Osborne's new quango to tackle Brown's profligate spending

A few thoughts about George Osborne’s plan to create a new quango called the ‘Office for Budget Regulation' (OBR) if the Conservatives win power. It was the first of the Conservative financial reforms to be announced at the weekend. The role of the new office would be to ensure government does not break certain spending or borrowing limits, as part of a new “Debt Responsibility Mechanism.” It would have a remit of forecasting the public finances and saying whether current trends are in line with the desired path. The idea is new in the UK although other European countries have similar ‘Offices’ in place and in the US there is the Congressional Budget Office (CBO).


George Osborne has said: “We will call time on Gordon Brown's age of financial irresponsibility and put in place an independent system that will allow a referee, if you like, to show a yellow card to a Chancellor and Prime Minister if they are stepping out of line.”

So, why has Osborne done it, how will it work and are there any problems?

• It aids the Conservative narrative that Brown has been an irresponsible, profligate spender and borrower who encouraged an irresponsible decade of unsustainable growth on the back of unprecedented levels of public and household debt. The Shadow Chancellor used his Conference speech yesterday to talk about the OBR and give an ‘honest’ assessment of the economic situation saying all the money had been spent and the “cupboard was bare.” This of course he blamed on the profligacy of Gordon Brown. Osborne said there was only one Golden Rule in politics: “Never trust a Labour government with the public finances.”


• It shows the Conservatives as the party of Prudence and Stability. Brown once had these two to himself but has jilted them both. His fiscal rules are now worthless and prudence was left behind in 1999 when Brown chose to no longer stick to Tory spending plans and began turning on the spending taps (he turned them on full in 2001).


• As Fraser Nelson from the Spectator has pointed out, it should act as handcuffs for a future Labour government who, in theory, would be reprimanded by the OBR if they ever tried to spend so much money and build up so much debt again. But as Nelson points out, this is slightly defeatist as it anticipates a future Labour government. That said, it is also pragmatic and if successful would be a thorn in any future Labour ‘tax and spend’ government. I see this (and the two points above) as the main reasons for the creation of the OBR. However, there are two possible flaws. One is that the Prime Minister will no doubt appoint the Chairman of the OBR. A future Labour PM could appoint as Chairman someone who is comfortable with a loose fiscal policy (i.e. tax and spend), though if the Tories appoint a Chairman on a long term it would make it harder for Labour to replace the incumbent Chairman. Second, a future Labour PM could just abolish the OBR claiming it was a waste of money. Whether it would be politically possible to do either would depend on how successful, trusted and established the OBR and its Chairman had become and therefore the criticism the media would level Labour’s way if they proposed abolishing it. It would also depend on whether ‘tax and spend’ was a toxic issue in the future. If it was, it is unlikely Labour would propose abolishing the OBR for fear of becoming unelectable.


• It will go some way towards convincing the electorate that a Conservative government will keep its promises to keep spending and debt at sustainable levels. However, it is a sad indictment of politics today that the Conservative Party – traditionally seen as the low tax and spend party – would not be trusted to deliver just that if it featured as a manifesto commitment. This makes me think this is more about constraining Labour and making them look bad than keeping Conservative spending under control.


• It may help placate those Conservatives who are pushing for tax cuts to be offered upfront. If they see the OBR as a credible tool in bringing down public spending (a good in itself for those on the Right as it will signal smaller government) they may also feel, in time, that tax cuts would be able to follow as a result.


• It will help the Conservatives cut spending and provide some political cover for the Tories from Labour attacks that they were cutting essential public services – a favourite line of the Left whenever cuts in public spending are proposed (as if all public spending goes on front line services!)


• Although some have compared the proposed OBR with Labour’s decision to grant the Bank of England independence over setting interest rates, the two are not comparable. Short of rescinding the Bank’s independence, the Chancellor cannot alter the interest rate decision taken by the MPC (though he does set the inflation target). With the OBR, its Chairman will only have an advisory role and will not recommend tax or spending changes. Prime Ministers and Chancellors will be able to ignore the OBR’s advice, though crucially the PM and/or Chancellor will have to come before Parliament to explain why they disagree. This way the government still keeps control but has a ‘spending conscience’ on its shoulder. David Cameron claims it will be a “rod for our own backs” though Peter Riddell of the Times sees it more of a “system of traffic lights” similar to the Bank of England's published Inflation Report before independence in 1997. Nevertheless, so long as the OBR is made credible, any differences between it and the government of the day would be heavily reported on by the media which could help keep a check on government spending and debt, though this would be dependent on the government which first created the OBR not undermining it straight away, which should be possible as it would be a Conservative government.


• Rather than Brown’s current fiscal rules (Golden Rule and Sustainable Investment Rule) which were backwards looking, could be revised (and thus were undermined), and had more relevance as anchors in prosperous times, the proposed OBR is meant to form part of a forward-looking framework for public finances, overseeing a falling proportion of debt and a balanced current budget. As Peter Riddell points out, instead of an upper limit set on spending and borrowing (Brown’s fiscal rules), the focus under the Tories would be on direction: downwards. It is hoped that this could make a real difference although there currently is a lack of detail about timing, and how long it will take to achieve such fiscal prudence.

P.S. Sorry for the absence of posts the last couple of days - i've had a busy few days!