One highlight of the recent King’s Speech, at least for a policy wonk like me, was hearing His Majesty talk about the importance of economic stability and the role of the Office for Budget Responsibility (OBR).
But if the latest reports are correct, the Chancellor is about to use the cover of the OBR to justify large tax rises to fill a fiscal black hole that can only now be revealed. Something has gone badly wrong here.
It may be tempting to blame the OBR itself. Just last month, Rachel Reeves told the Financial Times that “we have the OBR now”, “we know things are in a pretty bad state”, and “we don’t need an election to find that out”. So has the watchdog been asleep on the job?
The answer to that is a decisive no. In fact, Richard Hughes, the OBR chairman, has already barked his concerns about the lack of detail in the Government’s plans for public spending. The OBR has to take these plans at face value, regardless of how realistic or otherwise they may be.
Moreover, it is not the OBR’s role to crawl over every departmental budget to identify areas where spending is either underfunded or not funded at all, or where public services might be on the brink of collapse without an urgent injection of cash. This is apparently what the Treasury has just done – and identified an annual shortfall of around £20bn.
But this is still unsatisfactory. For a start, the problem here was clear for all to see. Numerous independent commentators, including the Institute for Fiscal Studies (IFS) and the Institute for Government, have flagged up the tightness of the existing spending plans. In particular, it was already obvious that the money was not there for inflation-busting increases in public sector pay. Despite this, Labour fought the election on a promise to stick to the Conservatives’ plans.
It will be interesting too to see how the Treasury arrived at its numbers. We are promised a raft of detail. But has the Treasury, under Labour management, simply asked departments how much more money they would like, rather than how much less they could manage with?
Above all, this is “abacus economics” of the worst kind. Ms Reeves is set to double down on a fiscal framework that is clearly failing.
The new Government is legislating to ensure that all significant tax and spending changes are subject to an independent assessment by the OBR. The aim is to check that any such measures are consistent with the Government’s “fiscal rules” and thus maintain discipline and the confidence of the markets.
It is reasonable to be pretty relaxed about Labour’s Budget Responsibility Bill. After all, the OBR is already tasked with reporting at least twice a year on whether the fiscal rules are being met. In practice these reports have been published alongside each Budget and Autumn Statement.
The new bill simply requires the OBR to produce an additional report if, in between these regular events, the Government proposes any other measures which are “fiscally significant”, based on the size of the package relative to national income.
However, this requirement would not apply if the measures were only intended to be temporary and introduced in response to an emergency (such as furlough scheme or the energy price guarantee). The upshot is that it is unlikely that this new rule will ever kick in.
The one exception, of course, was the permanent tax cuts included in the 2022 mini-Budget. A full OBR analysis was still promised by the end of the year, which could then take account of a review of spending. But this was wrongly sequenced and poorly communicated. The punishment dished out by the markets means no politician is likely to repeat that mistake again.
The strengthening of the oversight of the OBR is not therefore much of an additional constraint. Crucially, the Government will continue to set the “fiscal rules” against which the OBR must mark any tax and spending decisions.
What’s not to like?
So, what is not to like? Actually, quite a lot. There are three main concerns.
The first is that the current fiscal framework places too much weight on a single set of forecasts produced by a single body, which will inevitably be wrong. Again, this is not a criticism of the OBR itself. The watchdog’s forecasting record is no worse than other similar organisations. The OBR is also receptive to outside views, and open about the gaps and uncertainties in its analysis.
Instead, the problem is that the OBR’s numbers are taken as gospel by others and used mechanically to drive policy decisions. This is summed up by the spuriously accurate figures often tossed around for the amount of fiscal headroom for tax cuts and spending increases.
The second problem is that the focus on the OBR’s analysis draws attention away from the bigger issue, which is the flaws in the fiscal rules themselves. The main rule is that one particular measure of public debt has to be falling as a share of national income in the fifth year of the OBR’s forecasts.
But this is essentially arbitrary, and there are some relatively uncontroversial changes that could be made without scaring the markets. In turn, this would eliminate the need for tax increases – or cuts in spending on transport infrastructure and hospitals – that may well be counterproductive anyway.
The third problem is that the more power is delegated to non-elected technocrats, the less responsibility that politicians themselves are taking for their own decisions. There is also less scope for politicians to make judgement calls that the voters can hold them accountable for later.
All these points look set to combine when the Chancellor reveals the size of the black hole. Next up will be the inevitable tax increases to ensure that the fiscal rules are not broken and to keep the OBR on board. It does not have to be like this.
Julian Jessop (@julianhjessop) is an independent economist.
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