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Dare to Be Different

The May General Election debate surrounded the way the different parties might approach the public finances. There has always been disagreement on this topic but it was particularly fierce this time.

The May General Election debate surrounded the way the different parties might approach the public finances. There has always been disagreement on this topic but it was particularly fierce this time.

The Conservatives pushed hard that if people were not willing to sign up to their fiscal plans they were either deficit deniers (Labour mainly) and likely to lead us to bankruptcy and ruin or had secret plans to put up taxes (the Lib Dems). A crucial difference in the election was that for the first time the debate went on in the shadow of independent forecasts of what the world was going to look like, carried out by the Office for Budget Responsibility (OBR) - a body created in 2010. Its statements were held up as the true text, around which the debate must pivot.

The OBR said that based on the Government's plans, the deficit would be in surplus by 2018-19 and that the debt to GDP ratio would start to fall. This required hefty cuts to spending, leading the OBR to describe the 2014 Autumn Statement as taking spending back to its lowest level in 80 years.

In addition, the March Budget set out a very strange time path for public spending, diving right down for a couple of years and then recovering towards the end of the period in what the OBR's Robert Chote pointedly called a 'roller coaster' ride.

All political debate revolved around these forecasts. Unlike previous 'pre-OBR' political spats at elections, where very few took future government figures at face value, this time we had an all-powerful monopolist in charge.

Fast forward eight months. Now, in George Osborne's November Spending Review, things looked a lot different. We have a much smoother path for spending, and a less extreme cut overall - although the Institute for Fiscal Studies' Paul Johnson reminds us that the settlement 'is still one of the tightest in post-war history'.

Little of this is to do with extra optimism about the pace of economic growth per se.

The infamous £27bn found by the OBR down the back of a very spacious sofa is to some extent about lower interest on debt and some new estimates of how much VAT and National Insurance we get for a certain amount of growth.

In particular, the Government has now moved off from what it was saying pre-election. And from nowhere it has brought in a number of new taxes, including substantial ones on employers - to fund apprentices - and on second homeowners through new stamp duty rules.

This highlights a problem when what the OBR says is taken too literally in political debate. Sometimes it will get its macroeconomic forecasts of GDP, inflation and so on wrong. These days, there are few good independent, non-government, non-City rivals to it apart from the under-funded National Institute of Economic and Social Research.

But more importantly, the OBR cannot say what it really thinks will happen to government spending or to the rates spread and therefore some of the main determinants of revenues from taxation.

On these, it takes the figures straight from whatever the Government says, even if it thinks it is highly unlikely to happen or is just a political manoeuvre. It has even more problems making long-term forecasts when there has not been a detailed Spending Review - as was the case in March 2015.

As the OBR said then, beyond 2016-17 figures are based only on 'the Government's policy assumptions'.

The trouble is that these numbers are then pasted into everything else the OBR says, including the areas where it does act independently and then takes on an almost religious significance.

How can we get around this? More transparency and clarity as to what the Government is doing would help and Julian McCrae of the Institute of Government has come up with a list of minor changes.

More radically, perhaps the OBR should try to forecast for itself what might happen to spending and tax.

In the run-up to the election, experts like The King's Fund poured doubt over the health figures, while others queried the exact profile of spending as well as the likely severity of the cuts and the idea that there would be virtually no tax increases.

If better resourced, the OBR could give us both its best guess as to what will happen as well as the 'official' numbers. And maybe only the non-government determined figures should appear in the main tables.

However we go forward, the OBR -while a great step forward in terms of accountability and transparency - is now in danger of distorting political debate in ways that may not be its fault but which are not helpful.

One way or another, reform is needed before the next election.

This blog was originally published by The MJ