Labour and the politics of budget responsibility

The stakes are high as Labour seeks approval from the Office for Budget Responsibility

Craig Berry
Craig Berry

Labour’s Shadow Chancellor, Ed Balls, has requested that the Office for Budget Responsibility (OBR) assesses Labour’s plans for government. His intention is to show that the spending commitments Labour makes in the run-up to the general election are matched by cuts elsewhere, or extra revenue, having promised to maintain the coalition government’s deficit reduction plan for its prospective first year in office. The OBR is clearly well-placed to make this judgement.

There is the added bonus of ensuring that the OBR serves prospective governments as well as the incumbent one, given that the main criticism made of the OBR so far regards the apparent limitations of its independence from government.

The problem for Labour, however, is that, in seeking a pre-election seal of approval from the OBR, the party may be harming the prospect of building broad support for progressive policies if and when it forms a government.  Why?  Because of what the OBR represents within the machinery of the state, and what its existence means for the ideological underpinning of macroeconomic management in Britain today.

Let’s take the independence issue first (an issue I have written about previously). It has been largely forgotten that the OBR was set up by the Conservatives in opposition in 2009, as they attempted to make the case that Labour’s excessive spending was at the root of the economic downturn. After the 2010 election, George Osborne simply transplanted his OBR into the public sector, even retaining Sir Alan Budd as its chief executive.

The OBR has been criticised for being over-optimistic in its growth forecasts – an optimism which serves the government’s interests – but its analysis is generally in line with other economic forecasters. A more telling criticism is the timing of OBR forecasts; it famously brought forward the publication of employment projections in 2010 so that David Cameron could refer to them at Prime Minister’s Questions. Absurdly, however, although the OBR determines what to forecast, the Chancellor fully controls when it does so (as well as who leads the agency).

Furthermore, in December 2012 the OBR changed its methodology for calculating the ‘output gap’ – the difference between what the economy could have produced and what it has actually produced over a given period – in a way that appeared to suit the coalition government’s political interests. The key dilemma for the OBR, at this time, was how to interpret the slight upturn in economic growth. A purely cyclical upturn would make no difference to analysis of the budget deficit (and therefore borrowing) related to structural factors. But the OBR concluded that evidence of growth showed that the economy was not as damaged as it appeared by the events of 2008 and the subsequent recession. It therefore revised its model to produce a larger output gap, thus revising down the structural deficit – allowing Osborne to show austerity was working.

The OBR’s decision on the output gap was not necessarily bad economics – many other forecasters have done or will do the same – but that it was taken by an agency so closely intertwined with the Treasury and dependent on George Osborne’s patronage clearly raises serious questions about its independence.

There are signs that Parliament is concerned. The Treasury Select Committee insisted on appointment hearings for Budd’s successor – a move which no doubt inspired Osborne to choose the ‘ferociously independent’ Robert Chote. The Budget Responsibility and National Audit Act 2011 formalised the committee’s ‘veto power’. Crucially, if Ed Balls is successful in his request, it takes us a step closer to Parliament, rather than the Treasury or the Chancellor, taking a leading role in assessing the health of the public finances (as happens in the United States).

Balls seems therefore to be orchestrating a crucial tactical manoeuvre for Labour’s election hopes. The Conservatives’ main message at the next election will surely be that they have made the tough-but-necessary decisions to put Britain’s public finances back in order – while Labour is the party of excessive public spending which got us into this mess. By having the OBR sign off the fiscal neutrality of their spending plans, Labour hopes to have a watertight defence against this attack.

But what about the longer-term prospects for Labour in office? This requires consideration of what the OBR’s creation represents within British politics. The very notion of an organ of state dedicated to ‘budget responsibility’ helps to embed the idea that elected governments are prone to profligacy. At a more basic level, it institutionalises the misleading analogy favoured by Conservative politicians between the public finances and a household budget. The OBR’s role in adjudicating on public spending reinforces the idea that government’s main goal is to ‘balance the books’ and, in macroeconomic terms, to avoid spooking the bond markets and credit rating agencies.

The existence of the OBR, and the role that it plays within policy-making, represents ‘financialisation’ at its fullest extent, with the need for responsible financial behaviour first instilled upon citizens, and then turned back onto the state itself – a process evident under the Blair and Brown governments, but now seemingly taken to its logical extreme by the coalition government. The economic downturn, so the argument goes, was caused by not enough financialisation, rather than too much.

None of this bodes well for progressive politics, and may in fact represent the next phase of neoliberalism’s ideological morphology, as it survives the financial crisis by entrenching its assumptions into policy-making. By design, New Labour failed to challenge fundamentally public attitudes about Britain’s socio-economic structures. It is unlikely that a future Labour government could afford to be so complacent – it will need to develop a convincing critique of neoliberalism and financialisation to justify alternative economic policies. Reinforcing the near-divinity of the OBR’s judgement surely makes this more difficult.

A final point worth noting is where the concerns about independence and financialisation overlap. For the Conservatives, the independence of the OBR was guaranteed not by procedure, but by the status of its leaders as academic economists. The failure of mainstream economics is discussed in the latest SPERI paper, the Great Uncertainty by Colin Hay and Tony Payne. Hay and Payne argue that modern economic theory has produced a world of distorting simplifications and flawed assumptions dominated by neoclassical economists.

In theory, if Parliament (and the opposition) were to obtain greater influence over how the OBR works, it would open up assessments of budget management to a wider array of political perspectives. However, because the very idea of an agency dedicated to budget responsibility is derived from neoliberal thinking, it is hard to imagine anybody but a (neo)classically trained economist being deemed suitable for the job of leading the OBR.