Wednesday, 5 December 2012

Lessons from the UK

Nat O'Connor: The UK's Chancellor of the Exchequer, George Osborne, gave his Autumn Statement early this afternoon, as the UK too examines its debt and deficit levels. One striking feature is that he cited at length the independent Office of Budget Responsibility, which generates the growth forecasts used by the UK Government instead of the civil service predictions used in the past.

Despite presumably being disappointed by those independent forecasts (including the prediction of UK GDP decline of 0.1%), the Chancellor nevertheless praised the independence of the OBR. Given the history of optimistic growth forecasts by the Irish civil service in recent years, there may be a lesson for us in the value of having independent growth forecasts.

The OBR notes that problems in the Euro zone will "constrain growth for several years to come" in the UK. The Chancellor (citing the IMF and others) laid the blame for the UK's low economic growth on the problems abroad. Limited growth in the UK likewise affects Ireland greatly, as they remain our major trading partner. Of course, Ireland's woes are part and parcel of the Euro zone's problems and our growth will be even more constrained than the UK's until strong action is taken to repair the institutional weaknesses in the Euro zone.

The UK is not cutting spending in its Revenue service, but is instead clamping down on tax evasion and avoidance, including measures to close hundreds of tax loopholes and tax breaks, including pensions tax relief (which in Ireland has been described by the IMF as tax relief for richer sections of society).

The UK government is also increasing capital spending by a modest amount (£5 billion GBP) to improve economic infrastructure, which is exactly what is needed to foster long-term growth. Another lesson for Ireland there, as our capital expenditure has been slashed in recent years.

The UK is also creating a new business bank to ensure lending to SMEs. The lack of credit from Ireland's dyfunctional banks is currently killing businesses in Ireland.

The UK has capped rail fare increases for the next few years, unlike in Ireland where they continue to rise - including Dublin Bus's recent fare increase of c.18 per cent following a rise of around c. 15 per cent earlier this year!

Not that I'd agree with a lot of the Chancellor's other measures or rhetoric. Some bad moves include limiting welfare increases to below inflation (which will lower aggregate demand), tax incentives for shale gas extraction (which will be environmentally damaging) and ruling our further property taxes (which are less damaging to job growth than any other tax increases). But it will be interesting to compare the measures taken by the UK coalition with our own coalition budget later today.


Donagh said...

This is very poor Nat. It's well known that OBR is designed to provide cover for it's austerity tactic

Alan Budd who bowed out after three month is also well known as former economic advisor to Margaret Thatcher, not that he had not been critical of Tory policies at the time:

"Now, my worry is . . . that there may have been people making the actual policy decisions . . . who never believed for a moment that this was the correct way to bring down inflation.

They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes"

Nat O`Connor said...

@ Donagh

I'm not saying the OBR is perfect, but it's a move in the right direction.

In the Guardian article you cite it is noted that "the OBR has been welcomed by economists, who think it makes fiscal policy more transparent."

I think it does this. The OBR is under pressure to make its data available and to explain its predictions to technical specialists. Its independence and credibility depend on this, whereas civil servants can always use the cover that political decision making processes are confidential.

Politicians of all stripes have a tendency to restrict access to the data and analysis that informs their decisions.

The problem we have in Ireland is that GDP growth estimates from our DoF have been over-optimistic year after year. Throughout the calendar year they get revised downwards, but come the next Budget - as if by magic - they bounce back up again.

Consider, Minister Noonan's speech: "These deficit projections are based on projected economic growth for GDP in 2013 of 1.5 per cent, rising to 2.5 per cent in 2014 and 2.9 per cent in 2015". We have very little access to the assumptions and data that informed these growth estimates, despite the further shocks to aggregate demand in this and future budgets.

Alan Budd may have been part of Thatcher's Government, but you'll note in the Guardian article that "the suspicion is that Budd is going quickly for another reason – namely, that his independence has been called into question by the shambolic way in which Osborne's team handled the story, based on a Treasury leak, that the measures in the budget would cost 1.3m jobs across the public and private sectors. The Treasury, to put it mildly, was not best pleased by this story and vowed to 'trash' it when it broke in the Guardian..."

In other words, the Conservative government may have decided to reduce and limit the independence of the OBR because they didn't like its calculations on jobs, despite the fact that an ex-Thacher advisor was leading it!

I agree with the Guardian article that the OBR's independence "will remain in question until it has its own staff, is removed from the Treasury, and reports to parliament rather than the chancellor" but very few politicians will bring in a strong, independent body overnight. What is desirable about the OBR needs to be discussed and strengthened to reinforce a culture shift towards evidence-based national budgeting, otherwise we slide back to secretive estimates based on who knows what voodoo assumptions.