The tax man cometh

23 May 11
The government has stolen some of the Institute for Fiscal Studies’ thunder by setting up the Office for Budget Responsibility. But there is still a big role for the institute's forensic analysis of public spending, its new director Paul Johnson tells PF


By Judy Hirst | 1 June 2011

The government has stolen some of the Institute for Fiscal Studies’ thunder by setting up the Office for Budget Responsibility. But there is still a big role for the institute’s forensic analysis of public spending, its new director Paul Johnson tells PF


For someone whose specialist subject is some of the most dismal aspects of the dismal science, Paul Johnson laughs a lot. And well he might.

The new director of the Institute for Fiscal Studies finds topics such as the ­idiocies of our tax system – and the vicissitudes of economic forecasting – endlessly fascinating, amusing even. And as interest in these matters has expanded, so has demand for the institute’s expertise. The IFS’s stock has risen in proportion to the depth of the fiscal crisis.

Over recent years, the institute has acquired hallowed status, as its 40 economists – the high priests of fiscal rectitude -  pass judgement on all manner of tax and spend issues. Politicians, City analysts and the commentariat wait with bated breath for every IFS utterance on Budgets and Spending Reviews, and pore over its annual Green Budgets. Naturally, the institute’s forensic, frequently critical, verdicts have become a source of ­irritation for chancellors of all persuasions.

Whether debunking Gordon Brown’s ‘golden rules’, or describing George Osborne’s first Budget package as ­‘regressive’, the IFS has gained a highly valued reputation for independence and objectivity. Nick Clegg’s outburst – when he called the institute’s verdict on the ­coalition Budget  ‘distorted’ and ‘a complete nonsense’ – came close to being viewed as blasphemy.

But all that could be about to change. In one of Osborne’s smarter early moves at the Treasury, he paid homage to New Labour’s creation of the Monetary Policy Committee by setting up the quasi-independent Office for Budget Responsibility. By doing so, he took in-house one of the IFS’s key functions – the independent ­vetting of budgetary assumptions.

He even pinched Johnson’s IFS predecessor as director, the urbane, sharp-suited Robert Chote, and turned him into the OBR’s poacher-turned-gamekeeper chair (after a rather choppy start under Sir Alan Budd). The OBR is charged with scrutinising the Treasury’s Budget costings, assessing the chances of the chancellor achieving his ‘fiscal mandates’, and making its own forecasts. So where does this new landscape leave the IFS?

Johnson, a former public services ­director at the Treasury, with long ­experience as both a government and private sector microeconomist, is frank about the impact. ‘The IFS used to take the stated assumptions of the Treasury on the public finances and regularly came up with different numbers which challenged them. With the existence of an independent OBR, that’s going to happen a lot less.’ They’ve had ‘no substantive disagreements’ with the OBR as yet, though he adds, with a smile, ‘this may not always be the case’.

In fact, with the UK economy flatlining, many analysts regard the OBR’s growth forecast, at 1.7%, as rather bullish. Bank of England governor Mervyn King calls the economic outlook ‘unusually uncertain’, and a former OBR member, City economist Geoff Dicks, has raised serious doubts about the government hitting its fiscal and economic targets. Johnson himself has told the Treasury select committee that Osborne definitely needs a Plan B. So surely there’s a case for modelling some alternative scenarios?

Yes and no, says Johnson cheerily. The institute has rather cheekily suggested that the OBR could do a bit more of this, perhaps ‘in the run-up to a general election’. And the IFS is prepared to talk, albeit with pursed lips, about the ‘risk ­scenarios’ and ‘circumstances under which’ alternative models should be considered.

But – contrary to any impression it might inadvertently have given – the IFS is not in the business of macroeconomic forecasting, stresses Johnson. ‘That’s the domain of the National Institute for Economic and Social Research, City analysts and now the OBR,’ he says airily. ‘There are people out there who take a more or less pessimistic stance on growth, but we don’t take a view.’ What the IFS does do, extremely well, is examine the impact of tax and spend changes on real incomes, using powerful household data sets, and explore the minutiae of benefits, pensions, student fees and other policy areas.

These issues have long been enthusiasms for Johnson, dating back to his last spell at the IFS in the 1990s, which included two years as deputy director under Andrew Dilnot. When he arrived there in 1988, fresh from a philosophy, politics and economics degree at Oxford, he focused a lot on tax, pensions and benefits. More recently, he helped write the IFS-sponsored Mirrlees Review on tax policy, and led the government’s review of ­pensions auto-enrolment.

Like other think-tanks, a lot of what the IFS does is driven by its search for funding, from the Economic & Social Research Council and other sources. Johnson says his minimum goal is to keep the institute afloat. Prudent housekeeping – it still lives in fairly scruffy premises off London’s Tottenham Court Road and has expanded only modestly in recent years – has helped keep the ship steady. ‘But we’ve got no money in the bank,’ says Johnson, who claims that the bulk of what they do is not altered one iota by the existence of the OBR.

Others beg to differ. Tony Dolphin, chief economist at the Institute for Public Policy Research, says that setting up the OBR was ‘a huge compliment to the IFS’. But he worries that the institute’s role will be ‘neutralised’ in future, and its post-Budget reports ‘could appear increasingly mundane’. Warning that ‘the OBR could push the IFS out of business,’ he suggests the institute ‘should increasingly become about looking at alternatives, something the OBR won’t be doing very much’.

The independence, or otherwise, of the OBR clearly has a bearing on the institute’s future role. Johnson, drawing on his experience at the Treasury and the Financial Services Authority, says the OBR’s creation is ‘a good thing’ that should have happened much sooner. Indeed, it is something the IFS pressed for.

But Andrew Tyrie MP, chair of the Treasury select committee, is reserving judgement on the OBR’s effectiveness. A ‘worthwhile experiment’ is as far as his committee will go for the moment. And there have been some robust exchanges between him and Chote over forecasting, given the absence of crucial information ahead of the Budget. ‘It is important for the OBR to show independence in substance not just in process,’ Tyrie told PF. ‘We want to know it is making its best effort at forecasting, ­uninfluenced by party ­political pressures.’

Johnson concedes that ‘the OBR is very dependent on the rest of government to provide them with calculations’. And that whereas ‘the OBR will never stand up and say the public finances look horrible, we can’. The IFS can also point out the consequences of fiscal policies. ‘Most of the Spending Review is still largely a spreadsheet in the Treasury. How well do they understand the consequences of 25% cuts in local government and the police?’ he muses. ‘There are a lot of uncertainties to take into account.’

One of them, he says, is the impact of higher than expected inflation, which means in cash terms that real spending cuts will be bigger, and spending on social security will be greater. A recent IFS report predicts that household incomes will return to 2005 levels. ‘Incomes are going to be very squeezed over the next few years,’ says Johnson. ‘They will be stagnant for the majority of the population.’ He wants the IFS to do more work on this area, exploring the fiscal effects on pay, pensions, health and education. ‘I suspect the public finances per se will be a bit less of a big story in a few years, but public spending will be a huge issue.’

He is also keen to raise the profile of taxation within the tax and spend equation; which, of course, was where the IFS started out, more than 45 years ago. ‘Compared with most policy areas, I’d be very hard-pressed to tell you what this or the last government’s tax strategy is,’ he notes. In the Mirrlees Review they talk of ‘the tyranny of the status quo’ on tax policy, and Johnson cites the failure to revalue council tax, and the ‘staggeringly hard’ issues around altering tax bands, as evidence of how politically toxic the subject is.

He is mildly encouraged by the government’s modest moves towards integrating tax and national insurance, and its progress on the universal credit. But his experience at the Treasury, working alongside Sir Nicholas Stern on the economics of climate change, taught him just how quickly governments back off from controversial taxes in general, and environmental ones in particular. ‘The lorry driver protests of 2000 have scarred all politicians,’ he says.

Johnson does his personal bit for the planet by cycling to work, on his fold-up bike, from Muswell Hill, where he lives with his Australian economist wife, and their four children, all boys. Other than a bit of cricket, he doesn’t have any time for outside interests; the kids see to that.

But he does seem to be relishing the new job, which he took over in January. According to Dan Corry, a former colleague at the Treasury, Johnson’s breadth of experience and insider knowledge of policy makes him ‘an excellent choice’. ‘He’s been around and is a highly respected guy.’ He’s also proving a rather good media performer, says Corry – which, post-Dilnot and Chote, is an essential component of the job.

Johnson might also have the right instincts about where the IFS goes now. After all, as most economists – including Chote – freely admit, macroeconomic modelling is a bit of a mug’s game. Everyone got it wrong in 2007/08 and no one really has a clue what the long-term impact of oil price rises, Eurozone debt and the Japanese tsunami will be.

Tracking the distributional impact of the fiscal squeeze, on the other hand, is not just technically doable – it’s potentially political dynamite, and guaranteed to secure headlines. At times like these, it sometimes does pay to go back to the nuts and bolts basics. After all, in such an uncertain world, there really are only two certainties: death – and taxes. 

Paul Johnson is speaking on the public finances at CIPFA’s annual conference in Birmingham on July 5–7

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