While markets were digesting Ireland's €85bn bail-out, the revamped Office for Budget Responsibility (OBR) started to flex its muscles a little bit today. The headline figures were broadly sensible – growth in 2010 will be stronger than thought, but in 2011 and 2012 the recovery will be more subdued, with growth only getting up to 2.6% for when the Olympics arrive. The best news, for the coalition, is that the OBR now 'only' 330K public sector job cuts over the next four and a half years.
The politicians will doubtless get very excited about the jobs news, and the fact growth this year will be stronger than we all thought six months ago. The jobs figures, of course, will be hotly debated. But after two quarters where the UK economy was growing at an annualised pace of almost 4%, it would be frankly daft if the OBR had not changed its mind about growth in 2010 (along with everyone else).
Unfortunately, however, the more interesting aspects of the OBR's calculations are likely to get lost in the detail. Investigative journalism not quite being what it once was – certainly not when it comes to finance and economics – two important points may never get covered.
First, despite the strong growth seen this year – and in FY10/11 the OBR now expects the economy to post real growth of 2.5%, 0.8ppts stronger than back in June – the forecast for the fiscal deficit is basically unchanged. Public sector net borrowing (PSNB) in FY10/11 is forecast to be £148.5bn, just £1bn lower than in June. Given that growth has been notably stronger than expected this year, the fact that the borrowing forecast is basically unchanged means that the OBR is implicitly saying that more of the existing deficit is structural, ie will not respond to stronger growth. If these developments continue over the next six months, with healthy growth but no change in borrowing, it could pose serious problems for the coalition government. Markets are much more relaxed about deficits that are cyclically-driven, or reflect weak growth, than structural deficits that basically hang around forever without further deliberate policy changes.
The second point is that the OBR is also implicitly challenging the economic authority of the Bank of England. Both the Old Lady and the New Kid on the Block will emphasise that the differences between their forecasts are small, in absolute terms, and well nested within their error bands. But the OBR's calendar-year growth forecasts for 2011 onwards – which read 2.1%, 2.6% and 2.9% up to 2013 – are weaker than the MPC's projects. The Committee's best guess is that four-quarter GDP growth will average 3% over the same period. This discrepancy between the forecasts isn't much of anything to do with interest rates – in both sets of projections, these are derived from market expectations. But if I had to back Mervyn or Robert, my money would be on the artist formerly known as the Director of the IFS. (As an aside, the OBR gets around this whole issue via a time-honoured fudge in its report, another sign it is growing up fast.)
The OBR is also pushing the limits with its detail and transparency – and, to be fair, has been doing so since it was set up. For a long time Mervyn King has fought a quiet war against proper disclosure – indeed, an old gag from within the hallowed walls of Threadneedle St is that 'transparency is just a long word' (to be fair, I never said economists were that funny). Mervyn is so against people being able to see what the MPC actually thinks that the statistics behind its forecasts aren't even published until a week after the Inflation Report. And the detailed tables that are rumoured to exist, covering house prices, unemployment, wages and even the public sector deficit, will probably never see the light of day. The OBR, in complete contrast, has been totally up front and explicit about both its uncertainty and its central forecasts today, to the point of publishing detailed forecasts even up to and including quarterly GDP growth – something City economists have longed for from the BoE. After an inauspicious start, the OBR may just be shaping up to be the most influential economic forecaster in the UK. The Old Lady should sit up and take notice.