Statement by the Chancellor of the Exchequer.
[Check against delivery]
Mr Speaker, with permission, I would like to make a statement on the Office for Budget Responsibility, which this Government created in coming into office.
This morning, for the first time in British history, we have opened up the Treasury books and allowed the publication of an independent and comprehensive assessment of the public finances.
From now on we will have to fix the budget to fit the figures, instead of fixing the figures to fit the budget.
I would like to thank Sir Alan Budd, the members of the Budget Responsibility Committee, and all the staff for the impressive work they have done.
Mr Speaker, there has been some interest in whether the OBR will publish all the relevant underlying assumptions and judgements driving the forecast.
Today’s report does more than that, there are over 70 pages of detailed material, much of which has never been seen before.
For the first time ever, the Government is publishing the assumptions that lie behind the estimates for:
- average earnings
- property prices
- interest rates
- financial sector profits
- and, crucially, a five-year forecast for Annually Managed Expenditure.
This includes a forecast for the amount of debt interest that we, as a country, will pay over the coming years.
The creation of the OBR has already impressed the international community, and has been praised by the International Monetary Fund and the G20.
We will now move to put the OBR on a statutory footing with legislation included in the Queen’s Speech.
So from now on, Members of Parliament sent to this House to scrutinise how the Government spends taxpayers’ money will for the first time have access to the true figures.
Mr Speaker, let me now turn to those figures and what the OBR have uncovered.
First, the forecasts for growth in the economy.
The OBR are forecasting growth to reach 1.3 per cent this year and 2.6 per cent next year.
In future years, the OBR’s forecast is for growth of around 2 .8 per cent in 2012 and 2013, and then 2.6 per cent in 2014.
The forecasts for growth are sadly lower in every single year than the figures that were announced by the previous Chancellor at the time of the last Government’s Budget in March.
He told us growth would soar to 3 ¼ per cent in 2011, and then to 3 ½ per cent in 2012.
At the time these forecasts were given, neither the Bank of England nor 28 of the main 30 private institutions producing forecasts for the UK were offering such an optimistic central view of the economy.
We can only speculate as to why such a rosy forecasts for a trampoline recovery was produced only weeks ahead of a general election.
Mr Speaker, let me now turn to the OBR’s forecasts for the public finances.
The latest outturn data shows public sector net borrowing for last year was £156 billion.
That’s £10 billion less than the Budget only a month before the end of the fiscal year.
It the highest budget deficit of any country in the European Union with the exception of Ireland.
And I can tell the House that, based on the OBR’s figures, that £10 billion advantage we start with decreased to only £3 billion by the end of the Parliament.
The OBR is forecasting that it will be £155 billion this year.
The reason for that is that the cyclically adjusted current balance - commonly known as the structural deficit - is forecast to be higher in every single year than what this House was told in March.
This is the most important figure in this report, because the structural deficit is the borrowing that remains even when growth in the economy returns.
And it is the structural deficit that is a key determinant of whether the public finances are sustainable.
This year the structural deficit is forecast to reach 5.2 per cent of GDP, that’s £9 billion higher than we were told in March.
Next year, the structural deficit will be £12 billion higher than we were told.
Turning to debt, the OBR’s forecast sees it rising as a share of GDP throughout the Parliament.
And the interest on that debt, which we as taxpayers have to pay, also grows every year.
Let me be the first Chancellor in modern history to give you those numbers.
The OBR forecast is that this is what Britain will have to pay for its debts:
£42 billion this year, then £46 billion next year, then £54 billion, then £60 billion reaching £67 billion in 2014-15.
More than a quarter of a trillion pounds coming from the top pocket of the taxpayer over the course of this Parliament simply to service the debts left by the previous Government.
Mr Speaker, the figures produced by the OBR give us a new insight into the plans we inherited as a Government.
It shows that, given the OBR’s assumptions, the previous Government would have had to find £44 billion of spending cuts in departmental budgets, in order to deliver their spending plans.
I can confirm, Mr Speaker, that I have found no evidence at the Treasury for how even a single pound of these £44 billion of spending cuts were to be achieved.
There are two other very important consideration that relate to these forecasts, and which understate the situation we inherited.
First, these are central forecasts with a fan chart around them to represent the great uncertainty that exists, rather than a Treasury forecasts based on an arbitrary reduction in the trend level of output.
Second, these projections have been based on recent markets interest rates, which are about a third of a percentage point lower in Britain than at the time of the election.
And as is widely acknowledged, this partly reflects investors’ confidence that the new coalition Government will take action to deal with the deficit.
As a result, as Sir Alan points out in his report,
in present conditions the likely result is that these economic forecasts are biased upwards.
This is absolutely crucial to understanding today’s figures, because if we had the fiscal path set out by the previous Government it “would lead to higher interest rates and so lower economic activity” than forecast in the OBR report.
Mr Speaker, let me conclude with this.
The independent report published today confirms that this coalition Government had inherited from its predecessor:
- one of the largest deficits in the world
- forecasts for growth lower than the country was told at the time of the election
- a larger structural deficit than previously admitted
- a debt interest bill larger than the schools budget.
It is indeed worse than we thought.
And the public would have known none of this if we had not set up the Office for Budget Responsibility.
Next week I will return to the House to explain what we will do about it.
In the meantime, I commend this statement to the House.