The Office for Budget Responsibility is going to irritate lots of people this week. When it comes out with its assessment of the Budget, its multipliers and assumptions will come under attack. After years now (years!) of phoney arguments about the deficit, this will be A Good Thing. Indeed, all the Labour leadership candidates should embrace the new institution.
First, it should improve the credibility of the fiscal framework. No Briton can credibly claim that any fiscal rules could have any real disciplining effect: only an institution that can nip at the government can do that now. This framework offers the golden combination of clear red lines for governments and the flexibility to respond to as-yet-unforeseen economic circumstances.
Second, farming out forecasting should improve the quality of projections that inform fiscal decisions. As an excellent Social Market Foundation pamphlet puts it, an independent forecaster would help overcome some problems with internal forecasting:
- Organisational bias in projection-making: promotion, reward and status may be linked - most likely implicitly – potentially excluding valuable contrarian opinions from influencing fiscal projections. This effect may be particularly strong if fiscal decision-makers have significant powers over the institution. Indeed, academic research has shown that in several European countries, official growth forecasts used for fiscal policymaking are biased toward being over-optimistic.
- Policymakers risk being subject to group-think where all elements of fiscal policymaking are housed in the same institution with no institution charged with an “official challenge” role. For example a shared belief in what is actually unsustainable growth may be self-reinforcing and amplified if all the functions of a fiscal policymaking are combined in the same institution.
- When combined with the credibility associated with longstanding institutions, such as that of HM Treasury, this can also lead to another behavioural economic phenomenon known as anchoring, whereby other, non-governmental organisations take the cue for their economic forecasts from HM Treasury. This is particularly likely to occur since no institution wishes to stand out against received wisdom: for any independent forecaster it is far less reputationally damaging to be wrong with everyone else than to be wrong on their own.
At the moment, being seen to have credible forecasts is particularly worthwhile: investors have, in recent months, fixated on suspect growth forecasts. But all of those benefits rely on the OBR actually becoming independent – something it currently is not.
The body – now established on an interim basis – is a Whitehall beast. Sir Alan Budd, OBR chief pro tem, leads a team of Treasury lifers, based in the Treasury, running Treasury models. This is all forgiveable: the apparatus was set up rapidly and has yet to find its feet. It is important, however, that it does not become a permanent feature of the OBR.
The most important aspect of the institution’s independence is staffing. OBR staff cannot be borrowed from the chancellor, going back to the Treasury at the end of a stint at the slide-rule. Otherwise they will still be creatures of their political masters. The OBR needs its own recruitment stream. (I’m sure George Osborne will be alive to this issue: he has long had an interest in the independence of Bank of England monetary policy committee members.)
As David Miliband has written, the OBR should, moreover, answer to parliament – not to the Treasury. Furthermore, MPs and peers should be allowed to submit written questions to the institution and it should be ultra-transparent.