Watchdog contradicts Cameron on impact of austerity on growth

What David Cameron said about the OBR's position on the deficit, austerity and growth

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David Cameron has become involved in a dispute with the Office for Budget Responsibility about the impact of austerity measures on economic growth.

In a speech on the economy on Thursday, the prime minister said the independent watchdog had made it "absolutely clear" that spending cuts and tax rises were not responsible for the weak economy.

But the OBR said it had been arguing for years that this was an issue.

Labour said it was an "embarrassing rebuke" for the prime minister.

The BBC's political correspondent Chris Mason said the comments were difficult for Mr Cameron because they concerned the coalition's central economic message and came from an organisation which it had set up in 2010 to provide independent growth and borrowing forecasts.

'Widely held assumption'

Mr Cameron quoted the OBR in a major speech on the economy, in which he rejected calls for increased borrowing, insisting getting on top of the deficit was the "first essential step" for growth.

Start Quote

We believe that fiscal consolidation measures have reduced economic growth over the past couple of years”

End Quote Robert Chote OBR chairman

He said the OBR had made it clear that growth had been depressed by the legacy of the 2008 financial crisis, instability in the eurozone and a sharp rise in oil prices between 2010 and 2011.

The watchdog, he added, was "absolutely clear that the deficit reduction plan is not responsible, in fact, quite the opposite".

But the OBR's chairman, Robert Chote, has written to the prime minister to take issue with his comments.

"For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term," he wrote.

"To summarise, we believe that fiscal consolidation measures have reduced economic growth over the past couple of years."

But the OBR also said that it believed other factors, such as inflation, the weak global economy and the financial crisis, were "more likely explanations" for the fact that growth has been weaker than had been forecast at the end of 2010.

'Misleading'

A Downing Street spokesman said the OBR had pinpointed "external inflation shocks, the eurozone and financial sector difficulties as the reasons why their forecasts have come in lower than expected".

Ed Balls: "To see a prime minister play fast and loose with the facts is just unacceptable"

"That is precisely the point the prime minister was underlining," he added.

Labour's shadow chancellor Ed Balls said there was a debate to be had about the relative impact austerity had had on growth but David Cameron "must be living on another planet if he thinks spending cuts and tax rises have had no impact at all".

"This is another embarrassing rebuke for the prime minister, just 24 hours after his panicky and defensive speech on the economy," he added.

"Deep spending cuts and tax rises have reduced economic growth, as the OBR says, and so it was deeply misleading for David Cameron to claim otherwise."

'Face value'

But Lib Dem President Tim Farron, who is not a member of the government, said it was wrong for the prime minister to "overstate what the OBR is saying for political reasons".

"We have to accept what they say. We might not always agree with it, but the figures which the OBR put out have to be taken at face value," he told the BBC News Channel.

The government has been under increasing pressure over its economic strategy, after the economy contracted in the final three months of 2012 and the UK was stripped of its AAA credit rating last month.

Conservative MPs have called for tax cuts in the Budget later this month, while Lib Dem Business Secretary Vince Cable has urged ministers to relax the stance on borrowing to allow more targeted spending on capital projects such as construction and transport.

The government says the deficit has been reduced by a quarter since it came to power but Labour says the coalition's strategy has failed and a lack of growth over the last year has forced borrowing up again.

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