Belfast Telegraph

Wednesday 17 September 2014

OBR rebukes PM over economy claims

OBR chairman Robert Chote has written to the Prime Minister
The letter written by Robert Chote to David Cameron (OBR/PA)

David Cameron has suffered an embarrassing rebuke from a watchdog over claims he made about the impact of the Government's austerity measures on economic growth.

Robert Chote, chairman of the Office for Budget Responsibility (OBR), took the unprecedented step of writing to the Prime Minister to set the record straight.

But Number 10 insisted the premier had not misrepresented the OBR's position in a speech on the economy, and defended his choice of words. Shadow chancellor Ed Balls said Mr Cameron had been "deeply misleading" and pointed out that it was the latest in a series of slapped wrists for the premier over economic figures.

Mr Chote was moved to issue the missive after Mr Cameron declared that the OBR was "absolutely clear that the deficit reduction plan is not responsible" for depressed growth. "In fact, quite the opposite," he said during a pre-Budget address in West Yorkshire, which he used to insist there was "no alternative" to the present plan.

In a published letter, the head of the OBR - set up by Chancellor George Osborne in 2010 - wrote that "for the avoidance of doubt" it should be clear the watchdog did believe the measures had hit growth. "I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely-held assumption that tax increases and spending cuts reduce economic growth in the short term," Mr Chote told the Prime Minister. The OBR estimated that "consolidation measures put in place by the previous and current governments would have been sufficient to reduce GDP in 2011/12 by around 1.4%", he added, though there remained "huge uncertainty" over the accuracy of fiscal multipliers used to calculate that. The International Monetary Fund (IMF) has suggested that the impact may have been higher.

Mr Chote went on to say that "external inflation shocks, deteriorating export markets and financial sector and eurozone difficulties were more likely explanations" than incorrect assessments of the impact of austerity for growth being even weaker that the OBR initially forecast. Downing Street seized on that remark in defence of Mr Cameron - saying it was "precisely the point the Prime Minister was underlining". It insisted that he had been referring to the drop in growth beyond the forecasts.

Mr Balls said: "This is another embarrassing rebuke for the Prime Minister, just 24 hours after his panicky and defensive speech on the economy. Deep spending cuts and tax rises have reduced economic growth, as the OBR says, and so it was deeply misleading for David Cameron to claim otherwise. Of course there is a debate about the extent of the impact - the size of the so-called fiscal multipliers. The Office for Budget Responsibility rightly draws attention to recent research from the IMF suggesting that the multipliers have been much greater than previously thought. The OBR says they are yet to be persuaded, but David Cameron must be living on another planet if he thinks spending cuts and tax rises have had no impact at all."

Sir Alan Budd, the first chairman of the OBR, told BBC Radio 4's PM programme: "I think it could be regarded as something of a rebuke. "I think he is correcting a statement that the Prime Minister has made and the important thing is that the Prime Minister is attributing a view to the OBR which it doesn't hold, and I think when that happens it is absolutely right to write to the Prime Minister and point out that he has made an error." Sir Alan said he was "surprised" Mr Cameron had been briefed to "use the words that he did", claiming no one who had read the OBR documents "could possibly have thought that that was true".

Bernard Jenkin, chairman of the Public Administration Select Committee, said: "The Prime Minister is entitled to take a different view from the Office for Budget Responsibility about why the economy is not growing. The OBR knew about the Government deficit reduction plan when it published its forecast. Perhaps it would be appropriate for the OBR to apologise to the Prime Minister about why its forecasts for economic growth have proved so woefully wrong."

Business Secretary Vince Cable told Channel 4 News: "The Prime Minister's right that the evidence shows clearly that the downturn in the economy that took place last year and the year before was predominantly due to factors from overseas, imported commodity prices, higher oil prices, this squeezed living standards in the UK and pushed the economy down. The basic economics of it is that the necessary measures that the Government has had to take in order to get the budget right after the enormous deficit we inherited were not responsible predominantly for the downturn in the economy."

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