Is it time for an independent fiscal policy? - RSA

Is it time for an independent fiscal policy?


  • Economics and Finance
  • Leadership

Back in 1997, Gordon Brown gave the Bank of England independent control over monetary policy.  A move Labour has used ever since to display their economic credibility.

Back in 1997, Gordon Brown gave the Bank of England independent control over monetary policy.  A move Labour has used ever since to display their economic credibility.

Whether those new powers genuinely helped deliver low inflation and predictable interest rates is a moot point but it did extract the politics from interest rate setting.  So it, at least, helped create the perception of good decision-making in monetary matters.  It also, it could be argued, removed the inertia that can often be created when politicians refuse to abandon past decisions for fear of losing credibility even when those decisions are no longer valid.  So while the Monetary Policy Committee at times might appear too cautious, the decisions are, at least, taken by people who do not have to think about their electoral credibility - hence, the recent admirable turnaround by the more hawkish members of the MPC in the wake of clearly weak economic data.

So it's an interesting question whether we should look to repeat the same trick with fiscal policy.  The Office for Budget Responsibility seems to be on a trajectory which means it will accrue ever greater powers over time.  Since its establishment it has already been given more independence than first planned and Ed Balls now seems to be suggesting it should be given greater powers to judge whether fiscal rules are being met.  The influential Labour MP and member of the Public Accounts Committee, Stella Creasy, has also suggested further and sharper powers for the OBR.

So maybe now is the time for a wide debate about more radical change.  In essence, should we be moving towards an independent or semi-independent fiscal policy where the OBR might be tasked with setting the overall levels of government revenue and spend consummate with the achievement of a certain medium term target for growth and public debt? The Treasury would maintain control over the detail of how those revenue and spend targets are to be achieved but the OBR would set the overall envelope within which HMT had to work.

I'm not sure that this would necessarily lead to economic policy being based on sounder data because the OBR, in its short existence has, like the MPC, a mixed record on forecasting the economy.  But it is at least arguable that the approach could remove the political inertia that afflicted the last Labour Government and seems now to be afflicting the current Government.  The former remaining trapped in a tax and spend mode when there were clear signs (some would argue as early as the early noughties) that the approach was unsustainable and the latter seemingly unable to admit even the need for a debate about deficit reduction plans as the national and global economy teeters on the brink.

There are. of course, big questions to be asked about such a policy not least whether an issue such as the overall level of tax and spend is more appropriately decided by electorates rather than appointed economists. However, it feels to me like an issue that could bubble up to the top of the policy agenda quite soon. Indeed if Labour gets into its stride on the new approach of proving its fiscal responsibility credentials to the electorate, I would not be surprised if such ideas start to see the light of day.  For Labour, at least, they would have a certain electoral - and historical - logic.

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