Government and Institutions

Why the OBR shouldn’t audit the manifestos of political parties

Yesterday, Labour forced a Commons vote on allowing the Office for Budget Responsibility (OBR) to audit the manifestos of political parties. It followed a letter sent by Ed Balls to George Osborne last year urging him to pass an amendment to the Finance Bill so that the OBR can legally ‘provide independent scrutiny and certification of costings of political parties’ manifesto commitments on spending and tax, while ensuring the OBR is not drawn into party politics by commenting on the merits of individual policies or examining alternative policy scenarios.’

Many Conservatives, such as Andrew Tyrie, the Treasury Select Committee chairman, Dominic Raab MP and commentators such as Tim Montgomerie agree this would be a good idea. But we believe this would be profoundly misguided, both from the perspective of economic analysis and for the institutional credibility of the OBR.

The key argument in favour seems to be that OBR audits would improve the quality of public debate by providing the public with objective assessments of policy costings. But, in fact, presenting costings based on contestable assumptions as if they were an objective truth would stifle debate.

Balls wants the OBR to provide basic auditing of key tax and spend pledges. So, by definition, the analysis provided would be incomplete, static and automatically biased against tax cuts. Economic judgements and calculations are not objective and purely scientific matters.

For example, a key dividing line between politicians should be whether tax cuts have dynamic benefits that would reduce their fiscal cost (we believe they do). A second such line should be whether increased borrowing might have dynamic benefits as a result of raising aggregate demand that would lower the net cost of any spending programmes (we believe they don’t).

If politicians and economists cannot agree on whether there are likely to be significant second-round and dynamic effects of economic policies, they are hardly going to agree on their magnitude. Economic models contain assumptions and interpretations which form the dividing lines between political parties and academic economists.

Furthermore, the ‘tax and spend’ policies of governments interact with other policies. For example, the impact of a change in stamp duty could be offset by (or, potentially made greater by) a substantial liberalisation of planning controls. Immigration, employment regulation and so on all interact with the tax system so that policies presented at elections are a package, not a menu of bland accounting numbers.

So if one is costing tax and spend policies, one should also ‘cost’ immigration policies, the merits or demerits of nuclear deterrent policies as insurance against attacks, the effects of policies on employment, and so on. This would be incredibly difficult, and the assumptions should be challenged and debated.

In case readers think we are nitpicking, it should be borne in mind that the government has missed its deficit reduction targets not as a result of its spending and tax figures being wrong, but because of the lack of economic growth caused by a whole range of other policy mistakes and unforeseen events.

These ideological differences that lead, in turn, to differences in interpretation of the effects of alternative policies are important in the current political debates. Indeed, they are centre-stage. Last year the OBR audited HMRC’s work on the ‘cost’ of cutting the 50p tax rate to 45p, and signed off on the work that said the cut only cost £100 million as a best estimate (given behavioural effects etc.)

However, Balls has continued to call this ‘a £3 billion tax cut’ – the original, more static estimate of the cost when Labour introduced the 50p rate. There have been similar disagreements about how much a mansion tax would raise. Balls does not believe the OBR’s costing of the government’s own policies. How will anybody reach agreement on its costing of party manifestos?

There are many organisations, such as the Institute for Fiscal Studies and the Centre for Economics and Business Research, which already have the capacity to audit manifestos should the political parties wish to pay for them to do so. Other bodies are then able to critique or comment on their methodologies. It is therefore a typically managerialist, technocratic approach to assume that we need some centralised, government body that can work these numbers out in an objective way and thus remove issues from the political process and public debate.

There’s also an institutional reason why this would not a sensible move. The head of the OBR is appointed by a government. We should keep the functions of government separate from the operations of political parties as far as is possible. But we should also remember that the OBR is appointed by a party that forms a government. One day, a government that leaned in one direction might appoint Arthur Laffer, Philip Booth and Ryan Bourne to the OBR. A government of a different complexion might appoint Paul Krugman, Tony Dolphin and Owen Jones.

The calculation of the cost of a policy is not an objective fact that forms part of a debate about a policy’s merits. Discussion of the cost of a policy is the very starting of debate.

This article was originally published by ConservativeHome.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.