Newsletter #30: The OBR and silly deputies

PLUS: Trump’s persecution of Europa

Good morning,

This week, we have an attempt at a mini budget, Vance’s attempts to conquer Europe, and Rayner’s silly safari.

This newsletter’s agenda: The OBR is still not taking immigration seriously (free); The Persecution of Europa (paid); Angela Rayner wants to go on safari (paid).

The OBR is still is not taking immigration seriously

There are many criticisms you can make of the OBR and the process that surrounds it, but the central cause of Britain’s fiscal permacrisis remains the same: stumbling productivity growth leading to economic stagnation colliding with demands for ever-rising public expenditure. Productivity growth has never recovered from the 2008/9 Financial Crisis, got worse during Covid, and has struggled to get going again since then. In its analysis of the data since Rachel Reeves’ first budget, the OBR declares that trend productivity has got worse, not better: its expectation is that the economy will be 1% smaller than expected in 2029/30 just because of slower productivity growth.

The problem is that British politicians and officials refuse to confront many of the most glaring reasons for Britain’s stagnant productivity, and the OBR is central in dodging these questions. The OBR’s forecasts spring from a macroeconomic model which — like any model — carries a range of assumptions about various factors and their role in economic growth. The fact that their model oversimplifies reality isn’t a failing: that’s what models do. But the problem is that some of the OBR's assumptions are laughable given Britain’s recent economic experience: inevitably, the most telling example is immigration.

Cast your mind back just three years, to a time before Rachel Reeves, before Jeremy Hunt, and — fatefully — before Kwasi Kwarteng. The OBR’s ‘Economic and Fiscal Outlook’ in March 2022 forecast that growth would be lower than their pre-pandemic projections and even their forecast of the previous October, because immigration had been hit hard:

...we now assume that none of the 170,000 shortfall in net migration during the pandemic is made up over the forecast period [to 2026-27], whereas in October we assumed that half (85,000) of the shortfall we made up. This change has been driven by emerging evidence that most of the shortfall in net migration in 2020 was due to a fall in immigration rather than an increase in emigration, and is therefore less likely to be recovered. This is because it seems less likely that foregone inward migrants will choose to come to the UK at a later date.

They assumed that the population would grow by 0.2% each year for the next five years, while the economy would grow an extra 6.3% in those three years as it bounced back from the Covid pandemic. The reasoning here was straightforward: in any economic model, labour supply is one of the most important factors defining the path of future production, and immigration represents a growing labour supply. Because immigration seemed — to the OBR — to have fallen permanently after Covid, they assumed growth would be lower.

It turns out they needn’t have worried. Thanks to Boris Johnson and Priti Patel, immigration was exploding and population was to grow by around 1% a year for the next few years, with the ONS expecting similar this year in its latest projection. The consequence is that the population has likely grown by 3 million when the OBR’s 2022 forecast was assuming just a fraction of that. That level of population growth was a surprise ‘to the upside’ you might say. So surely the OBR’s gloomy forecasts of three years ago were smashed?

Well, clearly not. Population growth has been several times faster than anticipated and yet the economy has grown by just 3.6% in the OBR's spreadsheets, not the 6.3% expected. It turns out the GDP line does not always ‘go up’ in response to ever more immigration. With a faster-growing population and a slower-growing economy, it doesn’t take a maths genius to work out that living standards and productivity have gotten worse: three years ago, GDP per capita was expected to have risen 5.5% by now, but the OBR reckon it's been just 0.3%. That's 0.3% over three years, so if you’re feeling like Britain isn’t going anywhere, that’s because it isn’t.

There are pretty solid reasons why the connection between immigration and economic growth are breaking down, covered in Pimlico Journal over recent years. In an economy where capital investment is highly constrained — our planning system makes building illegal by default — and energy costs are now among the highest in the developed economy world, opening access to abundant cheap labour causes low-value economic activity to grow while the rests of the economy is left to rot. An ‘interesting’ feature of Britain's economic degeneration through immigration is that a high minimum wage and employment regulation makes it hard to expand in many industries except by getting the most pliable workers or by expanding consumption possibilities — hence Britain is now a country where nothing seems to work and everything is expensive, except the delivery of food and drink to your doorstep.

You would think that this episode would have been occasion for the OBR to rethink its assumptions about how well immigration can be modelled simply as ‘labour supply’, as if a Nigerian care worker arriving to work on minimum wage with a husband, grandmother and children in tow is perhaps not quite the same as the representative British employee. You would think that the OBR would start to model in the differences in labour quality involved; for instance, in the fact that even (for example) immigrants with degrees tend to see significant ‘downgrades’ in their employment and earnings in Britain.

You would, however, be wrong. In its new forecast, the OBR see migration slowing down given recent changes in policy, and assume that this will be bad for growth, as if the last three years didn’t see precisely the opposite effect:

A slowdown in net migration from recent, exceptionally high, levels drags down growth in aggregate potential output in 2025. The rise in growth in later years is due mainly to a projected recovery in total factor productivity (TFP) growth, which more than offsets a further drop in the growth of the labour supply.

This clinging to a disproven theory about immigration and economic growth is all the more depressing because of the strange game of Britain’s budgetary politics, as seen time and time again over the last decade and a half. Every six months, the OBR set the forecast and the Chancellor seeks to ‘play’ the forecast by pulling the least costly levers to flatter the numbers before they have to tweak tax and spend decisions. Increasing immigration has been favourite among these levers because it ‘costs’ nothing up-front fiscally, and yet in the model causes a boost to growth and therefore to tax revenues. This was doubtless part of the thinking behind the Boriswave.

The one upside of the Boriswave is that it has been a robust experiment of the hypothesis promoted by many across the centre of politics, that immigration is ‘the lifeblood of economic growth’. The disaster of the British economy over the past few years proves beyond reasonable doubt that it isn’t, and has shown that if expanded enough, immigration starts to damage the economy more than it adds to growth. It’s about time that the OBR, our trusted technocrats, learned the lesson of that experiment and made sure to share it with our politicians in the forecasts they present.

—Thdhmo Contributor, Pimlico Journal

The Persecution of Europa

During the First Trump Administration, the President made a concerted effort to have the nations of Europe increase their defence spending, meeting their 2% of GDP commitments as members of NATO. Since the end of the Cold War, Europe has essentially given up on maintaining functional militaries in the knowledge that ours is a relatively safe continent, and that the United States was willing to cover the costs of European defence in return for broad alignment in foreign relations. European leaders were happy with this arrangement because they had few real geopolitical enemies, and their voters wanted money spent on enormous welfare states.