The Bank, the OBR and Mr Osborne

George Osborne George Osborne's Statement was not as bad as some had feared

There are two pleasant surprises in this Autumn Statement, for everyone, perhaps, except Her Majesty's opposition.

The first was much in evidence in the chancellor's speech: borrowing will fall, not rise, this year, despite almost universal forecasts that it would go up.

The other was not: the Office for Budget Responsibility (OBR) has become a bit more optimistic about underlying state of the economy, and that has meant that the chancellor's target measure of the deficit has not increased as much as expected. He can still say that this borrowing is lower than in 2010-11. But £59bn of austerity has still only reduced it by around half-a-percentage point of GDP, to 4.3%.

The OBR is now a bit gloomier about the longer-term capacity of the economy, meaning they think our potential output will be about 1.3% of GDP smaller than previously thought by 2017. But that is a small change, relative to the big downgrade in the forecast a year ago.

There are plenty of odd things going on with the "headline" measure of borrowing this year - including not just the transfer of the Royal Mail pension fund, but the raid on the Bank of England's Asset Purchase Facility and reclassification of Bradford & Bingley. In his speech, George Osborne insisted that borrowing was falling, despite these oddities.

And that is true. Table 1.3 of the Autumn Statement document (on page 14) confirms that.

But, the borrowing would not have fallen this year, without the £3.5bn proceeds from auctioning the 4G spectrum. In that sense, it is thanks to another one-off factor. Though Danny Alexander has just entered the BBC studio, as I write this, and told me there are one-off asset sales like this every year. So that's alright then.

What about that other surprise? As I wrote in my earlier blog, the IFS and pretty much every other economic forecaster expected the OBR to raise its estimate of the structural current deficit, given what we knew about the way they forecast these things. We also thought they would probably cut or leave unchanged their estimate of spare capacity in the economy (the "output gap") - again, on the basis of their calculations in March.

In fact, they have increased the structural current deficit in 2012-13 only slightly: from 4.2% to 4.3% of GDP. Allowing for the effect of transferring the interest income that the Bank of England has earned as a result of quantitative easing, that measure of borrowing has actually fallen for the remaining years of the Parliament. Without that transfer, structural borrowing is higher in future years - around 0.6% of GDP higher, by 2015-16.

I will need more time to read the details, but if the OBR thinks those transfers from the Bank affect the structural borrowing picture significantly, then clearly it believes - as I did predict a few weeks ago - that quantitative easing has permanently improved the public finances.

To be clear, this is not due to the recent change in the way the interest payments are classified. The OBR has taken a look at the quantitative-easing policy and decided, over the course of its life, it will be a net positive for the chancellor. As I say, I need to check the details, but that is how it looks.

Also interesting is what the OBR has done to their estimate of Britain's room to grow: "our latest estimate of the output gap is significantly wider than we thought in March, in each year of our forecast." In explaining this, they say - in effect - that they looked at what the output gap would be, on the basis of their previous "cyclical indicators' approach, and decided it wasn't plausible. So they changed the model.

The funny thing is, the new forecast shows the chancellor eliminating that measure by 2016-17, as before. So why the extra year of austerity in 2017-18?

The explanation, again, is that he only achieves that with the help of the expected transfers from the Bank of England, thanks to quantitative easing. Otherwise, it would take until 2017-18 (see Table 1.6 of the Green Book).

Perhaps the chancellor does not want it to be said that he has benefited - even in this small way - from the disastrous performance of the economy that has made all that quantitative easing necessary.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 83.

    Monetary Central Planning:
    Kevin Annett, money system to slave native people in Canada:

  • rate this

    Comment number 82.

    It only took the OBR three years to go completely native, didn't it? Just look how optimistic their forecasts are compared with everyone else's. Ozzy could save a few (real) quid by getting rid of them, since that particular experiment in transparency and independence has manifestly failed.

  • rate this

    Comment number 81.

    Correction to my previous post - the euro zone crisis was the elephant in the room which the OBR completely missed, not the white elephant — which has a completely different meaning altogether.

  • rate this

    Comment number 80.

    I think the question people should be asking is if the OBR got the forecasts so wrong and overly optimistic (how could they miss the white elephant in the room which is the Euro zone), have they taken the so-called fiscal cliff in the USA into accont in these new forecasts?

  • rate this

    Comment number 79.

    positive money proponents
    that's what a deficit is
    if private banks create NET money
    that would be another law broken
    I am all for regulating lending criteria
    completely separating investment and retail banking
    banning some trades
    but banks responding to demand from households and firms
    for loans with a matching obligation I'm ok with that
    just regulate it properly

  • rate this

    Comment number 78.

    62.G Paul Turner
    Chairman of THE OBR is married to Sharon White Director General for public spending at HM Treasury
    So how independent OBR do you think they are now from the government

    This government do not rely on stuff from truly independent people as when you start checking people on these quangos you find that they are linked to the government in some way

  • rate this

    Comment number 77.

    of course to issue unlimited fiat would be inflationary
    not the "printing" of it
    but the spending of it in a market where supply could
    not expand fast enough
    demand pull inflation
    uk housing market recently
    relax mortgage criteria supply limited
    super profits for rentiers and speculators
    targeted govt spend or tax breaks
    whether backed by bond issue or not
    does not have to be inflationary

  • rate this

    Comment number 76.

    What make me laugh is the fact that most of the benefits paid to people are to keep businesses from having to pay a living wage and the government all ways get people stirred up over benefits as a lot of people do not know were these benefits go as the government only ever point to unemployed and those on long term sick and people fall for it every time

  • rate this

    Comment number 75.

    can govts borrow to infinity?
    yes but that would be dumb
    since 1971 no fiat currency has a gold claim on it
    BOE can issue what it likes that is the power of currency issue
    it is arcane to still issue bonds to cover govt net spending
    in a fully fiat floating exchange rate system
    but the BASEL rules do not stop
    central banks buying bonds in secondary market
    and turning yield to a + for the treasury

  • rate this

    Comment number 74.

    Hmm, when I try to follow the link in the article to the actual text of the Autumn Statement, I get this message:
    "The file is damaged and could not be repaired."
    Says it all really!

  • rate this

    Comment number 73.

    73 remember
    It may simply be that Cameron etc are seeking to appeal to the section of society that are vile, sick and evil. Either way, they are complicit.

  • rate this

    Comment number 72.

    So bribery, corruption, tax avoidance, interest rate rigging, drug cartel money laundering etc... Is still acceptable but claiming benefits you are entitled to is not.
    What a vile sick evil society Cameron and his vile cronies are creating.

  • rate this

    Comment number 71.

    Does the laffer curve really exist? It's a theory I have heard of, and it has some logic, but where does it really bite, where is the tipping point?

    And why are we forcing people onto lower benefits so that they 'get a job' when the jobs aren't there. There's enough people in construction on zero hour contracts as it is

  • rate this

    Comment number 70.

    How much of Osbourne's figures are helped by the money taken from the Royal Mail pension fund, and the QE monies - debt that will, like PFI, need repaying in the future? Why do we allow this stupid manipulation and arcane rules as to what is spending and borrowing, so our chancellors can play games

  • rate this

    Comment number 69.

    Osborne smirked Cameron giggled all girls together. QE rescued the austerity program because the BOE issues bank notes and buys Gov Bonds from 3rd Parties in the market. Gov sells more bonds to the market at low interest rates. BOE pays the Gov the interest on the Gov Bonds that it now owns. Deficit reduced???? NO add QE 500 Billion to the deficit because BOE is the GOV. THE DC:GO HOUDNI TRICK!!!

  • rate this

    Comment number 68.

    Stephanie, I still don't see why you and the BBC have punted all night that George Osborne's failure to hammer the economy so hard that he meets his original targets for defecit reduction by 2015, is bad news.

    Everybody should be pleased about this.

  • rate this

    Comment number 67.

    Well, at least Europe seems finally, to be cracking on.

    Regeneration, anyone?

  • rate this

    Comment number 66.

    For anyone interested in Monetary Reform you can learn about it in this video from Dr Bob Welham, who is a hero of mine.

    Highly recommended.

  • rate this

    Comment number 65.

    60. JfH
    An independent body creates all new money interest-free and gives some money (digitally) to the public sector and sells some to banks for re-lending to the private sector. When inflation starts to rise, stop creating new money. Banks can attract money numbers to themselves that are already in the system by normal business transactions. The result - halving of systemic debt in 15 years.

  • Comment number 64.

    All this user's posts have been removed.Why?


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