At last week’s Autumn Statement, George Osborne got off lightly. Everyone knew that the story would hang on the calculations of the experts at the independent Office for Budget Responsibility. In the event, the news about further spending cuts was grim, but it would have been much worse had the Government’s fiscal watchdog not shifted the goalposts.
The OBR’s decision to junk a crucial model deserves some scrutiny. But, like Dorothy encountering the Wizard of Oz in the final scenes of the film, the much-vaunted independence of the OBR implores us to “pay no attention to the men behind the curtain”. Maybe it is time we did.
The centrepiece of the Chancellor’s claim to economic credibility is to eliminate the structural deficit — the part that would remain when the economy gets back to its potential — within five years. This is all the more crucial since it has long been clear that his other target — to have national debt falling in 2015-16 — is set to be missed.
But at the Autumn Statement, the OBR declared its usual methods for assessing the size of today’s structural deficit unsound. That arcane technicality has huge social and political consequences. Had it stuck to its old approach, more cuts would have been necessary for the Chancellor to get the public finances to where he wants them to be.
But if the last model was ropey, how do we know the new one isn’t, too? After all, other models suggest that the Chancellor is still cutting too much. Plugging in the IMF’s assessment, for example, implies that the Chancellor is planning to cut £30 billion more from spending than is needed to balance the books. That is a difference equivalent to about six pence off the basic rate of income tax, or the Chancellor cancelling all cuts to public services planned for the next parliament. Some other forecasters think the planned over-cutting could be much bigger still. On the judgment about this slippery concept, therefore, hang decisions about tax and spending that dwarf the policy differences between the coalition and Opposition. All of this begs a number of questions. With the stakes so high, at what point does the OBR decide to pick an entirely different approach in this way? On what grounds? And will it do it again next time?
I agree with defenders of the OBR who argue that these changes of judgment are the result of sound, analytical reasoning. And if you are going to have economic high priests handing down prognostications on tablets of stone, I can think of no better candidate for the economic papacy than the excellent OBR chairman Robert Chote. Nor would the OBR cardinals wish for their ex-cathedra judgments to be considered infallible.
But all that is beside the point. Whatever the intention, the watchdog’s judgments invariably attain the status of fact in the public and political realm. And the OBR’s legitimacy was never based in the idea of appointing an unimpeachable philosopher king but on the principle of transparency, as Mr Chote himself has argued. Last week’s changes have damaged that principle. The loss of consistency and the sudden wholesale re-evaluation of its approach makes the OBR’s processes opaque and unpredictable for outsiders.
That is unfortunate at a time when some have raised questions about other judgments that the watchdog has made in the Government’s favour. The OBR’s decision to count the 4G auction proceeds as this year’s revenue, thus ensuring that the deficit falls this year, and changes to its treatment of departmental underspends that flatter the figures have raised eyebrows among experts.
Back in 2010, the case for the OBR was that independent economic experts would yield better judgments about crucial things such as the structural deficit than politicians. What that argument overlooked was that politicians are at least accountable for their judgments at the ballot box. Gordon Brown was certainly perceived to have been guilty of sautéing the books, and he paid a heavy price for it in terms of personal credibility. George Osborne, on the other hand, can claim to have washed his hands of such decisions. As a result, the phrase “the OBR says” is too often used to close down debate about the appropriate economic policy for the UK.
The OBR’s revisions highlight the fact that, in these uncertain economic times, the experts are guessing just as much as anyone else. And, since the judgments they are making are unavoidably political, we need to ask whether we want a more democratically accountable hand on the tiller.
There is a role for independent expertise in guiding fiscal policy, but, in trying to depoliticise judgments that are inherently uncertain, perhaps we haven’t got the model quite right.
The Great Oz has spoken, but maybe it is time to take a look behind the curtain and start a more open debate.