Economical with the truth? Independent financial watchdog the OBR slaps down David Cameron over claims that high taxes and cuts don't hurt growth

David Cameron was slapped down by his own independent fiscal watchdog yesterday, provoking a politically charged row over the economic impact of the Coalition’s austerity programme.

Robert Chote, the chairman of the Office for Budget Responsibility, wrote to Downing Street to protest that Mr Cameron had misrepresented its view on the reasons for the economy’s feeble performance in recent years.

The Treasury was rocked by the dramatic intervention, which follows several rebukes from the UK Statistics Authority for the Government’s handling and presentation of official figures on the economy and spending.

Last night Labour accused Mr Cameron of playing “fast and loose with the facts”.

Mr Chote’s letter came after a speech two days ago in which the Prime Minister blamed the economy’s anaemic state on factors such as high oil prices and the crisis in the Eurozone.

Mr Cameron denied that Coalition policies were to blame, naming the OBR as support his argument. He said the forecaster was “absolutely clear” that the spending cuts and tax rises pushed through since it came to power in May 2010 were not responsible for Britain slipping into its first double-dip recession since the 1970s.

Mr Cameron said: “They are absolutely clear that the deficit reduction plan is not responsible – in fact, quite the opposite.”

But Mr Chote, in unprecedentedly critical comments from the independent watchdog, objected that the OBR had always been very clear austerity measures would serve as a drag on growth.

“For the avoidance of doubt” he wrote “it is important to point out that every forecast published by the OBR since June 2010 has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term”.

Mr Chote added: “We believe that fiscal consolidation measures have reduced economic growth over the past couple of years.”

Ed Balls, the shadow Chancellor, described the comments as an “embarrassing rebuke”.

He said: “David Cameron’s attempts to defend his failing economic policy are getting more and more desperate but as Prime Minister he has an obligation to be straight with people and not play fast and loose with the facts.”

A Downing Street spokesman responded: “The OBR has today again highlighted external inflation shocks, the eurozone and financial sector difficulties as the reasons why their forecasts have come in lower than expected. That is precisely the point the Prime Minister was underlining.”

Jonathan Portes, the director of the National Institute of Economic and Social Research, said the OBR was right to clarify its position. “I’m very pleased to see it” he said. “I’m sure it was not intentionally misleading [from Mr Cameron], but anyone who was not familiar with the debate would have got the wrong impression.”

Sir Alan Budd, the first OBR chairman, told BBC Radio 4's PM programme: “It could be regarded as something of a rebuke.

“I think he is correcting a statement the Prime Minister has made and the important thing is the Prime Minister is attributing a view to the OBR which it doesn't hold and I think when that happens it is absolutely right to write to the Prime Minister and point out he has made an error.”

The UK’s GDP today is around 6 per cent smaller than the OBR forecast at the time of George Osborne’s first Budget in June 2010, when the Chancellor chose to accelerate Labour’s deficit reduction programme.

Some economists have argued the OBR underestimated the negative impact of the cuts, particularly its cuts to infrastructure spending, which has been slashed by 40 per cent over the past two years. Senior economists from the International Monetary Fund argue that many forecasters – including itself – misjudged the size of these so-called “fiscal multipliers” three years ago.

In an internal analysis last year looking at why it got its forecasts so wrong, the OBR concluded that turmoil in the eurozone and an unexpected global spike in energy prices were more likely to be responsible for the forecast error than the possibility that it had miscalculated the size of the UK’s fiscal multipliers. But Mr Chote conceded yesterday it was “clearly possible” that the fiscal consolidation had exerted a greater drag on the economy than it first though, although he said the OBR was “not yet persuaded” on that front.

Mr Chote took up the reins at the OBR in October 2011 Before that he was the director of the respected think tank the Institute for Fiscal Studies. He began his career as an economics reporter on The Independent.