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.