Opinion

Bank of England governor's men fiddle with UK forecasts

By David Blanchflower (China Daily)
Updated: 2010-07-14 10:54

The government has claimed the OBR is independent even though it is physically located in the Treasury; it is staffed by a handful of seconded Treasury officials; all queries are handled by the Treasury press office; and if you call them, the Treasury switchboard answers.

On June 22, Osborne announced a program of measures to cut public spending and raise taxes, including an increase in the value-added tax rate to 20 percent from 17.5 percent. The OBR produced a forecast that suggested these measures would have a minimal effect on employment and unemployment.

Subsequently, leaked documents showed they would actually result in the loss of at least 500,000 public-sector jobs and 600,000 to 700,000 jobs in the private sector.

Related readings:  Bank of England keeps interest rates at record low  Bank of England 'hasn't changed locks in decades'  Bank of England to buy more assets, keeps rate unchanged  Bank of England cuts interest rate

By noon the next day, the OBR had produced a new forecast saying that, even with these job cuts, employment would rise and unemployment would fall every year throughout the forecast period. The idea that the private sector would fill this hole by creating as many as 2.5 million jobs was greeted with howls of incredulity. And with a new forecast produced so quickly, it smacked strongly of political interference.

Adding to the firestorm, Alan Budd, the OBR's boss, almost immediately announced he would be leaving. The government's claims that Budd's appointment was always intended to be temporary don't appear credible.

A few days later, the plot thickened when it was reported that the OBR had also put a positive gloss on the employment numbers by trimming its forecasts for public-sector job losses by about 175,000.

The OBR pre-empted the results of the Pensions Commission by assuming lower pension contributions and reduced promotions for public servants, even though the government hasn't announced such a plan. Both assumptions cut the job-loss figure. Meanwhile, policy initiatives that would lower long-term growth and increase unemployment were excluded.

As a young economist, I gave a presentation on youth unemployment to an academic panel at the Congressional Budget Office, which produces a forecast twice a year for the US Congress. The panel's purpose is to "provide advice to further the reliability, professional quality and transparency of the CBO's work."

Before the talk, I had no idea who was on the panel. Sitting in front of me, among others, were Nobel laureates Lawrence Klein, Paul Samuelson, James Tobin and Robert Solow, who had to sign off on the forecast before it was made public. That is independence.

David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, is professor of economics at Dartmouth College and the University of Stirling. The opinions expressed are his own.