Gaming fiscal rules is no way to make budget policy

The chancellor will take centre stage on Wednesday as he delivers his budget. It’ll be Jeremy Hunt delivering the speech, taking the brickbats and the plaudits, making the headlines.

You might be forgiven, though, for thinking that it’s not really Hunt who is taking the decisions. It’s those shadowy beings at the Office for Budget Responsibility who wield the real power. With one changed line in their spreadsheets, with one adjustment to their assumptions, they can be the difference between Hunt the munificent and Hunt the stingy.

Week by week we have been fed news about whether they’ve seen the light and found a few billion of additional “headroom”, or whether they’ve been overtaken by gloom and squeezed the chancellor’s room for manoeuvre.

Of course, all they are doing is advising the chancellor on whether he is on course to meet his own fiscal rule. It is his rule, not the OBR’s. They have to take it as a given. And it’s a pretty daft rule: that debt should be forecast to be lower at the end of March 2029 than the end of March 2028. No matter that it is rising now and is forecast to be higher in five years’ time than it is today.

The problem for the chancellor is that he is sailing so close to the wind, abiding by his rule by such a wafer-thin margin, that tiny changes in assumptions can make the difference between meeting it or not.

Exactly what is forecast for growth, inflation and interest rates four and five years out will determine what he can do on Wednesday. Off the back of those fine judgments we will get tax cuts, or not. We will change the regime for taxing non-doms, or not. The budget will pump money into the economy, or it won’t.

This is patently ridiculous. Decisions about the structure of the taxation of non-doms should have nothing to do with what we think the path of debt might be in five years’ time. Whether we should be cutting income tax today should not be affected by whether we expect to meet or miss such arbitrary targets. The idea that £2 billion worth of changes in forecasts five years out should have any effect whatsoever on policy decisions today is almost literally mad and yet that’s exactly what was being briefed and reported last week.

What’s worse, to make their forecasts, the OBR has to accept as gospel what the Treasury tells it about future policy. So, this whole edifice is built on the presumption that, for example, fuel duties will rise each year in line with inflation, despite not having done so in 14 years.

On the spending side the OBR has to accept figures that imply £20 billion of cuts across a range of public services, despite no information on where those cuts might fall. That’s what led Richard Hughes, chairman of the OBR, to express his frustration in rather undiplomatic terms, calling it “generous” to refer to these plans as a “work of fiction” because “someone has bothered to write a work of fiction, whereas the government have not even bothered to write down their departmental spending plans”.

All of which nonsense has rather brought the idea of fiscal rules into disrepute. Here we are, potentially fiddling with the details of taxes and starving public services of funding because we are paying obeisance to a set of arbitrary rules. Rules which, according to a recent report by the Institute for Government, have led to an inappropriate macroeconomic stance, short-termism, arbitrariness, gaming, fiscal fine-tuning and fiscal fiction. A damning indictment, indeed, and one reflected in the issues that are bedevilling us right now. Everything is being bent to meet the letter of the rules while their spirit, the reason for having them in the first place, is effectively being ignored.

The authors also show the UK at the bottom of another international league table. We may bend every sinew to meet the letter of rules when we have them, but our rules last less long than in any of 34 other countries they examined. They come and go with alarming frequency, junked and replaced when convenient, hence undermining their very purpose.

It’s hardly surprising, then, that fiscal rules have got a bad name. Nevertheless, we need something to guide us, to provide direction, transparency, confidence. Markets, the public, the rest of government, need to know what the Treasury is trying to achieve, why, and how well it is doing.

That would be helped by two significant changes. First, we need fewer fiscal events. We need fewer economic and fiscal forecasts. In normal times one per year of each is plenty. The more forecasts there are, the more chance governments have to game them. Second, the OBR should have more flexibility to comment on the design of the fiscal rules and should offer more subjective comment on the sustainability of policy. We need to be clearer about uncertainty, to look into the longer term as well as over the forecast horizon, to be clear that investment spending is properly accounted for and protected, and to set spending plans over longer periods. We should all pay more attention to the underlying situation than to a few specific numbers.

What we really need is some good old common sense, flexibility, trust, give and take. It is right that we should be aiming to get debt on a downward trajectory. It’s aiming at precise numerical targets that leads to all the silliness and jiggery-pokery. It’s one of the many tragedies of the Truss/Kwarteng mini-budget that trust is in such short supply. That’s why Mr Hunt feels he has to keep so rigidly to the letter of the rules. Yet in so doing he risks undermining the very trust they are supposed to engender.