graham Gudgin, the Chief Economic Adviser to Policy Exchange, rebutted its “use of an implausible and flawed methodology to draw premature conclusions.” Gudgin felt that “a more plausible comparison, between the UK and the other G7 countries, shows no visible impact from Brexit at all.”
Jonathan Portes, of UK in a Changing Europe, says the costs have amounted to around 2.5 per cent of lost GDP. During the same conference, Julian Jessop of the Institute of Economic Affairs said GDP was around one per cent smaller than it would have been, but added that “the short-term impact was always going be negative, before the benefits of bespoke regulation and reduced trade barriers with the rest of the world kicked in.”
The EU has already changed significantly since 2016. So for a valid comparison we need to consider what it would be like for the UK being a member now, rather than then. Rather harder would be to consider what it would be like in five, 10 or 15 years. Similarly, just because Brexit gives us opportunities for deregulation and free trade, the extent and pace with which those opportunities are taken is a matter of choice.
Still, since the OBR had decided to enter into this territory, I thought it would be useful to discover more about their assumptions. Had they given due consideration to the advantages as well as the disadvantages? In the first Freedom of Information request, I asked:
This FOI request relates to the Edinburgh Reforms, the Government’s plans regarding “repealing and replacing EU-era Solvency II – the rules governing insurers’ balance sheets which is expected to unlock over £100 billion of private investment for productive assets such as UK infrastructure.”
Please advise:
What account of the Edinburgh Reforms have you taken, so far, in producing your analysis and writing about the potential effects of Brexit on the economy and public finances?
What account of the Edinburgh Reforms do you plan to take in producing your analysis and writing about the potential effects of Brexit on the economy and public finances?
Then I asked the equivalent questions about “the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.”
Next, it was the changes to procurement legislation.
The last query I put in concerned the EU Stimulus Package. It has been estimated that had we been EU members, the UK would have been liable to contribute £191 billion to this fund. Had they taken that into account in their calculations about whether we would have been richer in the EU.
In its response, the OBR said:
“In the case of the CPTPP, we have not produced a forecast since the agreement was announced, although we are aware of the UK government’s published estimate of the potential impact on UK GDP. We have not made any explicit changes to the forecast for the ‘Edinburgh reforms’. The Procurement Bill continues to make its way through the legislative process and so remains incomplete. We have not taken any explicit judgements for its effect on the economic and fiscal forecasts. We have not considered any impact of the EU stimulus bill as it is not a policy that directly affects the UK public finances, other than via its impact on our forecast for global GDP and exchange rates which is not separably identifiable.”
It added:
“Our March forecast incorporates our judgement that the post-Brexit trading relationship between the UK and EU, as set out in the ‘Trade and Cooperation Agreement’ (TCA) that came into effect on 1 January 2021, will reduce long-run productivity by 4 per cent relative to remaining in the EU.
“We do not attempt to track the counterfactual path for the UK had we remained in the EU as we are legally obliged to produce forecasts on the basis of current government policy (and are specifically forbidden to look at alternatives). As a result, we do not have any information on how any policy changes might have impacted the UK had we remained a member of the EU.”
So when it comes to trade with the EU the OBR cheerfully comes up with a figure “relative to remaining in the EU”. But when it comes to dodging the bullet of paying another £191 billion into the EU, it does “not attempt to track the counterfactual path”.
The OBR comment on CPTPP – “we are aware of the UK government’s published estimate of the potential impact on UK GDP” sounds like a sneering reference to the claim, highlighted by the BBC, that it would only boost growth by 0.08 per cent. That figure was indeed taken from an official analysis. But that estimate (from a couple of years ago) was for “static modelling” to increase growth by £3.3 billion. The report added that “this increase is not an economic forecast… UK exports have the potential to grow by 65% by 2030, not included in the static estimates…For example, as CPTPP expands to include Thailand and South Korea, the impact on UK GDP rises from +1.8bn to +£5.5bn.” So the 0.08 per cent figure is a complete misrepresentation.
As Greg Hands wrote on this site, CPTPP has: “Half a billion consumers. A combined GDP of £9 trillion. A naturally pro-free trade club.” To ignore the benefit to our economy of joining it, or to suggest the benefit will be negligible, is quite absurd. But that is the way to fit the OBR narrative.
When it comes to the Edinburgh Reforms and the procurement changes – both likely to have hugely positive financial impact – the OBR admits to completely ignoring them.
No matter how detailed and sophisticated the OBR’s computer modelling might be we come up against “garbage in, garbage out” as the American computer technicians put it. With the wrong, or incomplete inputs, the outputs will be wrong. With the allegiances of its staff, confirmation bias from the OBR is scarcely a surprise. Nor that its forecasts tend to be even more wayward that the alphabet soup of its rivals.
Each week I suppose I could send the OBR more FOI requests as further Brexit freedoms are seized. What about the likely benefit of a free trade deal with Switzerland? Or saving businesses £1 billion a year by reduced reporting requirements on working hours? Or the £180 million boost to our wine industry by scrapping red tape?
We shall see what reality brings us in the years and decades to come. In the interim, the media and the political class should treat the OBR with a bit more scepticism.