The big headline from Osborne’s first days at the Treasury is his setting up the Office for Budget Responsibility.  Stephanie Flanders describes the move here (she adds an observation about Osborne asking Mervyn King for permission to start cutting) and argues that this is not as significant as Brown giving away power over interest rates to the independent BOE in 1997.  Nevertheless, Ms Flanders sees this (current three man) operation as potentially a ‘hugely powerful force’.  John Rentoul is in no doubt:

the real issue is that the OBR will define government borrowing (clarifying the Private Finance Initiative and other off-balance sheet devices) and pronounce on what should happen to it in the coming years. Osborne and Laws would not be able, in practice, to ignore its rulings, provided that they are not patently unreasonable.

At a time when fiscal decisions will be as massively full of consequence as they have ever been, the word of an appointed three man committee may be too powerful for the new Chancellor to ignore.

The backdrop to this shift in power is the implicit assertion that Labour cooked the books.  David Smith does not agree, and LeftFootForward – run by Will Straw whom we should remember is not only son of a 13-year minister but also ex-Treasury himself – is rather outraged at the slight to the Treasury’s integrity. The FT writers at the Westminster blog meanwhile point out that ‘independent’ forecasters have their problems too, with a graph showing how evenly distributed have been the errors over the long period.

And as Dillow observes the latest revision revealed that Darling had been too PESSIMISTIC by £20bn or so.  All in all, my concerns about an OBR as expressed over a year ago in Fiscal Rules OK? are yet to be assuaged.

In the meantime, the opposite movement of power is taking place in the monetary sphere.  Politicians are recognising that in these difficult times the monetary steps we need become quasi fiscal.  Read Clive Crook today:

Monetary policy was thought separable partly because it seemed simpler: all you have to do is control interest rates. But in a crisis monetary policy gets complicated. Quantitative easing erases the line between monetary and fiscal policy altogether. When central banks support troubled borrowers, public or private, they expose themselves to default risk: again, fiscal policy by another name. Such interventions involve choices about who will be protected and who will pay. Those are, or should be, political choices.

Words that were largely prefigured in Credit Where It’s Due, where I used idea ‘restoring fiscal dominance’.

What an odd world for macro-policymakers.  With Merkel calling for balanced budget rules, and Osborne ceding some powers of suasian (i.e. embarrassment) to the OBR, we have technocrats or inhuman rules taking over fiscal policy, which in its turn is about to be ineluctably infected with the consequences of monetary policy.  Who is in control any more – if things go wrong, who do we blame?  What political structures do we need to manage accountability and to coordinate all these areas?  That is the biggie.


9 thoughts on “Wresting back monetary control, surrendering fiscal

  1. Interesting argumenst on similar themes (in a discussion of Rodrik’s Trilemma) over on the Crooked Timber Of Humanity blog…

    More on the trilemma In a discussion on the Greek economic mess) on

    (The Trilemma concept: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time.)

    1. Thanks for those links – I remember reading Rodrik in my Econ HIst course and lost the papers, so this is most welcome. Thanks

      1. I’m unconvinced by the power the OBR is going to actually be able to wield. The margins for errors involved in crises, when it really matters, will only make their predictions wrong in a different way to the predictions made by Treasury bods. What will the IFS do now as well?

        Anyway, Rodrik’s good, but he blogs only rarely. Worth addingto your bulging bloglines.

  2. Osborne says:

    “And at the Budget I will announce the overall path we intend to pursue for the public finances, and against which the OBR will judge the government’s fiscal policy.”

    This is the key. How flexible is that path to how our situation has evolved? Too close to a 2% CPI-type target, and if we end up going back into recession, Osborne will find it hard to reach for the discretionary stimulus.

  3. I had two friends who used to work at the Treasury…..both left because they felt that it had become overly politicised. One (a LibDem voter by choice) found himself effectively working for the Labour party to try and discredit the Tories. So, as for Will Straw being outraged by slights on the Treasury’s staff….maybe he should be less myopic about what those staff were being used for by their bosses.

    Anyway, the OBR is a sound idea, in my opinion, as it will force a chancellor back into line should in the long term. Brown was overspending year on year but there was no real focus on the issue. Likewise now, with now spending review, Darling’s figures are pretty meaningless. His numbers may or may not be better than initially forecast, because in truth, we don’t know how those numbers are generated. If nothing else, it will force chancellors to be more open and honest about where money is actually spent. Whilst not a perfect solution there is little dowside as far as I can tell.

  4. I do remember that…..I’m not saying that it’s always possible to get everything right.

    However, it is worth noting that the previous Tory administration managed to provide the first surpluses in 30 years, and on the whole were not far off their forecasts, especially when considered over an economic cycle. They weren’t actually that far off balancing the budget over their period of government, despite two recessions….Ken Clarke’s golden legacy.

    That’s what makes page 11 of Gordon Brown’s masterpiece of chutzpah such a rewarding read.

    “Cautious assumption of trend growth”
    “The Golden Rule”
    “public debt as a proportion of national income will be held over the economic cycle at a stable and prudent level”

    None of the above happened. Trend growth was always assumed to be indefinate (no more boom and bust), tax revenues were systematically overestimated and Labour ran a significant budget deficit every year from 2001 onwards, though the increase in debt/GDP was hidden by growth. I need not remind you of the catastrophe we are left with now.

    As for the civil servants in the Treasury; I never worked there so I can’t tell you for sure, but my feeling is that most of them are lovely bright young people. I do think though that Labour politicised the Treasury, if not the civil service in general, and ended up working on Labour or Gordon Brown’s economic project. There clearly wasn’t the level of scrutiny there should have bene whil eLabour embarked on their spending spree, and many are to blame for it. Complacency and political patronage in the Treasury must take some of it though.

    1. I agree entirely that Brown’s criticism of the Major record, in retrospect, seems very churlish – I mean, what a legacy Major left him! It takes some nerve.

  5. “They weren’t actually that far off balancing the budget over their period of government, despite two recessions….Ken Clarke’s golden legacy.”

    Oh glorious achievement!

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