The solid fiscal foundation underpinning all 40 of the bills announced in this week’s King’s Speech is the Budget Responsibility Bill or, as it might more aptly be called, the Let’s Not Forget The Absolute State Liz Truss Got The Country Into Bill.
A big part of the reason for the Truss-Kwarteng omnishambles was that the government announced some major policy changes that involved borrowing a lot of money from financial markets without the usual independent analysis from the Office for Budget Responsibility. Markets reacted in much the way you’d react if you were planning to buy a car, and the salesman said you couldn’t take it for a test drive or look at the mileage – you might buy it, but you’d want a steep discount.
This new law will therefore introduce a “fiscal lock” which will require the Office for Budget Responsibility to run the numbers on any “fiscally significant” policy that hasn’t been accounted for in its forecasts. If the government announces a plan that will cost (or save) anything over about £22 billion, the OBR will write an independent report on it.
This sounds very sensible, and also rather unnecessary. We don’t really need an insurance policy against the possibility that Rachel Reeves might wander into a Tufton Street think tank and emerge with a plan to push through tens of billions of pounds in unfunded tax cuts. If a future chancellor decides to do that, they could probably introduce some sort of fiscal angle grinder.
There is, however, another risk introduced by this bill, because it also allows the OBR will have “the discretion to trigger the fiscal lock” if a measure is temporary or in response to an emergency. The furlough scheme in 2020, would fit this definition. This discretion could in practice become a more significant power; it would mean that at certain points, it would be up to the OBR to say whether government policy gets a free pass.
Ben Zaranko, senior research economist at the Institute for Fiscal Studies, says this is a risky direction to take. “Suddenly, you’ve gone from something fairly innocuous to the OBR deciding whether or not the government’s allowed to do its energy price guarantee, or what it can do in response to a financial crisis. Those are political choices.”
It is of course a huge relief to have normal people in government who aren’t prepared to gamble the nation’s pension funds on a half-cooked economic theory. However, the other extreme is pretending that you can avoid making political choices, and that it’s all just a big maths puzzle.
The two-child benefit cap is one example: there is a clear fiscal issue with paying to remove it, but there is also clearly a long-term economic cost to not removing it. It is not for a dispassionate economist to say which of these is preferable: the job of a politician is to make such choices– and to accept the unpopularity that comes with doing so.
This is a time of very low trust in politics, but it’s also a time of low trust in institutions. Like many developed economies we have a lot of debt and slow growth, which means we need to retain the confidence of the markets, but government also needs to retain the confidence of voters. It doesn’t necessarily help to outsource more control to technocrats.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.
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