Bad news for Labour in OBR
Of course, the higher borrowing numbers in the Autumn Statement were bad news for the chancellor. But the OBR's new forecasts could prove to be even more damaging to the opposition.
Why? Because if you add together the key judgements in its report, they all point in once direction: the independent OBR has essentially taken George Osborne's side in the argument over austerity and growth.
Robert Chote will not say so explicitly and is probably not comfortable with others doing so, but think about it: Labour's core argument is that we have suffered slow growth in the past year in large part as a result of the government's austerity. The OBR says he's wrong. In its view, slow growth this year has been due to higher imported inflation squeezing household spending and, more recently, the crisis in the eurozone.
Its reasoning seems to be that the jump in utility prices and the depth of the crisis in the eurozone were unexpected, so are more likely to account for the slowdown. The squeeze in the public sector was already built into the OBR's forecasts so, in their eyes, is a less plausible culprit.
That's part one of the argument between Mr Balls and Mr Osborne. The second part of Labour's argument is that higher spending could boost growth significantly and thus lead to lower borrowing in the end.
As I said on Tuesday's 10pm bulletin, the OBR implicitly pours some cold water on that idea as well, at least if we're talking about a major change of course.
Examining the evidence from business surveys and other factors, the OBR has decided we have much less room to grow than it thought. In fact, it believes "there is less spare capacity in the economy than at the end of last year".
It's worth lingering over that extraordinarily gloomy claim: it says our capacity as a nation has actually shrunk since the start of the year, a period in which our actual economy has grown barely at all.
If the OBR is right, we have not built up any extra slack over this recent period of stagnation; we have lost it. We have not even done much to help the public finances.
On that point, a few more devastating stats (sorry). Since April 2010 we have had tax rises and spending cuts worth £42bn in 2011-12. When Mr Osborne wrote his first Budget, that £42bn was supposed to make a serious dent on the structural deficit, lowering it by 2.4% of GDP in a single year.
Now the OBR says the hole will only be 0.7% of GDP smaller in 2011-12 than it was last year: 6.4% of GDP, compared with 7.1% in 2010-11.
So, our prize for two years of austerity is... two years more. Because of this structural borrowing, Mr Osborne has now pencilled in extra spending cuts worth £15bn a year in 2016-17.
In that sense, you could say the OBR does agree with Ed Miliband: we have had quite a lot of pain, with not very much gain. But unlike Labour, the OBR doesn't seem to think things could have gone much better.
This is not a political judgment, it's an economic one. But it could just as easily be wrong.
Economists such as Adam Posen have warned that slow growth begets slow growth: if we don't use it, we lose it. (I explained this more clearly when he first made this argument, over a year ago). The OBR doesn't seem to agree.
I asked Robert Chote whether the report allowed for the possibility that the slow growth we have seen over the past few years might, in itself, have lowered our long-term productive capacity. He said no.
It's not just the past few years. The potential growth rate for the next two years has been cut as well. The implication is that we do not have an enormous amount of room for a Plan B.
The bottom line is that Mr Osborne has difficult times ahead, but the eurozone and the OBR have given him some very good lines of defence.
With the eurozone crisis, he has a very plausible explanation for any double dip in the economy. And if Ed Balls, or anyone else, says austerity is to blame and needs to be reversed, the OBR has given him a ready answer to that, too.
If its assessment is right, stimulus policies would have only limited room to work before coming up against the limits to Britain's sustainable growth.
Is it plausible that Britain is now so supply-constrained? As I have noted many times, there are those who would say it is not: notably Martin Wolf, Larry Summers and the economist I featured in my report, Bill Martin.
Economists at Capital Economics and Goldman Sachs have also now said they think the OBR is being too pessimistic about our long-term potential, though when it comes to the immediate forecasts (actual growth, as opposed to potential) they think the OBR may not be gloomy enough.
So, the debate changed yesterday, in a direction that may help George Osborne politically.
When it comes to the economics, you might expect me to end with the traditional get-out: "only time will tell". But the sad fact is that time will not tell.
We will never know whether the OBR was right to be so downbeat now about our economic potential. Perhaps it is. Or perhaps the fact that it has made this assessment will make it so. I'm not sure which is worse.