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A tricky situation for Robert Chote, head of the Office for Budget Responsibility

You have to feel the Office for Budget Responsibility’s pain.

By next Tuesday, the OBR has to come up with forecasts of what will happen to the UK economy and the government finances over the next five years.

The Act of Parliament that created the OBR said that its forecasts had to be based on government policies and “may not consider what the effect of any alternative policies would be”.

And here you see the problem facing the OBR in predicting what would happen to the economy and the public finances over the next five years.

Government policy is to trigger Article 50 in March 2017, meaning the UK will leave the European Union in March 2019.

The OBR is going to have to predict what will happen to the economy in 2019-20 and 2020-21 without knowing what sort of deal will be done with the EU, so it won’t know whether the UK will be part of the single market or the customs union.

The UK government does not officially have a policy on what outcome it would like or what the basis will be for its negotiations, beyond the ambition to get the best possible deal for the UK.

The OBR’s charter says: “If necessary, where a long-term policy has not yet been set by the government, the OBR will set out the assumptions it makes in its projections regarding policy transparently.”

Keeping the rebate

So, we know the OBR will show its workings, which is good, but how does it choose its assumptions?

There are endless arguments about what would be the best possible deal for the UK.

There are those who argue that we would be better off outside the single market or that we should try to stay within the customs union, but I have yet to see anyone argue that it does not make any difference.

So when the chairman of the OBR, Robert Chote, went to the Treasury and asked what government policy was, and hence on what basis he should prepare his forecasts, I wonder what he was told.

If he was given the official line, then we can expect the OBR forecast to be based on the government’s view of best possible deal, which will presumably involve remaining part of the single market while ending freedom of movement, stopping contributing to the EU Budget but still getting a rebate.

And that’s not going to be a very realistic forecast.

The first three years of the forecast shouldn’t be too difficult – we already have the Bank of England’s forecasts for this period.

But the final two years could be controversial. Some commentators, such as Paul Johnson who heads up the Institute for Fiscal Studies, suggested that there might be two forecasts for the last two years, one based on staying in the single market and one based on leaving it, but that may fall foul of the rules against considering alternative policies.

Could government disagree?

Instead, there could be a single forecast that is the average of those two figures, but then the forecast would be unlikely to be accurate whichever way the negotiations went.

So either the OBR’s forecasts will give an insight into the government’s aspirations for the coming negotiations that we have not yet seen, or the independent forecaster will have to come up with a forecast based on not knowing what government policy is, which would be odd.

But there’s another potential problem. Some members of the Cabinet, including the foreign secretary, have disputed the conclusion of the vast majority of economists (and the Treasury) that leaving the single market would be worse for the economy than staying in it.

The charter of the OBR allows the government to disagree with the OBR’s forecast as long as it explains why it has done so in Parliament.

But that would be an extraordinary situation.

So while there may be interesting details of the government’s fiscal policy announced in the Autumn Statement, the most interesting part will be contained in what the OBR does or doesn’t tell us about the government’s plans for our future relationship with the EU.

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  • UK economy