Ben Clift
The creation of the Office for Budget Responsibility (OBR) in 2010, and its subsequent embedding in UK economic policy-making, is part of a broader trend of expert involvement in economic policy-making in the UK and beyond. Credentialled economic experts, working for independent bodies such as central banks or fiscal councils, play a greater role in making the evidence-based judgements involved in overseeing and evaluating government economic policy decisions. Commitments to what is often termed ‘technocratic economic governance’ are part of a political settlement across advanced economies in recent decades – as I explore in my new book.
Labour and the Politics of Technocratic Economic Governance
Labour has a long relationship with rules-based economic governance, and independent technocratic oversight of economic policy. When in power in the 1990s, they were a key instigator of this technocratic shift, introducing Bank of England independence in 1997 and first developing fiscal rules in 1998. New Labour’s commitment to ‘constrained discretion’ involved a rules-based economic policy framework and institutions, delimiting government policy autonomy. This was designed to reconcile both the securing of credibility with international financial market actors and substantial fiscal policy space to pursue activist domestic economic policies. This strategy has been described as ‘credible Keynesianism’.
In the 1990s, Labour – wary of reduced fiscal autonomy – stopped short of creating an independent fiscal watchdog. Yet Labour soon embraced the OBR’s role, partly to signal their commitments to sound money and fiscal discipline. Even in the Corbyn era, Labour maintained strong commitments to fiscal rules, sometimes verging on deficit fetishism. The acceptance of the OBR, and fiscal rules, across the partisan divide cemented their place within Britain’s economic policy regime.
One justification for technocratic institutions such as the OBR is that they make economic policy-making more ‘evidence-based’. Prior to its creation, wishful-thinking Chancellors from Lawson to Brown tended to assume strong positive effects (e.g. on growth) of their policy proposals. The OBR now provides the independent economic forecasts which form the basis of budgetary decision-making. This ended Chancellors’ over-optimistic economic forecasting. The OBR was an important change to the transparency and reliability of official UK economic policy evaluation, eliminating much scope for political manipulation in the presentation of UK fiscal policy.
Fiscal Prudence: an evolving notion
The OBR sees itself as a non-normative body, applying the settled wisdom of the economics profession in scientific fashion. The technocratic presumption that experts dispassionately administer and apply an agreed policy script is at odds with the reality of a spectrum of different economic ideas, concepts and theories from which they could draw in any given conjuncture.
The technocratic veneer that enshrines the work of the OBR, the UK fiscal watchdog, obscures an important aspect of the politics of technocratic economic governance – namely the politics of economic ideas involved in putting independent fiscal oversight into practice. The OBR’s economic analysis, evaluation and oversight inevitably engages competing constructions of economic reason, drawn from different theoretical homes. These assumptive foundations underpin how market economies are understood, and through that inform expert economic assessment.
This repertoire of economic ideas deemed respectable and useable amongst leading economists and expert economic institutions has broadened in the early 21st Century – a period that has been noteworthy for frequent and intense economic crises. The ‘Great Moderation’ which preceded the financial crash has since been relabelled ‘the Great Complacence’. Three supposedly ‘once in a century’ shocks – the Global Financial Crisis (GFC), Brexit and the Covid-19 pandemic – occurred in a short time. Assumptions about the equilibrating, stabilising properties of free markets no longer seemed so persuasive or apposite. Successive and overlapping crises disrupted some settled economic wisdoms about the role of the state, and appropriate economic policy in response to economic crises. These shifting sands of economic rectitude have altered the terrain on which the OBR adjudicated upon fiscal probity.
Britain’s unprecedented fiscal policy response to COVID was legitimised through the assertion that the country was ‘on a war footing’. In the pandemic’s early stages, the government’s “battlefield medicine” fiscal approach was scaled up dramatically, as prior norms were abandoned in a bid to stem COVID’s damaging economic effects. The UK government’s active and fiscally expansionary pandemic response reflected a radical shift in thinking. This rethink of the appropriate role for fiscal policy within counter-cyclical economic stabilisation and crisis response extended to expert bodies. The OBR, designed to oversee UK fiscal rules and prudent public finances management, began to adapt its traditionally cautious approach. They pointed out that fiscal activism on an enormous scale was necessary to avoid eroding UK fiscal sustainability.
This underlines the contingency of economic orthodoxy. The standard mantra of leaving everything to free markets, baked into dominant economic models, could no longer be sustained. Instead, the pandemic refocused attention on the appropriate stabilising role of the state in the economy and society. Priorities changed once again as the threat of COVID-related economic collapse receded and inflationary pressures and borrowing costs rose. The existence of varied and changeable views on what constitutes appropriate and sound fiscal policy makes the OBR’s narrative of the UK economy a political artefact. This offers scope for more emphasis on public investment and expenditure under a future Labour government.
Yet whilst the OBR is willing to endorse policy activism, it still retains a close eye on UK fiscal sustainability. Their remit, after all, is to ensure ‘sound’ public finances, and the OBR therefore seeks reassurance about revenue-raising tax policies to fund more public services provision and increased government spending. This is difficult terrain to navigate for a prospective Labour administration with significant public policy ambitions, but wary of a reputation for increasing taxes – or being portrayed as fiscally irresponsible. Its relationship with, and evaluation at the hands of the OBR will play an important role in shaping perceptions of how far Labour’s economic management can be trusted.
The OBR and the Politics of Fiscal Rectitude
George Osborne’s creation of the OBR under the Coalition government brought the technocratic tendency in the UK economic regime to its fullest fruition. The OBR’s genesis occurred in the heat of politics of austerity, with the institution used by Osborne as a stick to beat ‘fiscally profligate’ Labour with. This continued a tradition of Conservative statecraft asserting that Labour could not be trusted to run the economy. The OBR, and the revised fiscal rules it oversaw, were presented by Osborne as codifying supposedly superior Conservative fiscal rectitude, an impression Labour have always found hard to overturn.
Osborne’s tendentious and erroneous claims about ‘Labour’s debt crisis’ asserted that Labour fiscal profligacy had caused the financial crisis. The Conservatives’ new austerity-centric fiscal philosophy urged Britain to ‘live within its means’, and to ‘pay its way in the world’. These household analogies can ring true with electorates uninterested in the intricacies of macroeconomic policy, but they are erroneous when applied to the public finances. Their policy corollary was austerity and fiscal retrenchment.
Building on their economic critique of Labour, the Conservatives proposed a new fiscal regime with enhanced independent expert oversight. Osborne presented the OBR as the solution to the problem of Labour mismanagement. Entangling an independent and self-avowedly apolitical body in the partisan politics of fiscal rectitude in this way placed the fledgling OBR in an invidious position.
For its part, however, the OBR quietly gave the lie to Osborne’s claims. Its evaluation of the June 2010 ‘emergency’ budget documented Labour’s modest deficits and net public borrowing. Labour soon embraced the OBR, hoping to benefit from the imprimatur its policy evaluation could offer. As shadow Chancellor, Ed Balls campaigned (albeit unsuccessfully) for OBR evaluation of Labour’s 2015 economic policy programme. Such independent oversight, Balls and Miliband thought, would demonstrate Labour’s credentials as a party of fiscal discipline.
The OBR and Starmer’s Labour
Labour under Starmer has remained committed to fiscal discipline, economic policy rules, and the OBR. Starmer went into bat in defence of the fiscal watchdog when it was under attack from Ministers under the ill-fated Truss administration. New Labour-era concerns about independent fiscal oversight limiting policy autonomy seem to have subsided. Yet the OBR’s judgements, and their prioritisation of fiscal sustainability, could yet clip the wings of Labour’s reforming ambition. So, what are the implications of OBR assessment, narrative and commentary on the UK fiscal stance for Labour’s ‘Missions’ agenda?
On Labour’s aspirations for the highest sustained growth in the G7, and productivity improvements, we may anticipate OBR scepticism. ‘Good jobs and productivity growth in every part of the country making everyone, not just a few, better off’ is a laudable ambition. However, the OBR have constantly heard promises from governments about how their policies will transform the UK’s growth and productivity prospects. They always await evidence in the data of such material improvements in economic performance. The history of the OBR, in short, has been one of consistent disappointments in the face of anticipated returns to earlier, stronger productivity which never materialised. Under-performance on Labour’s growth and productivity agenda is likely and would be highly consequential. Lower growth and productivity limit fiscal space and reduce monies available to fund Labour’s ambitions for reforms. The OBR, after all, have a track record of making Chancellors uncomfortable by pointing out gaps between spending commitments and revenue raising to pay for them.
Labour’s missions on breaking down barriers to opportunity, and building an NHS fit for the future focus on public service provision and tackling societal inequality. In terms of that broader social justice picture in Britain, OBR assessments have consistently pointed out historically significant falls in living standards and stagnation in incomes over 20 years. Real changes in economic, social and labour market policy will be needed to deliver social justice in the face of these deep-seated inequalities, and the very problematic distributional outcomes of British capitalism. However, the OBR also points out that the tax take is already the highest in decades, as are levels of public spending. So Starmer would have limited policy space to make the pledged improvements while continuing to adhere to the fiscal rules he and Labour value as an important source of economic credibility.
Labour’s laudable commitments to address inequalities will be closely scrutinised by the OBR. They have held successive Tory Chancellors to account, pointing our poor economic and social policy outcomes on incomes and living standards. Were Labour unable to alter the long-term trajectory of deepening inequalities, similar OBR commentary may sting Labour more – as they are more invested politically in improving the lives of the poor and vulnerable.
Labour’s commitments on green transition, pledging ‘zero-carbon electricity by 2030’ and ‘accelerating to net zero’ aligns in many ways with OBR commentary on the fiscal costs of climate change mitigation. Their 2021 Fiscal Risks Report lays out the gravity of ‘the catastrophic threat posed by unmitigated global warming and climate change’. It identifies ‘several market failures’, and highlight ‘snowball effects’ and ‘amplifying feedback mechanisms’ which could lead to ‘spiralling and irreversible costs’. The OBR makes the case for early and decisive ‘net zero’ mitigation action being much less fiscally damaging. They also identify a key role for the state in orchestrating transition to net zero, chiming with Green New Deal thinking which was a prominent feature of earlier Labour pronouncements on tackling the climate emergency.
All that said, their fiscal sustainability remit requires the OBR to underline that debt is high and demands on public spending already very extensive. This context suggests the need to fund climate change mitigation through a much bolder transfer of resources from polluting fossil fuel industries. In the absence of this, the OBR’s fiscal sustainability concerns will likely limit monies available for the massive societal transformations that ‘accelerating to net zero’ requires.
Labour, the OBR, & the Politics of Fiscal Rectitude
Since the 1990s, Labour has embraced rules-based economic policy, and shown itself to be fully bought in to the independent fiscal oversight regime. Labour politicians see an independent fiscal watchdog as important for bolstering their economic credibility. Starmer continues that tradition, championing the merits of the OBR and the imprimatur its economic policy evaluation can offer. Evolving views on sound fiscal policy could offer scope for more activism under a future Labour government.
The transition from Starmer’s 10 pledges to the five missions indicates reforming zeal may be waning. Even so, the relationship with the OBR may become more fraught as Labour seeks to transform economic outcomes while remaining within the UK’s fiscal rules. High levels of debt, taxation, and public spending will not make the politics of fiscal rectitude any easier to navigate, as the OBR will no doubt assiduously point out.
Ben Clift is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick. He has published widely in many leading journals. His latest book, The Office for Budget Responsibility and the Politics of Technocratic Economic Governance, is out now with the Oxford University Press.