Thursday, 18 October 2012

The Office for Budget Recklesness?

The creation of the Office for Budget Responsibility (OBR) was formally announced by the Tory chancellor George Osborne in May 2010, days after the Tory / Lib-Dem coalition had come to power, however it had actually come into existence in shadow form in December 2009. George Osborne used his first ever official speech as Chancellor of the Exchequer to criticise the economic and fiscal forecasts of the previous Labour government, and announce that in future the OBR would be responsible for publishing these forecasts "independently of government".

A short track record of failure 

From the very start, the OBR got their economic forecasting badly wrong. A pretty spectacular failing for an organisation established with the primary purpose of improving on the poor economic forecasting of the previous Labour administration.

The OBR were forced to begin downgrading their economic forecasts within months of being formally established by the 2011 Budget Responsibility and National Audit Act. After four downgrades in 2011, even the right-wing press began complaining about the inaccuracy of the economic forecasts emanating from George Osborne's pet project. The Daily Telegraph even reported the view that Osborne may have to disband the OBR in 2012 if their economic forecasting was as disastrously inaccurate as it had been in 2011. In fact their forecasting for 2012 has been even more wildly inaccurate and subject to even larger downgrades, but the Telegraph seem to have gone quiet about it.

Each time the OBR has been forced to further downgrade their economic forecasts, or explain the large disparities between their predictions and the quarterly economic results, they have come out with a list of absurd excuses (the cold winter, the Japanese Tsunami, the wet spring, the royal wedding, the Jubilee, the Eurozone crisis...). In fact, several of the events the OBR has cited as excuses for poorer than forecasted economic performance, were actually talked up as being economic stimulants before the fact, especially the two large royal events in 2012. One is left expecting their excuse for poorer than expected third quarter results to be based upon the staging of the £multi-billion Olympic and Paralympic games in London.

Whatever excuses the OBR posited for their inaccurate predictions, those of cynical disposition have been left with the distinct impression that the litany of feeble excuses are little more than transparent justification narratives cobbled together to cover up the failure of George Osborne's ideologically driven austerity experiment. To put this into perspective; in the improbable (or impossible) circumstance that "Osbornomics" had produced better returns than the OBR's forecasts, does anyone believe that they would have pre-packaged the positive economic results within a justification cloud of reasons for the over-performance of the economy? Of course they wouldn't have. They would have said little more than "it is better to be slightly conservative than to be recklessly over-optimistic" and offered a slight upwards revision of subsequent figures.

The litany of post-hoc justification narratives from the OBR has left many people with the notion that they were defending George Osborne's austerity agenda as an act of loyalty to the man that created their jobs. Another plausible explanation for their excuse-mongering is that the people picked to work at the OBR, were chosen specifically because of their neoliberal economic backgrounds. The majority of the board and expert advisory panel have broadly similar backgrounds. The majority are macro-economists that have studied at Oxford, Cambridge or both; many have experience in working for independent central banks (the Bank of England, the ECB); several have been economic advisers to Tory governments; two of the three members of the Budget Responsibility Committee have experience at the IMF (Robert Chote and Graham Parker); and many more have experience working in the financial services industry that was responsible for triggering the global economic crisis, most notably John Llewellyn (who was the chief economist at the collapsed Lehman Brothers bank) and Ben Broadbent (who was Goldman Sachs Senior European Economist when they were helping the Greek state to hide their debts in order to cheat their way into the Eurozone and when they later started betting on the collapse of the Greek economy, that they themselves had helped to engineer). If the composition of senior OBR staff is predominantly sympathetic to neoliberal economic theories and major financial institutions, they would be sure to approve of Osborne's agenda of repackaging neoliberal economic reforms as unavoidable austerity and hoofing financial sector regulatory reform into the long grass.

Of course, another potential motivation for the litany of lame excuses is pure self-interest (the motivation at the heart of neoliberal economics). The OBR have found themselves in the situation time and again where they have had to come up with something, anything, to obscure the fact that they have consistently got their economic forecasts so spectacularly wrong. 

In 2012 the UK economy slumped back into "official recession" (two or more consecutive quarters of economic contraction) but the post-hoc excuses from the OBR continued as reliably as the downgrades in their economic forecasts. To put the inaccuracy of their economic forecasts into perspective; in March 2011 they predicted that the GDP growth rate for 2012 would be a healthy 2.5%, however given the dismal first two quarters, it would take an 4th quarter miracle for the UK economy to recover to even a 0% growth rate for the entire year.

The OBR, the IMF and Fiscal Multipliers

In October 2012 the IMF announced a massive revision to their fiscal multiplication estimates (the returns on government spending). For years they had maintained that the fiscal multiplier was around 0.5 (a return of 50p for every £1 of investment), but the newly announced figures ranged between 0.9 and 1.7 (a 90p - £1.70 return). This revision shows a vast 80% - 320% margin of error on the original estimates. Here's what they said:
"IMF staff reports, suggest that fiscal multipliers used in the forecasting process are about 0.5. Our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession. This finding is consistent with research suggesting that in today’s environment of substantial economic slack, monetary policy constrained by the zero lower bound, and synchronized fiscal adjustment across numerous economies, multipliers may be well above 1." (IMF Global prospects and policies report, page 43)
This announcement was extremely bad news for the OBR, since rather than conducting their own fiscal analysis to calculate the lost economic returns on the government spending that Osborne had been slashing, they had simply been using the IMF's guesstimated fiscal multipliers of around 0.5 to make the calculations. In other words, they had been working under the assumption that government spending is essentially 50% "waste", when according to the revised IMF figures government spending ranges between 10% "waste" and a 70% increase in economic productivity. It is clear that slashing government spending is much more harmful to the economy if it ranges  between -10% to +70% economic stimulus, rather than matching the grossly underestimated -50% figure the OBR had been working with.

Later in October 2012 the OBR vaguely admitted the possibility that their fiscal multiplier assumptions were responsible for the inaccuracy of their forecasts in the executive summary of their 2012 Forecast Evaluation Report. Here's what they said:
The multipliers would have needed to be more than twice as large to explain the growth shortfall we have seen. Estimates of multipliers vary widely, so it is clearly possible that the fiscal consolidation exerted more of a drag on growth than we assumed. (page 10)
Given that the IMF announced an 80% - 320% revision of the fiscal multiplier, the get out clause of multipliers needing to be  "more than twice as large to explain the growth shortfall" doesn't look particularly unrealistic. Later in the document the OBR calculated that:
"The average multiplier over the two years would have needed to be 1.3 – more than double our estimate – to fully explain the weak level of GDP in 2011-12" (page 53)
By coincidence or not, this figure of 1.3 lies slap bang in the middle of the IMF's revised range of 0.9 - 1.7! 

The TUC carried out some analysis on the effects of the Osborne's austerity measures using the middle of the range figure of 1.3 and estimated £76 billion in economic damage, however if the higher estimate of 1.7 is used the scale of unforeseen economic damage from Osborne's austerity agenda could be as high as £114 billion. Whatever the case; if the IMF's figures are to be believed, the OBR helped Osborne to obscure between £38 billion and £114 billion in economic damage he was inflicting through his ideological austerity agenda by lazily bunging IMF statistics into their calculations rather than attempting to determine the fiscal multiplication values of the diverse range of axed government services for themselves.

Anyone familiar with science or maths knows that your entire equation is invalidated when you begin simply throwing in numbers based upon arbitrary assumptions. What makes the lazy reliance upon IMF figures even worse, is the IMF's appalling track record of failure. One country after another (Argentina being the most famous example) has suffered severe and catastrophic economic meltdowns after adhering too closely to the IMF neoliberalisation plan. An organisation that has shown a ruthless decades long determination to push the policies of privatisation, small-government, reduced welfare spending, and deregulation has an obvious vested interest in maintaining the fiction that government spending is essentially "waste". Given this track record of failure and the clear vested interest in downplaying the benefit of state spending, it seems incredibly unwise to take the IMF's fiscal multiplication statistics at face value and simply transpose them into your own national growth forecasts.

If millions of ordinary people are aware of the IMF's appalling track record of failure, it is fair to expect that  trained economists should be aware of it too. However, the problem is, that the people at the OBR have emerged from the same orthodox neoliberal macro-economist mould as the policy wonks at the IMF. In fact Robert Chote, the head of the OBR is a former IMF employee. When the IMF released absurd post-hoc justification narratives to explain away the catastrophic Argentine economic collapse, despite the fact that Argentina had been lauded as the IMF poster child for the pace and extent of their IMF backed neoliberalisation reforms throughout the preceding decade, people like Oxbridge trained macro-economists lapped it up. It is obviously easier for them to give in to confirmation bias and accept the IMF's absurd post-hoc rationalisations at face value, than it is to admit that a hell of a lot of the neoliberal dogma they've based their careers upon is fundamentally flawed, that many of the macroeconomic models they've learned are defunct and that the entire global economic system need to be dramatically reformed.

Simply transposing IMF fiscal multiplier figures into their calculations, rather than conducting their own analysis on returns on government investment is an act of budgetary negligence. The OBR are guilty of telling Osborne exactly what he wanted to hear, in order to justify his ideological austerity experiment. They fudged the figures in order to plaster his ideologically driven agenda with a veneer of economic credibility.

Even now, the fiscal multiplication statistics provided by the IMF must surely be treated with extreme caution. If they are prepared to make vast (80% - 320%) adjustments, who would bet on the latest figures being entirely accurate? If the OBR are going to continue to use fiscal multipliers in their economic forecasts, they must surely undertake rigorous returns on investment analysis across the whole range of UK government spending. If they don't adopt this evidence based approach, it would perhaps be better for everyone if they gave up the pretense of conducting rigorous economic analysis and admitted that, like Osborne, their agenda is an ideological one.

Responsibility

That the Conservative party established the OBR many months before the election leaves the distinct impression that it is, and always has been a partisan organisation. Their willingness to fudge the figures in order to tell George Osborne exactly what he wanted to hear (that "austerity would, or even could ever, work) suggests that if not demonstrably sympathetic to the Tory party, they must at least be considered sympathetic to the Tory indiscriminate austerity agenda, of further IMF style neoliberalisation dressed up as the cure to the economic crisis.

That the OBR have made catastrophic forecasting errors is beyond doubt, and no amount of excuses or absurd boasts about the health of the UK bond market are going to cover up the fact that fiscal consolidation is failing and that the OBR gave Osborne the green light to plough ahead with austerity policies that were widely predicted to fail (even by the odious Ed Balls).

Who should be held accountable for this disaster? Well on  page 92 of the OBR's 2011 Economic and Fiscal Outlook we find this statement:
"All judgements and assumptions in the forecasts are made by the OBR’s Budget Responsibility Committee (BRC), and the BRC takes full responsibility for the final forecast."
If this doesn't count as an overt admission of responsibility, then I'm not sure what would. Despite this admission of responsibility, I believe that the blame must go further that the three man BRC team (Chote, Nickell and Parker). George Osborne must be held accountable for not bothering to ensure that the OBR were fit for purpose before handing them responsibility for economic forecasting for the whole nation, and he should also be held responsible for the catastrophic failure of his austerity experiment.

What next for the OBR?

The claim of OBR "independence" must come under enormous scrutiny now, since their excuses have always been aimed at defending Osborne's austerity policies and because their fiscal multiplication errors allowed Osborne to plaster his ideologically driven agenda with a veneer of economic credibility. However, now that they are aware of their errors, the OBR have been presented with a golden opportunity to (at least partially) redeem themselves. 

Firstly: They can do what George Osborne would never do, and admit that they made a catastrophic £multi-billion mistake. They need to admit that their massive underestimates of the value of government spending led them to produce wildly inaccurate economic forecasts. They must also admit that these underestimates allowed George Osborne to inflict a massive amount of damage on a fragile but recovering economy, driving it back into recession.

Secondly: They can recalculate the costs of Osborne's ideological austerity experiment in light of the new fiscal multiplier figures, or even, God forbid, actually attempt to do their own research into the fiscal multiplication values of specific areas of government spending. Using these evidence based figures, they could present a plan of action (based on immediate increases in funding for strong fiscal multipliers and proposed funding cuts or systemic reforms in areas of particularly weak fiscal multiplication). With these new forecasts and proposals they could present an undeniable case that austerity hasn't been working, and will continue to not work. This would leave Osborne with the choice of abandoning his mindless austerity experiment or adding the body of experts he actually created to the ever growing list of people and organisations that he ignores in pursuit of his ideological dream. The futile dream of disproving the vast wealth of evidence that government stimulus and regulatory reform are the cures for economies reeling from the consequences of catastrophic free-market deregulations and unrestrained financial sector greed.


If the OBR take these steps, then perhaps there is a case to be made that they have a useful economic function and a potential future. However if they ignore the IMF's revision of fiscal multiplication values, continue to produce wildly inaccurate economic forecasts and deliberately obscure the destructive effects of austerity by churning out feeble excuses, I'm fairly sure they will be so utterly discredited that they will have to be immediately disbanded as soon as Osborne is removed from power.
 

See also


Post a Comment