The Conservative Party’s latest extra-manifestorial outburst that they would outlaw rises in certain taxes if they were elected takes the biscuit. They have not been alone in electorally-motivated and economically inexplicable tax gestures – the Labour Party have indulged too – but they have gone furthest.
What do these proposals say about the Office and Charter for Budget Responsibility, which were set up to provide fiscal credibility via independent scrutiny? If these bodies are not adequate to do their job and instil trust, what’s wrong with them and why are the major parties not suggesting reform?
I suspect that the reason is that these policies are offered because they sound catchy. It’s the modern, escalated version of ‘Read My Lips. No New Taxes.’ Beyond which, seemingly, there is nowhere else to escalate.
This election provides a great example of why there is such a good case for Simon Wren Lewis style fiscal councils.
Imagine a regime where the government of the day sets i) how redistributive tax and welfare policy is, ii) how countercyclical G-T should be overall, in broad terms, iii) even what share of counter-cyclical policy should be done via G or T. Then an independent fiscal council implements. So the government retains ‘goal independence’, but hands over ‘instrument independence’.
Come election time, parties offer different recipes for i)-iii), not silence and gimmicks.
Part of the problem in the last Parliament was that, feeling fiscally incredible, the Coalition felt it had to embark and stick to a policy of ‘deficit reduction come what may’, despite such a policy being eventually hazardous, once it became clear that there wasn’t going to be a 2nd banking crisis that threatened the value of our own sovereign debt. [Some, like Simon WL, Krugman and Blanchflower argue that even this initial austerian push was not warranted]. This credibility straitjacket was set so tightly it came to define the Coalition itself. So much so that when they eventually reneged in 2012, easing off on deficit reduction as it became clear the economy would not otherwise recover, the Government felt it had to insist – in the face of the facts – that nothing had changed.
If, instead, the Coalition had been defined by a fiscal rule that it handed on to a fiscal council, we could have had a much better recession and recovery. Initial austerity might not have had to be so tight. The subsequent easing off could have been greater, and with explicit expectations management – rather than denial – might have had more effect.
Right now, we need someone to make the case for postponing deficit reduction until there is adequate room for monetary policy to compensate without risk of trapping the economy in deflation, and at monetary policy’s limits. No-one is making that case. All we have is a cacophony of claims about public service or tax promises. Where would we be without BoE independence now? Would the left be promising vast quantities of further QE to pay for HS2? Or the Tories be promising to get interest rates up to save pensioners?
We can see that the Coalition did the country a favour by establishing the OBR. In short order it’s established a reputation for competence, candour, independence, and keeping tightly to its own mandate. This body is the obvious stepping-stone for further reform in the direction of delegating on the implementation of fiscal policy. Its success so far reduces the operational risks of further innovation. And at a time when the declining quality of the political discourse over fiscal policy, and the prospect of perpetual and possibly unstable coalitions, makes the risk of sticking with the status quo greater.