A democratic fiscal framework

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The UK’s fiscal framework is suffering a democratic deficit. It relies heavily on the Office for Budget Responsibility (OBR) to judge whether the Chancellor is meeting her fiscal rules. Yet it gives no route for the Chancellor to disagree with the OBR, even when they may be justified in doing so. Born of promises to ​“eliminate” the deficit and take ​“urgent action to reduce debt”, the OBR has manifestly failed to deliver what it was set up to do. Instead, if one views it as part of George Osborne’s austerity agenda, it has been successful in insulating austerity measures from democratic accountability.

The responsibility for this democratic deficit is certainly not solely the OBR’s. It is our entire fiscal framework, and specifically how our fiscal rules are defined, that has created these problems in the first place. In any other context, the OBR would be a well-designed independent institution. Yet, our fiscal framework gives it an effective veto on fiscal policy decisions. It privileges the OBR with a power that has received little democratic scrutiny. This must change to alter the trajectory of economic policy and protect the OBR from being overhauled in a way that allows the government to evade proper scrutiny. NEF proposes reform to the OBR that would sever the link between its assessments of the fiscal rules and government fiscal policymaking, by making it so that the fiscal rules only need to be met by the Treasury’s own forecast. In turn, the OBR’s role would be to scrutinise the Treasury’s economic forecast rather than explicitly define it. Importantly, this is not a call to abolish the OBR but to recognise that its current form is not fit for purpose.

To ensure that the OBR’s newfound independence from the assessment of fiscal rules isn’t completely ignored by the Treasury, we suggest more wholesale reform. We propose an Office for Fiscal Transparency (OFT) that would replace the OBR while absorbing its forecasting capacity. Importantly, the OFT would be required to publish where the OFT and Treasury disagreed on economic forecasting, making fiscal policy more transparent. Further, to stimulate debate, we recommend introducing a Fiscal Policy Committee (FPC). The members of the FPC would be required to judge whether they agreed more with the OFT or the Treasury regarding disagreements. The FPC would allow for better debate and recognition of alternative policy solutions even under our current fiscal rules. This would give the Treasury more degrees of freedom to go against the OFT’s judgment if it so wished.

Taken together, these reforms have the potential to transform UK fiscal policy for the better. However, such a proposal needs to be assessed not only on potential economic merits but on democratic ones too. As we live in an age of rising fascist movements, protecting democracy should be one of the government’s number one priorities. Yet the current approach, where governments seek to bolster independent institutions like the OBR, is doomed to fail. The OBR cannot be protected from anti-democratic attacks if it is already part of an anti-democratic fiscal framework. This paper sets out how to design a fiscal framework that can actually protect the UK against anti-democratic threats.

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