A few weeks ago I looked at a claim on the False Economy website made by economist Duncan Weldon. He argued that the fiscal adjustment was only cutting public sector debt at the expense of dramatically increasing private debt. That claim was a cause of huge excitement for those opposing spending cuts with commentators like Sunny Hundal and the Observer newspaper jumping on it. When I looked at the sources though it was very clear that the figure cited just wasn’t remotely credible. Now the Office for Budget Responsibility have released a new document that goes some way towards clarifying the issue.
Here is the key paragraph in the original False Economy post, the main empirical claim:
“Here we can clearly see the impact of Osborne’s changes over the next three years: public debt down by £43bn BUT private household debt up by £245bn – five times as much.”
That’s strong stuff. How has it stood up to scrutiny?
As I pointed out in my earlier post, that claim is false because it attributes to “Osborne’s changes” all of the difference between two forecasts and thereby misses the many other reasons why the level of personal debt the OBR expects has changed. It “essentially assumes that the entire world has been held constant but for George Osborne’s decisions since last Spring.” Almost certainly the fiscal adjustment will, for better and for worse, increase borrowing a bit but there is no evidence that £245 billion figure is anything like accurate.
In their new note, the OBR describe the different sources of that £245 billion increase in the debt forecast.
The fiscal adjustment does play a bit of a role in increasing household debt. You can see that in Table A.1 in their document which shows the change between the pre- and post- measures June 2010 forecast. That can reasonably be ascribed to “Osborne’s changes” but it is only £17 billion. It isn’t anything like the £245 billion that Duncan Weldon claimed and is less than 1 per cent of the £2.1 trillion total household debt that the OBR are now forecasting for household debt in 2015.
There is then a much bigger change in projected household debt between the post-Budget and November 2010 forecasts. This is the only time when the projection changes by hundreds of billions.
Between the two forecasts, the OBR changed how the household balance sheet was modelled and adjusted their forecast for net property income. “Taken together” those two methodological changes “accounted for the majority of the change in the household debt projection”. There is also a smaller increase as a result of the shift at the Spending Review from cuts in Departmental Expenditure Limits (public services like schools and hospitals) to Annually Managed Expenditure (transfers like welfare spending and pensions). You can see those changes in how the OBR models household debt dominate the change in their forecast from Table A.2 in their document. It shows that the reduction in benefits and transfers adding to personal debt was mostly offset by higher earnings and by far the biggest factor, increasing the household debt projection by £143 billion, was a change in the property income forecast.
There is then a final change in the projections for the March 2011 Budget forecast. That “mainly reflects the effect of higher-than-expected inflation on households’ real incomes.” There is also a revision to pension contributions data, back to 2009, which reduced expected household debt. Table A.3 shows the changes.
Overall then, the evidence in the new report suggests that only a small fraction of the £245 billion increase in the debt forecast that he originally noted is the result of the fiscal adjustment. And that’s even before we start looking at the change in the public sector net debt he uses as a comparator, which is also heavily affected by inflation as Mike Denham discussed in the TPA briefing after the last budget.
It all makes a post to Twitter on Thursday from Duncan Weldon a little hard to understand. Perhaps he was away over the bank holiday weekend, but I await the substantiation of this claim with keen interest:
The OBR are far from infallible. They are still using the Treasury model with all its problems including an insufficient appreciation of the impact policy changes can have on the supply side of the economy. And the scale of the revisions to the household debt figure suggest a large margin of error in their forecast.
The headline claim on False Economy was based on nothing but the change in those forecasts though, and ascribed that change entirely to “Osborne’s changes”. That is outright wrong and it was obviously dodgy even before this new clarification from the OBR. It is very worrying that so many politicians, reporters and bloggers jumped on the bandwagon that Duncan Weldon had started rolling before checking the facts. While the Government’s fiscal policy isn’t perfect, it is important that necessary spending cuts aren’t avoided on the basis of mistaken empirical claims.