Been wondering why the upturn just doesn’t seem to be coming around? Well the government’s independent economic forecasting body, the OBR, reckons it’s because of the austerity measures of the last two years. In its Forecast Evaluation Report (FER), it claimed: ‘Fiscal consolidation may have done more to slow growth than we assumed.’ The report also said that ‘we significantly overestimate economic growth for the past two years.’ So not only is the recovery being cut off, but also the readings we do have were false. Excellent.
So why has the OBR’s economic reporting been out of kilter with reality? Its explanation blames the following:
- The effect of contracting exports on net trade
- The continued credit squeeze
- The impact of inflation on real consumer spending
- The effect of uncertainty on how much firm’s are willing to invest
They all sound like fair reasons, but surely the OBR should have predicted the warping effects of these factors, no? These have been very real challenges for five long years – you’d think the OBR might have caught on by now.
Nonetheless, the report will only add to growing pressure for George Osborne to rethink his austerity programme. The IMF warned him earlier this month that the cuts are damaging the economy, and then actually slashed its forecast for how much the UK will grow this year. The UK got the largest downgrade in forecast of any developed economy.
It does read like a bit of a chicken and egg situation: is austerity hampering growth as the OBR says, or is it the OBR’s fault for giving bad economic readings? Predictably, the Treasury has seized on the four bullet points as the actual reasons why growth is weaker than expected, instead of making any concession that austerity is having an effect too. We at MT are not economists, but we can sure tell you the economy ain’t gonna be roaring out of recession any time soon…