I knew it was too good to last. Having delivered a broadly sensible Budget, and even gone about the process of fiscal consolidation the right way – detailing specific projects that will be cut, and how much each will save – the government’s economic honeymoon, such as it was, came to a crashing end in the past week.
This is partly due to increasing signs that the global recovery – which UK recovery, in turn, is so dependent on – is already showing signs of running out of steam, before it even really got going. The slowdown in Chinese manufacturing activity is not to be overplayed, and should have been expected given the monetary tightening and the decision to let the yuan appreciate (a bit). That said, it was surprising that the slowdown in June came so swiftly. And alongside a very poor reading on private sector jobs from the US, which suggests that the fiscal stimulus there may also have had its biggest impact already, the twin engines of the global economy – the US budget deficit and aspiring China – have stuttered. This is not good news for a small, open economy that has only been crawling out of recession over the past six months. Indeed, it is striking that the UK has not registered a strong (ie above-trend) quarter of growth since the start of 2007.
To be fair, of course, there is not much that the Treasury, or indeed anyone in the UK, can do about the rest of the World. But the departure of Sir Alan Budd from the newly formed Office for Budget Responsibility (OBR) was at best a public relations disaster, and at worst the government failing to understand and follow through on its promises.
When the OBR was set up, I was initially sceptical – I was not sure it would enjoy genuine independence from Treasury mandarins or Ministers. But I was swiftly won over – although the forecasts the OBR produced ahead of and alongside the Budget were still a tad punchy, they were a lot more sensible than the old government’s numbers, and well thought-through and reasoned. In generating such detailed and transparent forecasts in such a short space of time, the OBR got off to a very good start. Sir Alan and co had delivered in spades.
Unfortunately, it looks like the government then couldn’t help but interfere. Things came to a head last week before PMQs, when the OBR was forced to rush out a set of employment forecasts following a leak. To be clear, the OBR should not have done this. I, for one, do not believe it wanted to. Unfortunately, the sight of David Cameron standing up a day later brandishing the figures was a clear sign that the OBR, still just two months old, had already been dragged into the political quagmire.
This made a mockery of the OBR’s independence – a concept that Osborne clearly just doesn’t get, given that he talked about working ‘hand in hand’ with the MPC last year. And the timing of Sir Alan’s departure, coming before he has even reported on what the structural setting of the OBR should be – the very details of where and how it will live and breathe – suggests that he, for one, was not prepared to put up with it.
All of this means the OBR now faces an uphill battle to save itself. As Danny Blanchflower, the MPC member who predicted the recession, has said, which independent forecaster is ever going to touch this job now, given that it will destroy their reputation?
So here is my plan to rescue the OBR.
First, appoint a new chair – maybe even Blanchflower, if you can persuade him. There is certainly no danger of him putting up with nonsense from Osborne. Second, increase the governing committee to five, grabbing a couple of vocal but untainted economists from elsewhere (I am still available, if HMT is interested). Third, give the new committee a fixed budget, but then let it spend that money however it wants, being accountable to the Commons Treasury Committee. And, finally, move the OBR out of the Treasury building – Lord knows, there is plenty of spare office space in London – and make the staff permanent employees, not civil servants on secondment. As long as the people cranking the handle have a link back to the mandarins and ministers, there will be a temptation to leak.
Unfortunately, I am not sure the Treasury will go for this, and the OBR may be left to whither on the vine. Meanwhile, Martin Weale – the head of NIESR, who has just been appointed to the MPC – might be a little nervous about what he has let himself in for. Fortunately, Mervyn King – like Blanchflower – will take no truck whatsoever with Osborne mucking around with the MPC’s independence.