Coffee House

IFS warns Osborne: don’t cook the books, like Brown

26 November 2012

The Institute for Fiscal Studies has today published its attempt to predict what the OBR forecasts will show when they’re released as George Osborne sits down after delivering his Autumn Statement next week. They put forward two possible scenarios: a ‘pessimistic’ one where the economy’s recent weakness is largely permanent, and an ‘optimistic’ one where it is largely temporary. In both scenarios, they show Osborne missing his ‘supplementary target’: to have the debt-to-GDP ratio falling by 2015-16. But these forecasts exclude the effect of transferring of the interest on the Bank of England’s Quantitative Easing purchases to the Treasury. As I reported on Friday, that effect might be enough to allow Osborne to meet his debt target even despite the weakness in the economy and the deterioration in the public finances. But the IFS cautions that Osborne would be wrong to claim success if that’s the case:

‘it would be disingenuous for the Chancellor to claim that he was still on course to meet his supplementary target purely as a result of such a change. Any assessment of whether the Chancellor remains on course to meet his supplementary target should use the same measure of debt as was in place at the time he committed himself to this rule; not doing so – and thus being seen to move the goalposts – could risk undermining the credibility of any commitments he makes to fiscal discipline.’

And to underline just how disingenuous it would be, the IFS likens such trickery to the kind used by Gordon Brown during his chancellorship:

‘Similar arguments were made when, soon after the general election of 2005, the then Chancellor Gordon Brown revised his assessment about when the then current economic cycle began (from 1999–2000 to 1997–98), which happened to make his ‘golden rule’ easier to meet just at the moment when data from the ONS first suggested that the rule was on course to be breached.’

The IFS urges Osborne not to follow the example of his predecessor-but-one, but instead to come clean. If, as is very likely, the OBR judges that he would be missing his debt target without the QE transfer, Osborne should either announce more spending cuts and tax rises in order to meet it, or admit defeat and drop the target. The IFS says meeting the target would take an extra £16 billion of savings on its optimistic forecast, and £27 billion on its pessimistic one. But they recommend dropping the target, arguing that:

‘Ensuring debt falls between two fixed dates does not ensure long-run sustainability, since it does not prevent the government from pursuing unsustainable fiscal policies before or after those dates. Furthermore, seeking to remain on course to meet this target could require the government to announce inappropriately contractionary fiscal policies. There will be periods when it would be better to allow debt to rise than to ensure (or try to ensure) that it falls.’


They say Osborne ‘would likely be best advised to abandon the rule and consult on replacing it with something that better ensures long-run sustainability.’ But considering that it was Osborne who introduced the rule in the first place — back in 2010 — it’ll be profoundly embarrassing for him to first admit that he’s breaking it, and then say ‘Well, it was a silly rule anyway. Oh and here’s a new rule. I’ll meet this one, honest.’

But even more worrying for Osborne will be that the IFS’s pessimistic scenario shows him missing his main fiscal rule: to eliminate the current budget’s structural deficit within five years (ie. by 2017-18 in these forecasts). Even the optimistic scenario has him only just managing it, with a surplus of just 0.6 per cent of GDP in 2017-18.

The IFS reckons that the pessimistic scenario would require Osborne to find an extra £23 billion in spending cuts and tax rises, although he would be able to delay them until after the election, just as he did with the extra tightening he announced in last year’s Autumn Statement.

UPDATE: While welcoming the appointment of Mark Carney as Bank of England Governor, Ed Balls put the IFS’s warning to George Osborne and asked him to promise not to include the QE-transfer effect. Osborne didn’t make that promise.

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  • swatantra

    There is an amazing likeness between Gordon and George. Thanks for pointing it out.

  • itdoesntaddup

    It’s quite clear that any profits from the QE gilts are the property of the Treasury and taxpayers – and so are any losses. Those are the terms of the guarantee given by the Treasury to the BoE.

    So, what are the profits? Last time I did the full calculation a week ago, the mark to market value of the gilts was £398bn, compared with cost of £375bn – a capital gain of £23bn. In addition, there is the coupon income that has been parked at a current account at the BoE earning no significant interest, which we are told will shortly amount to £35bn after deducting the 0.5% interest charged by the BoE on its £375bn loan to the fund.

    So far these profits have been treated as part of the financial deficit including financial interventions (which no-one seems to bother to check, gaily accepting that the deficit excluding financial interventions is what counts without thinking about it). That is, they are lumped along with the funding provided to the state banks. Those of us who have actually looked at the numbers over time in Table PSF11b of the monthly ONS public sector finances bulletin may have thought that banks were repaying loans from the BoE under the Credit Guarantee Scheme and Special Liquidity Scheme etc. by some £58bn more than they have been: the total profit on a mark to market basis from QE. That’s the first element of the bad news.

    The second element is that the modified duration of the QE portfolio implies a yield sensitivity of about £30bn for a 1% increase in yields – i.e. this is the amount that the value of portfolio would fall if yields rose by 1% across the board. In addition, the Treasury has exposure to rising yields on the gross amount of borrowing it does: the deficit, plus redemptions of gilts to be refinanced (some £166bn this year according to the current DMO remit – so assuming similar maturities, an exposure of another 30×166/375, or around £13bn). If the Treasury wishes to take a large chunk of the profits and spend them now, then it is exposing itself to having to finance losses that could arise very rapidly e.g. if UK debt suffers a downgrade, instead of having money in the BoE savings account rainy day fund to tide them over.

    The third element is that held to redemption the gilts are only worth £326bn, so there will be a capital loss to be funded of nearly £50bn over time. The first small chunk is about £0.5bn which will be realised when the 2013 4.5% gilt is redeemed next March. At present, the QE portfolio generates £14.5bn in income p.a. (which will decline as more gilts mature, assuming no further QE purchases). At least it only takes about 4 years’ coupon income to cover these losses.

  • anyfool

    The Labour Party spent its 13 years in government blaming the Tory Party for everything that went wrong with their financial maneuvering as an excuse the spend buckets of cash on so called investments mainly wage rises and new buildings for its clients in the Public Sector.

    Why do you think that in 20 months anyone could correct the massive destruction to the financial base of the country caused by the overspending that was exacerbated by the importing of millions of not very productive immigrants mainly from the third world.

    That it is taking longer than projected should be no surprise to anyone, politicians always think they can do things quicker than most others think is possible especially when unforeseen circumstances like the EU recession occur, by unforeseen i mean people who used the supposed growth over the last two years of the EU as an example to confirm their wrongly based predictions of what should happen here.
    Osborne has been as guilty of this as a lot of people but his was based on building confidence whereas his opponents on destroying it.

  • Daniel Maris

    Are we really supposed to take the IFS seriously? Here’s what they said in their annual report in Jan 2008, just before the credit crunch:

    “[the] longer-term fundamentals continue to look relatively sound.”

    More than that, they predicted real consumer spending would continue to increase at 1-2% over the next couple of years! – just before consumer confidence collapsed completely.

    What a perspicacious bunch of prognosticators!

  • dalai guevara

    Don’t get me wrong, we love a bit of positive propaganda.

    But repatriating Royal Mail pensions whilst declaring it might be for sale, zig zagging in and out of triple dips to ensure pension increases are set low, continuing the farce of splitting CPI and RPI (which other first world economy doeas this?), claiming foot fall is now important rather than sales, what can we expect with respect to the fantasy accounting we are about to witness here?

    BoE QE ‘returns’ to the treasury without any form of securitisation mark the beginning of the end.

  • GaryEssex

    Time to make some real cuts instead of increasing government expenditure as has been happening this year. The overseas aid budget would be a good place to start, followed by our contributions to the EU – there’s £20-25 bn a year for starters and enough, hey presto, to solve all of George’s immediate problems – not to mention the bloated bill for benefits and public sector pensions.
    I recognise that the EU money can’t be saved right now, but a good part of the wasted overseas “aid” budget can be and should be.

    • commonsenseobserver

      It’s ring-fenced.

      On the other hand, why shouldn’t EU money be counted as “overseas aid”? ^^
      HM Government would be able to claim a large rise in overseas aid to satisfy the liberals, and the abolition of the budget for EU contributions to satisfy Conservatives. Makes it a lot easier to enact cuts without technically violating the % of GDP pledge.

  • TomTom

    Best thing is to continue to raise taxes…..the public has an infinite capacity to absorb tax increases and fund incompetent government…….perhaps a Window Tax or a Hearth Tax ? So far Osborne has simply raised taxes to discourage Consumption which makes shops look more empty……maybe he should go further and double Business Rates and VAT ?

    • Daniel Maris

      Given Sweden’s tax take is about 30% greater than our own, there is certainly room to raise taxes. That would be the most effective way to reduce debt.

      • TomTom

        Yes it is called Paradox of Thrift…….it is how you crush an economy. Do read up on Colbert………..raise Taxes and give more money to the Banks…….if you find any Light feed it to a Black Hole

        • Daniel Maris

          I’m not suggesting we raise them by 30%. But I am suggesting we raise them – and do a whole lot of other things as well to ameliorate the effects working people. We can’t go on piling up debt indefinitely.

      • Noa

        Reducing expenditure would equally reduce debt.

        • Daniel Maris

          Well we could cut expenditure that’s true. Let’s start with the ridiculous Trident “deterrent”. There are cheaper ways to buy deterrence.

  • Coffeehousewall

    This is why Cameron has been keeping quiet about Rotherham:-

    He was promoting Common Purpose in India and is undoubtedly a graduate. That explains his many nanny-like pronouncements.

    • Daniel Maris

      Brilliant spot Coffeehousewall. I think we can see now where he’s coming from.

      Do we know anything about Common Purpose’s founders?

      • Coffeehousewall

        IRISHBOY spotted this and posted it on the Coffee House Wall at www coffeehousewall co uk.

        How do we get the Daily Mail to notice and investigate?

        • Coffeehousewall

          A search of Hansard for the phrase ‘common purpose’ is very interesting. It is not a phrase I ever use, yet it seems popular among some politicians. If I can make the time I will try to analyse who uses this phrase and how often.

          • Salisbury

            Oh good, please do. I for one would feel so much happier knowing that you were safely tucked up in your bedroom doing this, rather than at loose on the streets, or with access of sharp implements or anything.

            • Coffeehousewall

              Thanks for making it very clear that you are a tit. I assume you are a Common Purpose drone from the ‘public’ services..

              • Salisbury

                Well you’d be wrong. To be honest I had never heard of Common Purpose until the UKIP mob started droning on about it as the latest component of the vast leftist-EUSSR conspiracy to take over the world.

                Part of your delusion is not being able to comprehend that one doesn’t have to have an “agenda” to believe that your ideas, if not necessarily you yourselves, are completely bonkers.

              • telemachus

                Common Purpose is a force for personal good
                Ask any graduand
                Further the contacts made beat the Freemasons hands down
                We are amused at the envy demonstrated in the daily mail and crackpot blogs about this increasingly influential organisation

    • TomTom

      Julia Middleton founded Common Purpose after being at DEMOS and after her time as Editor of Marxism Today which seems to have spores all over the BBC and politics…..Julia Middleton was an independent assessor for the Office of the
      Commissioner for Public Appointments and is a trustee of Alfanar and the
      Media Standards Trust and is also a member of the Shadow National
      Advisory Board of the UK National Centre for Diversity.
      Born 1958 in Lambeth, to Agnes M. (nee Whowell) and Eric H. Morland.

      Agnes and Eric were married in 1952 in the district of Heywood (Greater

      Julia married Rupert J. Middleton in April, 1984 in Hackney, London,
      they have 5 children 2 boys, 3 girls, aged 13 – 24

      • Daniel Maris

        Thanks – that probably explains a lot. Why doesn’t the Spectator bang on about that a lot more? Why don’t they lead a campaign against CP’s baleful influence on our national life? It seems to be tube feeding milkwater Marxism to the whole country.

  • LB Page 4.

    So lets see.
    Osbourne comes clean. We’ve been lying about the debts. It’s not 1.1 trillion, the accountants forget to book 4.7 trillion of state pension debt. 1.6 trillion for the civil service, ….

  • HooksLaw

    The Eurozone has gone into recession and the USA are scrabbling to stop themselves falling off a fiscal cliff.
    Nowhere do you put in any of this context.
    I suggest to you that your journalistic standards are as remote from reality and most of your loopy commentators.

    • TomTom

      The Eurozone is in DEPRESSION as is the USA as is BRITAIN…………there is no “fiscal cliff” in the USA, there is simply the Federal Reserve which has absorbed the US Treasury and is now running the US Government and subverting the US Constitution just as the ECB is doing in Europe and Bank of England – Representative Democracy has been end-run by the Coin Clippers

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