03 October 2008
Conservative proposals to establish an independent Office for Budget Responsibility could fail to fulfil the party's ambition of lowering public debt, senior economists have warned.
As expected, a central plank of shadow chancellor George Osborne's keynote speech to the party conference was the creation of a body, independent of government, to scrutinise performance against fiscal policy.
'This independent office will stand in judgement over our commitments, hold us to our promises. And it will let the whole country know if we try to wriggle out of them,' Osborne told delegates in Birmingham on September 29.
The proposal develops an idea floated by the Institute for Fiscal Studies in previous Green Budgets, chiefly that forecasts of the public finances should be independent of political influence and any targets be much more forward looking, rather than based on a retrospective definition of an economic cycle.
Gemma Tetlow, senior research economist at the IFS, said the Tories might need to back it with some more concrete ideas if they were serious about reducing public debt.
She told Public Finance that some countries were already building up assets to protect against future challenges such as the ageing population and lower oil revenues.
'Some OECD countries are building up surpluses now so the [Tories] may need to think more carefully about stronger steers to policy in that respect,' she said.
Another issue was who would sit on the OBR and how long they would sit for. While members of the Bank of England's Monetary Policy Committee frequently disagreed with each other, such open dissent was unlikely to be appropriate for the OBR, Tetlow said. 'For fiscal policy they'll need a much smaller team coming up with a unanimous decision on these things.'
The Tories are confident that the establishment of an OBR would change the future fiscal landscape for good.
In his conference speech on October 1, party leader David Cameron said the OBR would 'help us stick to the right course'. He went on: 'There will be no hiding place, no fiddling the figures – for all governments, forever.'
Cameron also promised to 'rein in private borrowing' by 'restoring the Bank of England's power to limit debt in the economy', reversing what he called Gordon Brown's 'big mistake' – depriving the Bank of the power to regulate financial markets.
Oliver Letwin, who chairs the party's policy review, said the OBR would be 'for keeps' and predicted: 'It will not be undone by any successive government.'
Speaking at a fringe meeting immediately after Osborne's speech, Letwin said: 'Brown, having introduced the rules, abused them with endless definitions of the cycle.
'What the Office for Budget Responsibility will do is publish its analysis of whether the stance the chancellor has taken will mean that, on trend, public debt will be reduced.
'It will create a huge rod for the back of any chancellor. It's parallel to what happened on the monetary policy side [Bank of England independence], which was a good thing that Gordon Brown did. It's not been possible to fiddle the monetary books.'
But Ray Barrell, senior research fellow at the National Institute for Economic and Social Research, did not share Letwin's confidence. He warned that the OBR would succeed only if it had cross-party support, otherwise any new government could abolish it or totally revise its targets.
He added that there was no consensus on what good fiscal policy was. 'It is not like having an independent central bank, where we all agree low and stable inflation is good,' Barrell said.
'Whereas with inflation we argue only over the details, arguments over appropriate fiscal deficit targets are much deeper. Some economists point to a national savings shortfall and suggest that we should be
running a government surplus of 6% of GDP to pay for future
ageing-related commitments. Other economists are happy with the idea that borrowing to invest is a good idea. Both positions are defendable.'
As the OBR idea was floated, there was more bad news for Gordon Brown and Chancellor Alistair Darling as they struggled to meet their own fiscal rules.
A new way of measuring financial services boosted gross domestic product by 1.4% for last years and all years previously. As a result, debt has fallen as a proportion of GDP – but not by as much as Treasury officials had hoped, giving government leeway to borrow just an additional £8bn if it wants to stay within its 'sustainable investment rule'.
Tetlow said: 'It gives them a little bit of extra headroom on the 40% ceiling but given developments since the Budget, it seems unlikely that's going to be sufficient to keep them below 40% throughout 2009/10.'
Public finances came under additional pressure earlier in the week when the government was forced to nationalise part of the failing Bradford & Bingley bank, which, according to economists Capital Economics, could add 2% to the net debt figure.
PFoct2008
