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Tuesday 24 September 2013

Labour’s OBR Proposal

It is not the stuff of headlines, but Ed Balls conference speech contained an interesting idea for extending the remit of the Office for Budget Responsibility (OBR). Although this could in theory have major implications for the 2015 debate on UK fiscal policy, I suspect in practice it will not. But first some background.

Labours failure to contest the profligacy myth

In the year after the 2010 election, the new government relentlessly plugged the line that Labour’s past fiscal profligacy was central to the need for current austerity. It was a smart line to push, so it didn’t worry those making it that it was not true. I’ve documented the facts in a peer reviewed article, in various blog posts, in a debate with Jeremy Warner (follow links back from here), and elsewhere. I have no political interest in pursuing this point, beyond a perhaps naive belief that evidence should not be distorted for political ends.

Preoccupied with electing a new leader, Labour did little to counteract the myth at the time. Whether they could have done anything in the face of a largely right wing press I do not know, but the result had two key negative consequences. First, there was no effective political opposition to austerity. Second, Labour or its supporters fell over themselves any time they were asked whether their proposals might lead to additional borrowing. It is also clear that the government will return to this line of attack in the next election, meeting any policy proposal that involves spending money with the accusation that this signifies a return to Labour’s profligate ways.

The OBRs remit

The OBR is a ‘fiscal council’ or ‘independent fiscal institution’ established by the current government, of which there are now many international examples. (Calmfors and Wren-Lewis analyse in detail eleven that existed in 2011.) The two most longstanding are the CBO in the US and the CPB in the Netherlands. Both these institutions can cost opposition as well as government fiscal plans, if they are requested to do so, although the CPB approach appears less open to political game playing than the CBOs. The OBR has a much more restricted remit: it can only cost the governments announced fiscal plans.

Labours new proposal

Ed Balls will ask the OBR to cost the fiscal proposals it puts to the electorate in the 2015 election. If the OBR did this, this would either expose Labour’s dodgy fiscal arithmetic, or deflate claims their proposals were not properly costed. As Labour would do its utmost to prevent the former, this looks like a smart move politically. I also think it would improve the level of the macroeconomic debate, which is why I have often suggested the OBR might be given this role.

The only problem is that the OBR cannot say yes under its current remit, and it would also need additional resources to undertake this. In theory the remit of the OBR could be extended before the next election, but the government will block this, because it does not want to lose a valuable political weapon. (The block will probably come in the form of some delaying tactic, perhaps linked to a formal review of the OBR’s performance after 5 years.)

So Labour will not be able to say that its plans have been costed by the OBR, but only that it is happy for the OBR to do this. As it knows this offer will not be taken up, its political force appears weak. I cannot help but remark that this shows how foolish Labour was in government to reject the idea of a fiscal council. If they had created a fiscal council with wider powers than the current OBR, they would be in a much stronger position now.  

In practice, therefore, anyone seeking the facts on the fiscal plans of the opposition during the election will have to turn to the expertise at the widely respected Institute of Fiscal Studies (IFS). So for 2015, not much will change. But in the longer term the momentum for extending the OBR’s remit is building, which I regard as a very positive development.


  1. Here is a tactic: according to Skidelsky's column 'Models Behaving Badly' at Project Syndicate, he says that:

    'Forecasting organizations are finally admitting that they underestimated the fiscal multiplier. The OBR, reviewing its recent mistakes, accepted that “the average [fiscal] multiplier over the two years would have needed to be 1.3 – more than double our estimate – to fully explain the weak level of GDP in 2011-12.”'

    Is it not possible to drive a wedge between the government and the OBR on this?

  2. What is wrong with Balls going to the IFS with their manifesto, which LibDems have done for yonks?

  3. The “Labour failed to contest the profligacy myth” problem is actually more general and worldwide than Simon suggests.

    MMTers and Keynsians all over the Western world have been screaming from the rooftops for about three years that the political left has fallen for the right’s “we’ve got to endure austerity so as to cut the deficit and debt” story.

  4. On Labour
    The reason Labour does bad is simply because they are horrible in the 2 main areas that any successful political party should be good at.
    - Leadership. Messrs Ed are both as appealing to voters as the average turd, probably much worse, may be close to something like me. Milli simply shows no link with potential voters (bit like Mitt R in the US) and furthermore simply looks very incompetent and inexperienced. In a crisis especially, people go for certain not for nice. He is not nice and definitely not certain as well. Young as such is positive when it is a sign of energy or a new wind not when it is a sign of inexperience and not having a clue, like with thin Ed.
    -Coherent and consistent (and appealing) policies. These are moving all over the place. EU referendum we have seen 3 or 4 180 degrees turn. No alternative economic policies simply only Tories are bad and we are against them.

    The idea to move the party to the left is likely also a disaster in the making. Cameron appeals to the middle (he has a problem on his right). And especially Blair did move the party to the centre for good strategic reasons.
    As well as they are very poor in keeping the manure inside. All ends up in the headlines. And when it does not like Merkel policies are adjusted and mouths are kept shut (to get it out of the headlines), people start to throw mud at each other.

    In a nutshell a complete disaster. It is that Cameron Fs up things also big time (next to a not great economy) otherwise the Eds would be political toast. Tories seem to have found the weak spot now so expect more of this.
    Basically labour needs new leadership and a proper programm and stick to that.

  5. On OBR
    Just some wild ideas.
    In a wider context there are 2 problems.
    -Executive getting too much power compared to the other powers (combined with a credibilkity problem in the making);
    -Executive and legistlative simply frequently doing a very poor job in handling the public finances (stimuli are rubbish more often than not not refersed in good times, high debts etc).

    As said just a wild idea:
    Why not split the executive:
    -one part doing the fiscal (as far as amounts) and monetary policies.
    -the other (sort of present government equivalent does the major part of the allocation).

    Makes the OBR focussed on one task how much deficit or surplus and where to allocate stimuli and how to reverse them.
    Plus as they could be voted into office the legitinmacy problem would be solved as well.
    (and you would not get bankers in massively like in the US or lefties (of the with beard variety) like the Dutch CPB. Both of these would have large credibility issues with large parts of the population as well. Probably more of the not banker Central Banker kind.

    So basically a layer in between government as now and CBs but with a platform with the electorate. Not like in the US where all major civil servant functions (FED, Supreme Court etc are heavily politicised but with effectively no voter involvement.

  6. Considerably more important than the discussion about austerity is imho where and stimulate the economy in a large crisis and in completely unbalanced economies (basically the whole West).
    It was simply way too risky to let the bottom fall out in 2008. But the way that was done was probably pretty inefficient. Why were banks not nationalised for instance when they were clearly not only illiquid but also simply broke. Now the taxpayer only has had the downside and is still stuck with a largely (in Europe) dysfunctional financial sector (as 3/4 or more on some countries are heavily undercapitalised and often are simply bust).

    And so was the follow up.

    Anyway the likelihood a change to stimulus is decreasing by the day at least month.
    First of all apparently your economies are doing sort of ok now (only most of the population hardly noticed that). Plus debt levels have no by just kicking the can become so high that they especially when combined with a further stimulus would become a danger.
    So not only outputgaps and zero stuff but also riskyness of more borrowing plus ideas how stimuli could be used more effective. Now it is largely used for filling gaps because of high unemployment and that sort of things. And credible reversals (not Obamaing new social policies which will be nearly impossible to reverse in the good times (that hopefully follow).
    Debtlevels over 100-105% in larger and middlesize countries have almost always ended in some sort of disaster. And inflating away (often the least bad option) doesnot seem to be a realistic strategy in practice. Most of the West is very close to that and a stimulus would likley lift most over that.

    Basically how to adress (and first recognise) unbalances when these arise and act asap not wait till things start to collapse what we see uptil and including now. Pump up prices in US RRE and the S&P (and Co) require now basically continuing QE and anyway make and exit illusory.

  7. Simon,

    Commentary from a different angle: I am encouraged that there is a space I.e your blog to discuss these issues openly. The same goes for Paul Krugman's blog.

    My impression is that the blogosphere is dominated by the Austerians. You won't see any of the views expressed here on social media such as Linked In. Maybe it's there but you need to look hard to find it.

    That world is in the thrall of the Huffington Post. The leaders influencers are the Bransons and Welches. The relentless sub-text is that entrepreneurship is the highest form of human existence.

    Why is this relevant to the Labour Party, the subject of your blog? Because the views you putting forward with the other commentators need to inform any political party that has even a glimmer of hope of dislodging the Austerity Parties. That would be the first step in exiting this depression.

    How about some talks by you and Paul Krugman in, say, Oxford to make the debate more public?




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