Dominic Alexander considers the latest plan by the Labour leader and how it shows that he is as committed to the same austerity policies as the government he hopes to replace

Keir Starmer is clearly anxious to assure capital that he will be a safe pair of hands to let govern the country. His latest signal is the promise to legislate so that governments would be required by law to consult the Office for Budgetary Responsibility over major fiscal events, and that the OBR would have the right to publish its assessments independently. This is in the name of ensuring economic stability for business, and to avoid another Truss-like debacle. This, apparently is all about being ‘focused on working people and the pain that they’ve been through’, although that pain has been overwhelmingly due to inflation and the cost-of-living crisis, rather than Truss’ mishaps with the financial markets. And yet, Starmer’s actual contribution to the struggles of working people has so far been solely to ban his frontbenchers from supporting strikes for pay rises in the face of inflation.

The mysterious thing about this announcement is why anyone would consider such legislation necessary at all. One of the things that did for Truss was precisely her government’s refusal to release the OBR’s advice on her ‘fiscal event’. Though not the only factor, this triggered a meltdown in the financial markets. It’s hard to imagine any government making that mistake again. Or was Starmer planning to do something as reckless as Truss, and is therefore going to pass legislation to prevent himself from doing it?

In other words, this is just economic stability theatre. The message is, however, quite clear, if largely symbolic: a Starmer government will not in any way deviate from the austerity programme that has ruled Britain since 2010, and will grant further institutionalised power to any entity which can further entrench that settlement. The OBR was created by the then Chancellor George Osborne in 2010 precisely to give cover to this agenda. Ostensibly, the purpose was to separate the task of making economic measurements and predictions from the Treasury, under political direction, into an ‘independent’ body, thereby preventing the government from ‘marking its own homework’, as the saying went. However, economics is neither an exact nor an objective science by any means, and so setting up an independent body like the OBR in no way produces a set of neutral benchmarks by which to measure the potential success or likely wisdom of a government’s fiscal plans.

What it does do is provide a plausible narrative of technical expertise with which to bamboozle the public into accepting that ‘there is no alternative’. The OBR may be independent of the Treasury, but it is not independent of economics as ideology. In short, the purpose of the OBR is to remove politics from economic debate, and this is, of course, what Starmer means by his pointless promise about what he will do to strengthen the remit of the OBR.

Black holes and fiscal rules

Everything that the OBR does is inherently political. For a start, the government sets a series of essentially arbitrary fiscal rules, on the basis of which the OBR evaluates policy. These are to do with net public borrowing and debt, the pace at which the government must seek to reduce debt, and limits to certain types of welfare spending. All of these can be changed by each government, as well as suspended in the case of a ‘significant negative shock’, which is defined by the Treasury itself. In any case, the methodologies the OBR uses to project growth rates, revenue and spending are all contestable among economists, and therefore ultimately political in nature.

During George Osborne’s time as Chancellor, the OBR’s changing evaluations of Britain’s finances came to his rescue more than once. Early on, it changed its forecast to reduce the estimate of jobs that would be lost as a result of the austerity of his upcoming 2010 budget. Later its models discovered an extra £27bn of projected government revenue in time for a budget rabbit trick. On another occasion, it explained that a £58bn overshoot in government borrowing was not the result of Osborne’s austerity programme, but rather of the crisis in the Eurozone. This is not to malign the OBR’s exalted independence of government, but just to suggest that ideological affinities can be very convenient in the highly inexact science of economic forecasting.

The fiscal rules that governments set for the OBR bake in a political stance right from the start. In the autumn of 2022, these arbitrary rules created the story of a £40bn ‘black hole’ in the nation’s finances, which justified Chancellor Jeremy Hunt’s austerity budget of November. However, Karl Whelan, professor of economics at University College Dublin pointed out that had ‘the UK government set a longer time horizon for the net debt ratio to be falling or used a different definition of the net debt ratio, the black hole would be smaller or perhaps non-existent.’ Whelan went on to explain a whole series of technical decisions by the OBR on how it counts the Bank of England’s liabilities, all of which made the fiscal situation look much worse than it need have done. On the OBR’s reasoning for these technical decisions, he confessed, ‘I don’t know why’.

Interest rates and banking profits

Furthermore, there is an issue of how the Bank of England manages interest rate policy. It does not just declare a rise in interest rates, like an exam board sets grade boundaries. A rise has to be engineered into the system. Before 2006, the Bank did this by creating a shortage of reserves, but in the aftermath of quantitative easing, which created an abundance of reserves, this was no longer possible. Instead, the Bank started paying interest on reserves other banks held with it: ‘A bank that received a 4% interest rate just for keeping money with the central bank would not be willing to make loans at lower rates than this, so the interest rate paid on reserves became the floor for market interest rates.’

However, there was a highly political choice to be made here, since the Bank did not actually need to pay interest on the whole of the reserves to have the desired effect on interest rates. Only a portion needed to be treated this way for the same impact on the market interest rate. The estimate is that paying interest only on a marginal part of these reserves, ‘hardly a radical and dangerous idea’, would have saved between £30 and £45bn. Certainly, banks would have gained fewer profits through this move, but it would have allowed for a very different approach to Hunt’s budget.

However, governments have been trying to wall off economic and fiscal policy from public debate for some time. When Gordon Brown made the Bank of England independent in 1998, he was deliberately removing a major instrument of economic policy out of democratic control. The OBR is another advance in the evacuation of economics from political debate, and the closing down of democratically made choices. One economist has suggested that because the OBR’s rules mean too close attention is paid to the short-term balancing of budgets, the need for long-term investment is neglected, thus preventing growth, and making it actually harder to keep fiscal policy in order. He favours creating powers for the OBR to measure what investment is needed where, in order to produce the ‘multiplier effect’. This is the Keynesian term for state investment that, through growth, produces a greater return than was originally spent.

The fiscal rules governing the OBR should certainly be changed so that it is not biased towards justifying austerity, but the whole model should be questioned too. Apparently, even at the LSE, a survey of macroeconomists found that ‘half believed fiscal rules had harmed the UK’s economic performance and nearly one-third favoured scrapping fiscal rules altogether.’ The problem is that institutions like the OBR, rather than producing objective and reliable economic data on which a government can take ‘sensible and pragmatic’ decisions, as Starmer puts it, are part of a technocratic theatre that is designed solely to convince the public that the interests of capital are the only ones that can be taken into consideration. Fiscal rules are a way of closing down economic-policy options ahead of moments of political crisis, when support for different paths might gain traction. Economics was once known as ‘political economy’, and it’s up to socialists to insist that economics is indeed political.