Here‘s an interesting discussion from Mainly Macro: Does the Office for Budget Responsibility really dictate how much tax we pay?

The answer is no. The OBR only predicts the results if a government follows its own fiscal rules and, while this can lead to governments making decisions on a mechanical basis, that is because of its rules, not because of the OBR.

Governments are always at liberty to waive their fiscal rules if they want – but because those rules have been established for specific, stated, reasons it is hard to justify that. By making these decisions more transparent, the OBR in fact increases democratic accountability.

The really interesting part of the article is the discussion about whether the OBR should have more leeway to discuss multiple possible policies, rather than the one laid out by a current government.

Mainly Macro writer Simon Wren-Lewis suggests that the OBR should be allowed not to take government projections of their spending totals or policy decisions as given when past evidence suggests they are highly unrealistic.

He uses fuel duty as an example: the last government repeatedly froze this tax while pretending that it would increase it in the future and the OBR had to accept this lie as fact – making its predictions inaccurate.

Instead, he said he would

give the OBR discretion to look at scenarios based on alternative projections for government spending and taxes. The latest review of the Bank of England’s forecast said it should look at more scenarios, but at present the OBR is not allowed in its budget forecast to look at any scenario that involves an alternative path for government spending and taxes (‘policy simulations’).

Ending this restriction would allow the OBR to avoid being saddled with unrealistic assumptions about government spending, like those bequeathed by the last government. But more generally doing policy simulations alongside its forecast would give the OBR the opportunity to enrich the fiscal debate. The most obvious example was the Coalition’s austerity policy. Indeed I suspect the reason the OBR is not allowed to do policy simulations alongside its forecast is because Osborne did not want the impact of austerity on output exposed in this way.

This change would potentially give the OBR some political power, because it could choose what policy simulations it wanted to do. But Prof Wren-Lewis reckons (and I think he’s right) that it would be responsible and any scenarios it examined would reflect the direction of debates in Parliament.

This would make the OBR a tool for Parliament as a whole, rather than just an instrument of the government. And it would be considerably better than the way it used to be, with secret (or, if you like, confidential) projections done by civil servants who were vulnerable to pressure from politicians.

It would also open up more interesting discussions:

The biggest and most important fiscal issues involve the structure of taxation and spending. Have we got the right balance between direct (e.g. income tax) and indirect (e.g. VAT) taxation? Are we right to exempt so many goods from paying VAT? How does the income tax schedule influence incentives, and is it fair? Should the rich be paying more tax? How do cuts in some areas of public spending increase public spending elsewhere? How much should the biggest area of welfare spending, pensions, be provided by the state? The list of such issues is endless, and these questions are usually much more interesting than a discussion of how much room the latest OBR forecast leaves for tax cuts.

The second most important issue in fiscal policy involves the size of the state. How much more spending do we need on the NHS, education, defence etc, and what taxes need to be raised as a consequence.

If you’re yawning at the thought, you shouldn’t be. These are matters that directly affect the amount of money that goes into your pocket because government policy dictates how much you have and how much goes to other people.

There is a reason you got poorer after austerity was imposed, while the rich got three times richer.

If you don’t understand that, you need to wise up fast – otherwise you will let the current government and those that follow it rip you off again and again.

Is that what you want?

If you don’t, the OBR can help prevent it – if it is allowed to do its job properly.

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