The OBR’s Richard Hughes: ‘With a shock like Covid, you get information from wherever you can’ | Office for Budget Responsibility
Richard Hughes has one of the best views in London. From his open-plan office on the 14th floor of the Ministry of Justice building, he can see Buckingham Palace in one direction and parliament in the other.
As well as compiling the government’s economic and financial forecasts, Hughes has become something of an amateur meteorologist. “You can look out of the window and say, ‘It is going to rain in 15 minutes’ time.’”
A pandemic has meant Hughes’s day job has been a lot trickier than predicting the next shower in central London. As chair of the Office for Budget Responsibility, Hughes and his staff of 45 have had to delve into new disciplines to understand what is happening to the economy.
“We spend a lot of time talking to public health experts, to epidemiologists, to [England’s chief medical officer] Chris Whitty and to Sage advisers. We start by saying: what’s the outlook for the virus? How effective are the vaccines? What are the prospects of having to reimpose Covid restrictions? Because all of that dictates the near-term economic outlook.”
The point is emphasised by a glance around the OBR office, where there are only three other members of staff at their desks. Everybody else, thanks to the Omicron variant, is working from home.
Hughes is 46 and went to school in Pittsburgh after his parents, both doctors, moved to a practice in the US. “In the postwar years, steel was in decline where I was growing up, so it was very much a city
Education Attended Shady Side Academy in Pittsburgh, Pennsylvania, a private school that paved the way for him to study political science and government at Harvard before doing a master’s in development economics and international development at Oxford University.
Pay He gets £150,000 a year as the OBR’s chair, and says the megabucks salaries offered by the City have never had much appeal: “For me, the questions facing policymakers are more interesting than those in the private sector.”
Last holiday Venice
Best advice he’s been given “Hope for the best but plan for the worst.”
Biggest career mistake Nothing major springs to mind, he says. “Fortunately, I have made it this far without making too many.”
Word he overuses “I have used ‘unprecedented’ an unprecedented number of times.”
How he relaxes Reading and watching cricket.
where you were watching it struggling with the trials and tribulations of the post-industrial period.”
He joined the Treasury in 2000, when Gordon Brown was in his pomp as chancellor, then after a brief spell advising the French finance ministry in 2007, spent eight years at the International Monetary Fund, which was in the throes of the global financial crisis when he arrived in 2008. Hughes worked on programmes for Iceland, Greece, Ireland, Portugal, Libya and South Sudan, but recalls the trickiest technical challenge being Zimbabwe during its period of hyperinflation.
“Hyperinflation makes all your analytical tools almost impossible to use. When we arrived there in 2009, our biggest problem was trying to figure out what GDP was in any kind of hard currency, because the exchange rate between the Zimbabwe dollar and the US dollar was somewhere in the quadrillions.”
The IMF team ended up constructing its own version of the “Big Mac index”, a way of comparing how much it costs to buy an internationally uniform product in any local currency. “We knew that civil servants were paid Z$100tn as their monthly salary and we asked them what could you buy with it and they said that basically it was enough to buy lunch on that day … Z$100tn was worth around US$2.50.”
There were, he says, parallels with the pandemic. “When you are hit with an enormous shock, you gather information from wherever you can get it.”
The OBR was set up by George Osborne when he became chancellor following the 2010 election. Designed to keep government economic forecasting honest, it was consistently too optimistic about the UK economy in its early years, but those mistakes were nothing compared with its forecast before the March 2020 budget. Published before the full implications of Covid were known, it assumed the economy would grow by about 1% last year. In the end, it contracted by almost 10%.
“We have just had our biggest UK forecasting error in history in 2020,” says Hughes, who took over at the OBR in October last year, following a second spell at the Treasury that started on the day after the 2016 Brexit vote and a year at the Resolution Foundation thinktank. All forecasters make mistakes, he adds, but what matters is what they learn from the experience. Noting that the UK seems to face a big shock every 10 years, he says: “There was a lot of uncertainty in March and April of 2020. We didn’t know if any vaccine was going to come along, we didn’t know how the economy was going to cope with the stresses and strains, we didn’t know how long the lockdown was going to last.”
The OBR, like forecasters, also underestimated how adaptable the economy would be to pandemic conditions, with the result that each lockdown has caused less economic damage than the last.
The tightening of restrictions under plan B was factored in to the latest OBR forecasts prepared for Rishi Sunak’s October budget. “What is not assumed in our forecasts is a vaccine-escaping variant. We are all waiting to see what Omicron does to hospitalisations and deaths, and whether it requires tighter public health restrictions than are assumed in plan B.”
As well as forecasting the short-term path of the economy, the OBR looks at some of the longer-term fiscal risks facing the UK, such as the potential cost of climate change and the debt interest bill from the Covid crisis. “The pandemic has helped taken these things out of the realm of science fiction and shows these risks are not the work of catastrophists and Cassandras, but that these are risks that can happen to a country like the UK.”
More in hope than in expectation, he adds: “It would be nice to have some semblance of normality to think about longer-term issues a bit more.”