Fiscal watchdogs, pluralist democracy, technocracy and evidence based policy

 

When I write about fiscal watchdogs like the OBR in the UK, I generally get some comments along the lines that these watchdogs produce technocratic policy and limit the freedom of democratically elected governments and that they should therefore be abolished. Such comments come from both the left and right. This reflects public discourse in the UK at least, where many have called for the OBR’s reform or abolition over the last year. In this post I want to suggest that this argument is inherently populist, and would have the effect of suppressing the influence of knowledge on decision making.

People use the term ‘pluralist democracy’ in different ways, but the definition that fits what I want to talk about here is as follows. “Pluralist democracy is a political system where power is dispersed among various groups and organizations, allowing for multiple voices and interests to influence decision-making.” For example, on some issues local authorities have power, while on others the central government has power. Judges, not politicians, make decisions about interpreting the law or constitution, if one exists. Universities and the academics within them in as a collective, have power in terms of authority, because most of the public believe that they will have looked at and interpreted evidence in a reasonably unbiased way.[1]

Populists almost by definition oppose pluralist democracy. For the populist, the people should have all this power, and the populist is the expression of the people’s will. They appoint judges who they hope will side with them rather than with the law. They interfere with the governance of universities and cut funding in areas where academics have different views to those of the populist administration.

A fiscal watchdog, like the OBR in the UK, is part of a pluralist democracy. It gathers information on the state of the economy and public finances, and tries to assess their likely trajectory over the next few years. The OBR is like a university in the sense that it works in the open, publishing as much as it can, and draws conclusions (forecasts) from evidence (data) and theory (economics). It should be no surprise that one of Victor Orban’s first acts as the populist leader in Hungary was to abolish their fiscal watchdog.

Nigel Farage, populist leader of the Reform political party, is giving “serious thought” to abolishing the OBR. In typical populist fashion, he says that the OBR is “effectively dictating to elected politicians”. All the OBR does is a forecast. Would you rather the OBR or Nigel Farage produce the forecast on which fiscal policy is based? Farage would like to do away with the OBR because he would like to pretend he can deliver the impossible: lower taxes, more public spending and lower borrowing.[2]

One particular feature of the OBR’s set-up that critics seldom mention is that the government is not formally bound to follow the OBR’s forecast. It can either ignore it (as the Truss government did) or produce a budget based on a more optimistic forecast and give its reasons why it disagrees with the OBR’s forecast. In that formal sense, any power the OBR has can easily be overridden. That this option is never used or discussed is very revealing.

If a government can ignore the OBR’s forecast, why do some claim the OBR hinders the operation of a democratic government? It is because the OBR uses and publicises knowledge, in this case about what is likely to happen to the economy and public finances, in a way that is difficult for the government to dismiss. You might say I am being naive here. It would be politically very difficult for the government to ignore what the OBR forecast: just look at what happened to the Truss government. But that is my point. Why is it politically difficult? It is because the public and the markets are more likely to believe the OBR than the government. The markets in particular are in the business of using information like everyone else, and if they believed the government was right and the OBR was wrong they would react positively, not negatively.

The government overriding the OBR is problematic because the chances that the government knows better than the OBR are extremely small. When I asked above whether you would rather the OBR or Nigel Farage produce the forecast on which fiscal policy is based, I think you could substitute any politician for Farage and get the same answer. It is of course possible that a politician could get advice about the economy that had nothing to do with their wishful thinking or political advantage and only involved knowledge the OBR had erroneously ignored, but that possibility is pretty small. At best it could duplicate what the OBR does, but almost certainly with a lot less transparency.

The reality is that most governments do not ignore or dispute the forecast presented by the OBR because the public and markets would rightly suspect that it was doing so not because it knew better than the OBR’s economists, but because it was politically expedient to take a different view. Truss’s government ignored the OBR in part because they thought that tax cuts would spur non-inflationary growth sufficient to generate additional revenue that would pay for most of the tax cuts. That was wishful thinking, and the markets reacted accordingly.

Of course institutions like the OBR, or other elements of a pluralistic democracy, have to be accountable in a way that ensures they do what they are supposed to do without surrendering their independence to the government. That can be tricky but it is not impossible. In the case of the OBR, accountability is pretty strong. Past mistakes are examined and lessons learned. Of course economists like myself will sometimes disagree with their judgements, but the OBR is generally careful to ensure its judgements are not wide of the mark in terms of the academic consensus. The argument that the OBR is not fit for purpose because it gets its forecasts wrong simply reveals that the person making that argument knows little about macro forecasting. Another example of the OBR’s accountability is that the head of the OBR recently resigned because of a technical computer error.[3]

This is why, as an academic, I am naturally very supportive of institutions like the OBR, an independent central bank, or a body like NICE, because I see them as means to ensure policy decisions are based on evidence and knowledge. Of course such institutions can in theory be replicated by a government and a very efficient and open civil service, but in practice government based decision making is rarely as open and transparent as it is in these institutions.

It is of course important to ensure that such institutions are limited to obtaining and using evidence, and do not stray into making decisions which are rightly the province of elected representatives. There are inevitably grey areas. Again the OBR is a useful example because it is hard to think of any way the OBR currently oversteps this line. Independent institutions like the OBR, Bank of England or NICE are hardly examples of technocratic government. For example the Chancellor decides the inflation target, not the Bank, and it is in my view right that she does so. To say that too much policy is based on evidence rather than values is a confusion, because good policy uses both.

The rise of populism has made evidence based policy that much more unlikely. Populists want total power, and one of the many things that might frustrate that is people putting facts and evidence to the public that contradicts their preferred narrative. The best way for populists to avoid that happening is to control the media, but institutions that by their nature automatically have a voice remain a threat.

For this reason, while we still have a government that says it sees populism as a critical threat, I think we should be talking about strengthening bodies like the OBR, not abolishing them. One proposal that received some attention in the past but which is hardly mentioned nowadays is to follow the Netherlands and have the OBR cost opposition policy proposals before a General Election. (I discussed this here.) While this might make Farage even more antagonistic towards the OBR, it might help to stop him getting elected.

[1] Of course any individual academic has less authority, although still probably more than a typical politician in this sense.

[2] To their credit, the Conservatives have not followed Farage.

[3] Was his resignation accepted by the Chancellor because the OBR published facts about the budget process that contradicted the spin coming from the Treasury?