Professor Philip Booth is Editorial and Programme Director and Ryan Bourne is Head of Public Policy at the Institute of Economic Affairs
Yesterday, Labour forced a Commons vote on allowing the Office for Budget Responsibility (OBR) to audit the manifestos of political parties. It followed a letter sent by Ed Balls to George Osborne last year urging him to pass an amendment to the Finance Bill so that the OBR can legally “provide independent scrutiny and certification of costings of political parties’ manifesto commitments on spending and tax, while ensuring the OBR is not drawn into party politics by commenting on the merits of individual policies or examining alternative policy scenarios.”
Many Conservatives, such as Andrew Tyrie, the Treasury Select Committee chairman, Dominic Raab MP and commentators such as Tim Montgomerie agree this would be a good idea. But we believe this would be profoundly misguided, both from the perspective of economic analysis and for the institutional credibility of the OBR.
The key argument in favour seems to be OBR audits would improve the quality of public debate by providing the public with objective assessments of policy costings. But, in fact, presenting costings based on contestable assumptions as if they were an objective truth would stifle debate.
Balls wants the OBR to provide basic auditing of key tax and spend pledges. So, by definition, the analysis provided would be incomplete, static and automatically biased against tax cuts. Economic judgements and calculations are not objective and purely scientific matters.
For example, a key dividing line between politicians should be whether tax cuts have dynamic benefits that would reduce their fiscal cost (we believe they do). A second such line should be whether increased borrowing might have dynamic benefits as a result of raising aggregate demand that would lower the net cost of any spending programmes (we believe they don’t).
If politicians and economists cannot agree on whether there are likely to be significant second-round and dynamic effects of economic policies, they are hardly going to agree on their magnitude. Economic models contain assumptions and interpretations which form the dividing lines between political parties and academic economists.
Furthermore, the “tax and spend” policies of governments interact with other policies. For example, the impact of a change in stamp duty could be offset by (or, potentially made greater by) a substantial liberalisaiton of planning controls. Immigration, employment regulation and so on all interact with the tax system so that policies presented at elections are a package, not a menu of bland accounting numbers.
So if one is costing tax and spend policies, one should also ‘cost’ immigration policies, the merits or demerits of nuclear deterrent policies as insurance against attacks, the effects of policies on employment, and so on. This would be incredibly difficult, and the assumptions should be challenged and debated.
In case readers think we are nitpicking, it should be borne in mind that the Government has missed its deficit reduction targets not as a result of its spending and tax figures being wrong, but because of the lack of economic growth caused by a whole range of other policy mistakes and unforeseen events.
These ideological differences that lead, in turn, to differences in interpretation of the effects of alternative policies are important in the current political debates. Indeed, they are centre-stage. Last year the OBR audited HMRC’s work on the “cost” of cutting the 50p tax rate to 45p, and signed off on the work that said the cut only cost £100 million as a best estimate (given behavioural effects etc)
However, Balls has continued to call this “a £3 billion tax cut” – the original, more static estimate of the cost when Labour introduced the 50p rate. There have been similar disagreements about how much a mansion tax would raise. Balls does not believe the OBR’s costing of the government’s own policies. How will anybody reach agreement on its costing of party manifestos?
There are many organisations, such as the Institute for Fiscal Studies and the Centre for Economics and Business Research, which already have the capacity to audit manifestos should the political parties wish to pay for them to do so. Other bodies are then able to critique or comment on their methodologies. It is therefore a typically managerialist, technocratic approach to assume that we need some centralised, government body that can work these numbers out in an objective way and thus remove issues from the political process and public debate.
There’s also an institutional reason why this would not a sensible move. The head of the OBR is appointed by a Government. We should keep the functions of government separate from the operations of political parties as far as is possible. But we should also remember that the OBR is appointed by a party that forms a government. One day, a government that leaned in one direction might appoint Arthur Laffer, Philip Booth and Ryan Bourne to the OBR. A government of a different complexion might appoint Paul Krugman, Tony Dolphin and Owen Jones.
The calculation of the cost of a policy is not an objective fact that forms part of a debate about a policy’s merits. Discussion of the cost of a policy is the very starting of debate.