Head of the OBR, Robert Chote was questioned on the Autumn Statement by the Treasury Select Committee yesterday. The full transcript is here, but I don’t recommend it unless you are having trouble sleeping. I blogged last week about the OBR’s forecasts and what they imply about household debt, but this didn’t come up much at all yesterday. The only point at which it did was when Conservative MP Steve Baker asked:
“Can I just tie some of this into what we heard yesterday from some of the economists from the City who came in? I had an exchange with them about this notion that savings are being run down and that consumer credit is coming forward, and we agreed that this is demand being brought forward. So if demand is being brought forward today, through the rundown of savings and the taking up of consumer credit, wouldn’t we expect a reduction of demand in the future and wouldn’t this lead us into a further boom/bust cycle, even within the context of how you think about demand?”
So Baker is saying consumers are spending money today, not because of rising incomes but because they are spending their savings or borrowing for consumption. He asks how long this can continue. Here is Robert Chote’s reply:
“Certainly if you look at the relatively robust pace of growth over recent quarters, that has been reflected particularly in terms of the contribution from the consumer of people running down savings rather than having stronger income growth. We have assumed that it is not plausible, and I think if you look at the last year the real consumption growth has been running further ahead of real wage growth than in almost any other year over the last 15 or 20 or so. Therefore, in our forecast, the main reason we expect the quarterly pace of growth to slow into next year is that you see consumer spending moving more into line with income growth and being less driven by the sort of decline in saving you are talking about.”
So Chote is saying the potential for the trend of consumer spending being supported by running down savings and consumer debt continuing is not plausible, but that they expect wages to pick up which will ensure spending growth continues (albeit at a slower rate). The thing is though, as I outlined in the two posts linked to above, in order for the deficit to be eliminated over the next 4 or five years, that’s exactly what the OBR are forecasting needs to happen. Household debt needs to rise and consumers need to spend more than income on an unprecedented scale. So either Chote doesn’t understand the implications of his own forecasts, or it’s his way of saying they are just ‘not plausible’. It’s a shame none of the MPs present pushed him more on this.