Wednesday, May 19, 2010

Responsible uncertainty

I’m giving a cautious and provisional welcome to the Office for Budgetary Responsibility, the new body that’s going to do George Osborne’s sums for him so he doesn’t try to fake the numbers, like Alistair Darling used to.

While I’m deeply unconvinced that chancellors really have been leaning on Treasury civil servants to come up with more convenient figures, the idea of an arm’s-length body to do this sort of thing – economic forecasts, public finance outlook and so on – sounds pretty reasonable. The numbers may not be any more accurate, but they’ll probably inspire a bit more confidence.

Here are a couple of concerns:

First, because the OBR will be both official and impartial (like a cross between the National Audit Office and the Institute for Fiscal Studies), there’s a risk that it will be seen as a sort of Ministry of Truth, making oracular pronouncements that are swallowed uncritically. I really don’t like the mildly Orwellian-sounding name, implying that it is by definition responsible.

Second, and relatedly, it absolutely must not be a body that says what should or should not be done, even in vague terms (‘bring the deficit down faster’), because decisions on tax rates and public spending are inherently political, not technocratic. The OBR must only be advisory, producing forecasts and evaluating policies against politically given objectives. It will be failing us if it endorses, rather than merely accepts as a given, the chancellor’s fiscal targets.

The Treasury press release seems reassuring on this point:

The OBR will make an independent assessment of the public finances and the economy … The Chancellor will retain responsibility for fiscal policy and will set the fiscal mandate, his target for fiscal policy.

Although of course in practice, Osborne will hope to use OBR assessments as political cover for spending cuts. I expect he’ll act as though its judgements are moral decrees rather than technical advice, and in doing so he’ll try to present his own ideological agenda as apolitical good sense. I hope the OBR won’t be flattered into colluding in this. We’ll have to see how it goes.

But another thing the OBR could usefully do is to transform the way we debate fiscal policy. It might allow us to discuss tax, spending and borrowing more like adults than idealistic-yet-cynical children who long for certainty (even as we scorn any attempt to provide it).

The OBR’s numbers will only have credibility (well, with me, at least) if they’re explicit about uncertainty and the inevitable margin of error in forecasting. OK, a politician might well get skewered for being honest about uncertainty (‘you mean you don’t know?’), but the likes of Alan Budd, the seasoned economist and mandarin who’ll be running the OBR, should be able to handle this.

Look at the Bank of England’s marvellous fan chart projections – literally a picture of uncertainty. The media might prefer clearer figures, but they do often seem to accept this approach and some even make the effort to explain margins of error. The Bank has not only changed the way monetary policy has been made, but also changed the way it’s been communicated. The OBR could help us come to accept uncertainty about tax, spending and borrowing as well.

Again, I’m encouraged. Budd says that he is “not claiming that we shall get the fiscal forecasts right; it is easy to demonstrate that that is impossible. Above all, we shall be emphasising the risks and uncertainties”. And the OBR’s remit will be to “present a range of outcomes around its forecasts to demonstrate the degree of uncertainty” and “confirm whether the Government’s policy is consistent with a better than 50 per cent chance of achieving the forward looking fiscal mandate”.

Will it work out well? I don’t know.

7 comments:

Liam Murray said...

"Second, and relatedly, it absolutely must not be a body that says what should or should not be done, even in vague terms (‘bring the deficit down faster’), because decisions on tax rates and public spending are inherently political, not technocratic."

The bit that troubles me there is "should or should not be done" - surely you mean HOW things should be done? If the OBR is tasked with assessing the arithmetic coherence of spending & revenue projections then it can absolutely say "on any reasonable projections there will be insufficient revenue to build that hospital / hire that teacher etc." That wouldn't be a political statement but a arithmetic truth.

I completely accept that it's hugely more complicated than that and there's a danger of a cut-hungry government abusing such output but there ARE absolute truths in terms of national finances and it's entirely legitimage for the OBR to uphold those surely?

CS Clark said...

I agree the idea of an arm’s-length body to do this sort of thing – economic forecasts, public finance outlook and so on – sounds pretty reasonable and would help the debate.

But so did the idea of a public survey about crime instead of relying on police figures, and look what's happened there.

jams o donnell said...

I have serious doubts that OBR will be any more accurate than anything HMT has produced.

One thing that does strike me. OBR is an "arms-length body". I find it quite amusing that the first act of a government pledged to wage war on QUANGOs is to create a...... QUANGO!

Tom Freeman said...

Liam, I think we agree. I'm fine for it to say "To cut the deficit by x% next year, as you want to, you'll need to raise taxes by y% more or cut spending by z% more".

What I wouldn't want it saying is "Good budgetary practice would suggest a deficit cut of x+1% next year is responsible" or "Tax rises/spending cuts have now gone as far as is prudent, so the remainder of your effort should focus on spending cuts/tax rises" - or something subtler that amounts to the same thing. But I'd hope it probably won't. Then again, we now have the Governor of the Bank of England recommending this fiscal policy over that, so who knows?

CS - I think the BCS has been an improvement. Instead of one fairly ropey set of crime stats, we now also have a middling set. Discussion of the two can be confused and opportunistic, to be sure, but the better measure does now get a fair bit of attention, which is more than the none it used to get.

Jams - I believe Cameron will be naming his new Tsar Tsar any day now. Or possibly a Tsar Bolshevik...

CS Clark said...

'Instead of one fairly ropey set of crime stats, we now also have a middling set.'

Or, if you're the right sort of person, two fairly ropey set of crime stats. My, rather obliquely-put, cynical point, was more that the BCS is now attacked as wrong whenever it's convenient to do so despite the intentions involved in setting it up. Similarly, while the OBR will seem better for a while in providing, in its range of pedictions, justification for whatever the government wants to do now, in 15 years if there's a government in place that wants to raise public spending and there is evidence from the OBR that this wouldn't be an absolute disaster, whoever's in opposition will definitely accuse someone of fiddling the figures.

Quinn said...

First, because the OBR will be both official and impartial (like a cross between the National Audit Office and the Institute for Fiscal Studies)...

Indeed. So why not just announce that from now on you'll be working from IFS predictions instead of treasury ones, rather than making the setting up a new quango one of the first acts of a supposedly quango-busting government?

Tom Freeman said...

CS - You've probably got a point there. And now I think about it, however good Budd may be, he's someone who has been hand-picked by Osborne without the usual civil service recruitment procedures, and is serving in an acting capacity until a permanent OBR can be set up. Meanwhile, Osborne himself has made it very clear what he thinks of the existing HMT numbers and by implication what he thinks the numbers really ought to be. No possibility of political pressure there at all then...

Quinn - yeah, I wonder if the IFS is worried about the competition? Or maybe they'll take a 'who audits the auditors?' attitude. And maybe it would have been more 'Big Society' to just use them rather than setting up another government body...