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What can be done about the Chancellor gaming his fiscal rules


As Chris Giles
explains here,
Chancellor Hunt is gaming his fiscal rules. He is not the first
Conservative Chancellor to do so. In particular, it is now routine
for Conservative Chancellors to announce that they are freezing fuel
duty, but they then tell the OBR that they will raise them with inflation in
every forthcoming Budget. They have repeated this fiction for the
last dozen years. The fiction that the duty will be raised in the
future, just not now, flatters future revenue projections and makes
it easier for the Chancellor to meet his fiscal rules.

This particular
problem arises because the OBR is legally obliged to produce a
forecast on the basis of what the government claims is its policy.
However there is the letter of the law, and there is politics.
Suppose the head of the OBR decided next year that it would ignore
the government and instead use past data to assume that fuel duty
would not be uprated in future, what exactly would the Chancellor do?
Fire him? It just wouldn’t happen.

I know the previous
head of the OBR thought about doing this. The current head, Richard
Hughes, would have his hand strengthened considerably if the Treasury
Select Committee stated that in future it expects the OBR to do this.
This committee has to approve senior appointments to the OBR. Whether
the Committee has the political courage to do this is another matter.
In the longer run the legislation governing the OBR should be changed
so as to allow it to base its projections on what it believes the
government will do in the future. [1]

Much the most
difficult and serious element of gaming, that I mentioned
after the budget, involves the projections for
public spending. As was clear from the last Autumn Statement, the
Chancellor’s plans involve two things that almost certainly will
not happen. The first is that we have a renewed round of public
spending cuts, in a public sector that is already cut to the bone.
The second is that the relative pay of public sector workers
continues to be reduced relative to other workers, in a situation
where public sector vacancies are at critical levels and public
sector workers are either striking or have won awards that exceed the
government’s assumptions. This bit of gaming is more difficult to
fix, yet it risks making a mockery of the whole Budget forecast.

Some might say that
fiscal rules are a fiction anyway, so who cares about this. I don’t
like the particular fiscal rules the Chancellor has chosen [2], but I
do think fiscal rules are there for a good reason. I partially disagree
with Stephen Bush
on why they are important. They are
not there to keep the markets happy, and nor are they required to
keep departmental spending in place. The purpose of fiscal rules is
to stop the Chancellor fooling voters, by for example cutting taxes
just before an election and pretending that these cuts are
sustainable. Voters deserve to know whether pre-election tax cuts or
other bits of fiscal largesse are bribes that will disappear once the
government is elected or something that is more permanent. That is
why gaming the fiscal rules matters.

If we go into why
the rules are currently being gamed, it helps to understand why it’s difficult to stop. Paragraph 4.46 of the OBR report explains
why assumed pay growth for the public sector is about 1% lower than
that for the private sector, thereby continuing the relative fall in
the pay of public sector workers that we have seen since 2010/11.
There are two points to make. The first involves implausibility,
given the increase in vacancies, quit rates and strikes we are currently
seeing in the public sector. But just because something is
implausible doesn’t mean it is impossible. The second is visibility
– you have to dig deep in the OBR’s report to find this analysis.

On public
spending, the numbers the government have pencilled in are broad aggregates, so you have
to make some assumptions to see what this means for individual
departments. Luckily the IFS post-budget
has a go in the chart below.

NHS spending increases are at
the past long term average, which is the minimum conceivable in that
it does nothing to relieve current pressures. Spending on schools
declines as a share of GDP, while it is announced policy that defence
spending does the opposite. That leaves an annual real term fall in
spending of 3.2% in everything else. We have the same two problems.
The government’s assumptions are opaque, so they can always say
they don’t ‘recognise these numbers’, and they are highly
implausible but it is hard to say they are totally impossible.

So the OBR under its
current remit cannot say that these projections cannot happen, but
because the detail is hidden (pay) or not spelled out (departmental
totals) the Chancellor bears little cost in putting these implausible
numbers forward.

One way around this
problem is to make fiscal rules apply to the short term rather than
medium term, but there are excellent
why this cure would be worse than the disease.
A much better option is to strengthen the watchdog role of the OBR,
to make it more in line with some
other fiscal councils
. This would require two changes
to the legislation that set up the OBR.

First, the OBR needs
to be able to do policy variants: simulations/forecasts where policy
variables are different from the government’s announced plans. That
goes well beyond the minor tweak suggested for fuel duty, because no
evidence would be required that this would be what the government
might actually do. The Treasury were insistent that the OBR would not
be able to do this when it was set up, partly I suspect because it
didn’t want to see alternatives to austerity.

Second, the OBR
would be mandated to comment on the feasibility of aggregate public
spending plans, and if the government’s projected plans were
unlikely to be feasible, to prepare an alternative forecast based on
plans that were feasible. Very quickly this alternative, more
plausible forecast would be the one that everyone quotes.

Of course neither of
these things will happen under the current government, so what is to
be done next year if, as some
have suggested
, the government not only cuts taxes but
pencils in even more tax cuts, and combines these with even more
unlikely paths for public spending than are already there. The IFS
and Resolution Foundation will no doubt call the government out on
this, and the text in the OBR forecast will provide plenty of hints,
but both are likely to pass most voters by.

Ironically the
government will see these tax cuts as a ‘trap for Labour’. If
Labour say they will not implement these tax cuts if they win the
election then they give a real ‘higher taxes under Labour’ weapon
to the Conservatives. If they say they will cut taxes then
journalists, with some justice, will ask Labour about the clear
implications for public spending. A compromise for Labour would be to
accept the immediate cuts, but not future cuts, saying the
Conservatives couldn’t afford these either. There are no easy
answers here, but these dilemmas stem from the government’s ability
to game the system. The government’s ability to game the system in
turn stems from the weakness of the OBR as a watchdog.

[1] Another example
of possible gaming that Giles and others have mentioned is investment
allowances for firms. In the OBR projections this is a three year
policy, but Hunt announced that he would like to make it permanent if
and when resources allow. There is the expectation that the
Chancellor probably will make it permanent at some point, but this is
based on politics rather than experience. In this case the OBR would
have little past evidence on which to warrant overruling what the
Chancellor says his current plans are. For that reason I don’t
think this is an example of gaming the rules. Chancellors should be able to announce
aspirations, but if the fiscal rules don’t allow those aspirations
to happen I can see no reason why the OBR should do otherwise than
take the Chancellor at his word. I think this is an example of the rules working.

[2] I have always
argued that falling debt to GDP is a silly rule, and I’m glad the
consensus seems
to be shifting
that way even if Labour policy is not.
In addition, targeting the total deficit rather than the current
deficit that excludes private investment is wrong both in principle
and in practice.




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