Chair of Office for Budget Responsibility says results would be deflation, soaring unemployment and rise in state debt
It could be as bad as the recession caused by the credit crunch and there would be a possibility that “you go down and you never quite get back up to where you started”, he said.
Chote – who as head of the independent OBR is Britain’s economic forecaster-in-chief – delivered his warning in a wideranging interview with the Guardian, in which he also said there was no evidence to show that cutting the 50p top rate of tax would promote growth, that current spending on public sector pensions was sustainable and that the rules preventing the OBR from costing opposition policies should eventually be lifted.
The OBR predicted that the economy would grow by just 0.8% in 2012 when it published its last forecast, at the time of the budget, but Chote said that if the eurozone crisis resulted in Greece leaving the euro, the outcome could be very much worse.
“The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that that has consequences both for hitting economic activity in the economy, but also its underlying potential,” he said.
“And it’s the latter which has particular difficulties for the fiscal position, because it means not just that the economy weakens and then strengthens again – ie, it goes into a hole and comes out – but that you go down and you never quite get back up to where you started.”
Chote said there were so many uncertainties around what might happen with Greece and the eurozone that trying to produce firm predictions was not “particularly helpful”. But the OBR has tried to quantify the impact of a disorderly sovereign debt restructuring in the eurozone on Britain and the figures make grim reading.
Britain would be plunged into recession for two years, according to the OBR analysis, published in its most recent economic and fiscal outlook report. There would also be deflation, and by 2013-14 unemployment would reach almost 11%, with debt subsequently reaching more than 90% of GDP.
Chote admitted these projections were of limited value because the eurozone crisis could develop in so many different ways.
“For example, one issue would be do difficulties in the eurozone make it cheaper or more expensive for the UK government to borrow,” he said. “If it makes investors more nervous about risk in general, it might make it more expensive. If they see the UK as more of a safe haven, it might make it less expensive.”
Although the chancellor, George Osborne, has presented his controversial decision to cut the top rate of tax for those earning more than £150,000 from 50p to 45p as one of the government measures that will promote growth, Chote cast doubt on this claim.
Osborne said in his budget speech that cutting the 50p rate would improve Britain’s competitiveness. But Chote said the OBR’s analysis was that there was no evidence to show that the measure would have a positive effect of that kind.
“We didn’t feel that there was a strong enough evidence base to say our long-term or medium-term view of the economy is now more optimistic than it was beforehand as a result of that measure,” he said.
He also challenged another government nostrum by saying the OBR did not accept government claims that public sector pensions as currently paid were unsustainable.
Although the public finances as a whole would come under pressure in years to come, the current public sector pension regime was “not where the problem is coming from”, he said. That was because OBR figures show spending on public sector pensions – even without reform – falling as a proportion of GDP.
Chote also said that eventually it would be a good idea for the OBR to be allowed to cost opposition policies. Currently the OBR is not allowed to do this, but the government is committed to reviewing the operation of the OBR in 2015 and Chote said this would be a good point to change the rules.
He also suggested that the current arrangements, which will allow Osborne to go into the election saying his plans have been approved by the OBR while the shadow chancellor, Ed Balls, would not be able to make the same claim, were potentially unfair.