It might seem like smart politics. And it will reassure the markets. The legislation in the King’s Speech today to ensure all Budgets are assessed by the Office for Budget Responsibility (OBR) no doubt seems like a good idea right now. And yet, there is a catch. The incoming Labour government has now completed the job started by Gordon Brown as chancellor back in 1997, and completely outsourced economic policy to ‘independent experts’. At some point, it is going to regret that decision.
It is not hard to understand why the powers of the OBR have been increased in the King’s Speech unveiled today. It will allow Labour to keep reminding everyone that it is determined to avoid the mistakes of the Liz Truss administration, which famously brushed aside the need for an independent forecast before launching its ill-fated mini-Budget. And it will reassure the bond markets that a ‘fiscal lock’ is now in place that will prevent a Labour chancellor from launching any wild spending plans. To some degree that will even lower borrowing costs, which will help the economy at the margins. It was probably one reason why the pound broke through the $1.30 barrier this morning. The global capital markets will like it.
Yet there are at least two big problems. First, economic policy is now entirely outsourced. The Bank of England controls monetary policy and now the OBR controls fiscal policy. Sure, in theory it will just make an ‘assessment’, but since that is mandated all it has to do is threaten a negative report to kill off any plans a Labour chancellor might have. In reality, the last chancellor to have full control of the economic levers was Ken Clarke in 1997, and British economic policy making is now more constrained than at any time since we left the gold standard before the second world war.
With the fiscal lock in place, a chancellor can make some structural reforms, although those usually take a long time to have any impact, and can play around with how money is split between departments. But the major tools of macroeconomics will be off-limits.
Next, the new legislation has surrendered the UK economy to an unaccountable body, and to the prevailing orthodoxy. The OBR does a perfectly respectable job, given its mandate, even if its forecasts are often well wide of the mark. But by its very nature, it is dominated by conventional wisdom, and it is resistant to radical changes, or anything that breaks away from the consensus.
At some point a Labour government, or indeed an administration from the centre right, may want to break with that and boost growth. It might want to break out of a cycle of stagnation with a big increase in infrastructure spending, or, alternatively, with bold tax cuts that draw inward investment, and stimulate investment. With the new law in place, that will now be impossible. It may be the right choice for now. But in the medium-term the price will be a very high one.
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