Winner of the New Statesman SPERI Prize in Political Economy 2016


Monday 5 January 2015

Who is lying about UK budget plans? The OBR test.

Over the next five months you will be told by the Conservatives that Labour’s spending plans will ‘cost billions’, are unaffordable, will put the recovery at risk - I could go on and on. Is there any truth in all this? Well you can read what I and others have written, but that involves looking at lots of numbers which, even if you are an economist or economic journalist, takes time. So here is a very simple reason why you can ignore all these Conservative claims.

Some months ago Ed Balls asked the Chancellor if the OBR, which does all the government’s number crunching, could also look at Labour’s fiscal plans. Now the OBR is independent, and interrogates what the government tells it to make sure it is not being deceived. So they would do the same to Labour’s fiscal plans, if instructed to do so. If Labour’s fiscal plans really are irresponsible, or do not add up, here was an excellent opportunity to expose that using an independent authority.

George Osborne refused Ed Ball’s request. Now Osborne will say that there were various technical issues, and that such a move might damage the OBR’s impartiality, but remember that Osborne is the most political of Chancellors. If he saw a clear way to damage Labour’s economic credibility, do you think he would let such concerns bother him for a second? (The OBR’s equivalent in the Netherlands does this kind of exercise, and the Dutch political debate is much better as a result.) So there really is only one conclusion to draw. Allowing the OBR to cost Labour’s plans would have done Labour more good than harm.

So it really is that easy. Do by all means look at all the numbers (which come to the same conclusion), but if you want a simpler reason to ignore Conservative claims about Labour’s future plans, this is it. The OBR test is clear, compelling and correct. (And any fair minded journalist who reports these Conservative claims should at least note the OBR request and refusal.)

What about the other way around: is what Labour say about Conservative plans just fear mongering? In this case we do have OBR numbers, and they said about existing plans (which exclude Cameron’s conference tax give-away but also any additions to the coalition’s welfare cuts):

“Consistent historical data for RDEL [Departmental Spending] are not available over a long period, but the closest equivalent in the National Accounts implies that by 2019-20 day-to-day spending on public services would be at its lowest level since 2002-03 in real terms (based on whole economy inflation), since 2001-02 in real terms per capita and since the late-1930s as a share of GDP.”

To see what those numbers might mean in practice, let Rick start you off.

Update

At their press conference today where the Conservatives ‘costed’ Labour’s plans, Osborne was twice asked about the OBR refusal. According to the Guardian the first time he did not answer. The second time he said

“The OBR brought in an external reviewer last year. The review concluded that it was not right to let the OBR audit opposition spending plans now. But this can be looked at in the next parliament.”

Balls proposal was first made, and rejected, in October 2013. Kevin Page’s review was not published until nearly a year later, so will not have been the basis of Osborne’s rejection. [1] Osborne’s reply is interesting – he is not rejecting the idea in principle, but just for now. Now it is true that the OBR is relatively young, and would need more resources to do this, but they are reportedly up for the task if asked. So my key point still stands. If the Chancellor really thought that OBR analysis would damage Labour, would he let caution and some small extra costs get in his way?

[1] Here is what Kevin Page’s review actually said:

“Given that the organisational underpinnings of the OBR are in their institutional infancy and are interdependent with a host of government departments and agencies, it is recommended that caution be exercised in considering the expansion of the OBR’s mandate (e.g. costing certification of opposition manifestos). The OBR may not have the organisational capacity to expand its remit without further drawing on the resources of other government departments. In addition, the particularly narrow legal framework of the OBR and its interdependencies with the executive branch may risk creating perceptions of conflicts-of-interest.”




24 comments:

  1. But surely Osborne is a closet Keynesian! See Skidelsky... http://www.project-syndicate.org/commentary/osborne-deficit-growth-by-robert-skidelsky-2014-12#2W33x0VjqZQ9UwL4.99

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  2. Save that Labour's claim, which I accept is based upon that very loose statement by the OBR, is similarly complete nonsense.

    1939 was the highest of the 30s with 30% of GDP spent by the government. Around half of that was debt interest, far far higher than today.

    So that leaves around 15% for the rest.

    Now, history may not be your strong suit, but what do you think might have been taking up the bulk of that government expenditure in 1939, which it doesn't today?

    So, claiming that the Tories spending plans, which I am quite prepared to accept are wholly implausible, would even if enacted takes us back to the 1930s as Labour does is, at very best, disingenuous.

    As for whether the OBR should have been allowed to cost Labour's plans, personally I think they should have, but they are so open textured as to be incapable of being seriously assessed.

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    1. Now, politics may not be your strong suit, but think about what the OBR were trying to convey by making that statement.

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    2. That the Tory declared plans are implausible.

      As I said.

      But I don't think they have a monopoly on dishonesty.

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    3. It's patently obvious that Osborne's spending plans are not remotely credible. But as I said a few weeks ago (and as the discussion now seems to be concluding) the AS was never about rational economics. It was about setting the austerest of Austerity plans as a standard which could be used to bash the Deficit Deniers on the other side.

      Osborne knows from experience that, should he win in May, he can blithely miss the AS targets and not be held responsible. So of course he's going to play that game.

      In that light, pointing out that his stated plans would take us to spending levels lower than any we've seen since the 1930s is not only accurate, it's a necessary fact for any rational observer to push.

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    4. 1) The Tories are not going to win, as Osborne knows as much as everyone else.

      2) Just as a matter if fact, the last paragraph isnt true (although the rest is).

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    5. SH

      I meant spending as a share of GDP. That is accurate.

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  3. "Now the OBR is independent"

    No it isn't. Any more than the bank of england is 'independent'.

    The OBR is stuffed full of ideological economists with a particular set of beliefs. They have yet to get anything even remotely right in any of their forecasts. They are a complete waste of time and money - there only to maintain a belief structure within the political elite.

    Government spending always covers itself in Sterling because of the nature of the monetary system. It either generates taxation - owned directly by the Treasury - , or it generates increased reserve savings from banks at the Bank of England - also owned by the Treasury.

    Each time, every time.

    It's a completely closed system.

    So government spending is funded financially by government spending - which will always generate precisely the level of taxation and increased saving necessary to cover the government spending. At any level.

    The restrictions are all in real terms. To which the question should be asked: exactly what is somebody who could be a nurse or a doctor in the NHS doing at the moment that is more important and valuable than being a nurse or a doctor in the NHS?

    It's time to stop the financial jousting and Get Real.

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    1. You can "con" all the people all the time, politicians have proved it every four or five years for decades.

      In a fiat currency economy, there is no such thing, (as Osborne claims today), of "unfunded spending pledges". The government never runs out of its own money. If there is a good or service available priced in Sterling, the government can buy as much as it wants, at no cost to itself. That's the beauty of being the currency ISSUER. Inflation is the government's only worry if part or all the economy runs out of the capacity to supply; that is, no "output gaps" existing.

      A really smart government at this point would ask itself the question; how come the widget making sector has run out of capacity to make widgets and prices are going up; when six percent of the widget making people are on Job-seekers Allowance?

      Another myth is the one about the government having to "borrow" money to finance its "deficit". Why would a government that issues its own fiat currency, "borrow" it back and pay interest on it, when it can just spend new money into existence at no cost to itself? The fact that it does pretend to, sort of, "borrow" allows, currently, about forty odd billion pounds of "fiscal stimulus" to be injected into the private sector for rich people to get free government money. Lovely jubbly; I have got loads of that stimulus (Gilts) in my pension funds.

      Probably the best myth of all is Taxes. People are still led to believe that the government has to get tax money before it can pay for its nurses or doctors. Taxes don't pay for anything. Taxes vaporise into thin air the moment the government collects them. Like the government's spending, it is just numbers in a spreadsheet, taxes are, in aggregate, the same numbers with a minus sign in front of them.

      Remember that eventually the government gets ALL its spending back as taxes. The deficit and all the past deficits together are in safe hands; yours. The currency ISSUERS DEFICIT (government), is the currency USERS SAVINGS (private sector, rest of world). Pound Sterling for Pound Sterling.

      PS. Don't fall for this hype about your children's children paying off our debts. When they are old enough to vote, they will still have a deficit and they won't be in a rush to pay it off because by then they will have learnt how a sovereign fiat currency economy actually works.

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  4. Get Real. For the last few years household income has consistently risen less than CPI, as has household expenditure. Why should government income and expenditure be any different?

    We all agree that there has been macro mismanagement, but households (in general) don't want to see one rule for themselves and another rule for government. Who can blame them?

    So, back to Market Monetarism vs Keynesian Fiscalism as the optimal solution to the macro mismanagementl.

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    1. James, as a "market monetarist", you will have no care for inflation and no care for the the unemployed. Exactly whom are you representing? “The use of quantity of money as a target has not been a success. I’m not sure I would push it as hard as I once did.” – Milton Friedman, Financial Times, 2003. Watching the twin ideologies of monetarism and ‘market’ monetarism go at it is the equivalent of attending the birthday party of a five year old where the main attraction is witnessing the kids take blindfolded swats at pinning the tail on the Donkey; always missing in splendid fashion. (Forbes)

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    2. Not sure whether to leave an answer. You clearly know very little about market monetarism. I'd advise you go to:
      Themoneyillusion.com and scroll down the right hand side to visit a few blog entries on the "quick intro to my views" section
      Or
      Marketmonetarist.com

      Then come back and comment.

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    3. In this room we dismissed both of them when it became apparent that they didn't know that Banks don't lend "reserves", except to other Banks as part of the clearing process.

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  5. Before the current prominence of the OBR began with the current Government, Robert Chote was making quite a nuisance of himself by doing a very good job of laser bombing by serious and independent analysis at the IFS anything silly politicians such as Osborne, Balls and others were saying in the run up to the 2010 election. I saw his "elevation" to the OBR merely as a way to keep a lid on his public statements, much as one of Jim Hacker's vociferous and effective political critics was effectively controlled by being persuaded to accept Chairmanship of a QUANGO in one episode of "Yes, Minister".

    Osborne's refusal to let the OBR analyse Labour's spending plans shows how effective this political move was. When it comes to this Tory led Government's actions, there are three fundamental pronciples: Politics, Politics, Politics. Nothing else counts for them.

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  6. I think the only reason Osborne is confident of doing what he has done is that the BBC disappeared into a sinkhole of postmodern relativism some decades ago.

    I heard Gavin Estler last week say all economists believe different things so none should be followed, a cliché I've heard from BBC journalists repeatedly.

    So at the bottom of this sinkhole, it should not be a surprise to find a conservative Machiavel - yet the BBC were still amazed when the Tories rounded on them a couple of years ago.

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  7. does the bbc lead or follow? if the public are so stupid as to be led by the bbc then there is really no hope for any of us. the blogsphere is the place to be these days.

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  8. A fair point.

    But the issue isn't just whether Labour's plans are internally consistent, but whether they are consistent with the anti-cuts mood music that Labour has been so happy to sing to over the last four years.

    "Remember all those times we criticised those unfair, unfeeling Tory cuts? Well, you might have been left with the impression that we would plan on reversing them. Nothing could be further from the truth!"

    And people wonder why the electorate is cynical about politics.

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    1. Labour's actual rhetoric on cuts has actually been very muted. Also, given that they went into the 2010 election promising fewer cuts than the Tories some criticism of cuts would seem fair.

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    2. Really? The Tories have come up with £21bn of extra spending that shadow cabinet members have either promised or have criticised the withdrawal of over the last parliament. Labour's response to this dossier is that these claims/criticism weren't party policy. But how can the average voter trust what shadow cabinet members have been saying at all in that case?

      It seems fundamentally dishonest to criticise a cut while in the small print (which is effectively what the official budget proposals are) saying that you effectively endorse it. That's regardless of what your position at the previous election would be.

      There are a couple of exceptions. Labour has consistently attacked the Bedroom Tax, and has promised to reverse it. That's honest (if they do). Labour criticised the tuition fee hike, but explicitly stated that they wouldn't necessarily reverse it if they won the next election. That's also fine. What's not fine is all the other, smaller cuts which they spent four years making hay with and now tacitly endorse; just so the IFS (and, if Simon got his way, the OBR) endorse the overall plans for.

      The vetting of official spending plans is at best a partial solution to the issue of trust. It's important that all parties show a consistency between what they say in media appearances and their "official" published position.

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    3. Put it another way. Labour's published position is to make severe cuts across a number of departments (not as drastic as the Tory position, but still severe). If Ed Miliband becomes PM, do you really think that he has a mandate to make these cuts in the mind of the average voter?

      In contrast, no-one doubts that the Tory party stands for serious cuts - it they win, they have a mandate for that (qualitatively, at least).

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  9. Surely Balls can say Of course it is responsible. That is why you refused to let OBR examine our plans?

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  10. When people only get a say once every five years, it's no wonder they are disillusioned with politics!

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  11. There is nothing to stop either the IFS or NIESR doing a costing of the plans of all parties, as they have done before. This would be a fair and level playing field.

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