David Prosser: The battle for fiscal credibility

Outlook: Governments should retain their duty to set spending priorities and raise taxation

The credit ratings agency Fitch is entitled to its view that Britain's current plan to cut the budget deficit is too vague and too slow. But if Fitch, or any other critic, thinks it is going to get any more clarity from the Government – or the Conservatives, for that matter – on deficit reduction this side of the election, it is living in cloud cuckoo land.

There is, however, one aspect of economic policy on this issue that we can judge Labour and the Tories on today. Keen to impress on both the markets and the electorate that they are serious about tackling the deficit, both parties have attempted to provide a backstop to their deficit reduction policies.

Labour has made its promise to halve the budget deficit within four years a legal requirement on the Government. The Tories, meanwhile, plan to set up an Office for Budget Responsibility, to be run by the former Treasury adviser Sir Alan Budd, who has promised to "keep the Chancellor's feet to the fire". The OBR's role would be to deliver an independent verdict on whether a Conservative government was keeping its word on borrowing and spending.

Labour's plan has a veneer of credibility. A legal requirement might be considered a tighter corset within which to operate than a system where an independent body simply lobs criticism at a government with which it is unimpressed (and the OBR would have no power to dictate or overturn Treasury policy).

Still, you can imagine all sorts of wriggle room with such a law. And in any case, what would the sanctions be if a Labour government broke its own law? It is difficult to imagine Alistair Darling being dragged out of Number 11 in chains for cutting the deficit by only a third, say.

An Office for Budget Responsibility, on the other hand, could be a real thorn in the side of any government with which it fell out. Having set up such a body with a mandate to hold the Government to account on reducing the deficit, Chancellor Osborne (or Clark, if the Westminster rumour-mongers are to be believed) could hardly ignore its advice.

The OBR, then, is a step in the right direction. And in truth, Labour will likely have to come up with something similar. Its deficit reduction law is no use unless there is a policeman to monitor ministers' compliance and a prosecution service to bring charges should they be necessary. The Treasury cannot be allowed to be a self-regulating authority on this of all issues.

What, though, if we were to go further with the OBR? Imagine, for a moment, that the Conservatives win the election on 6 May. What would be their Bank of England moment – remember how Chancellor Gordon Brown stunned people by handing the Bank independence after Labour won in 1997 – in the days following such a victory?

Handing over a great big slice of fiscal power might be an equivalent gesture. Any democratically elected government should retain its duty and right to set spending priorities and raise taxation in the way it sees fit, but that would not prevent the next administration giving a souped-up OBR power to set borrowing limits within which it had to operate. Not necessarily annual limits on deficits, say, but some sort of programme over the short to medium term.

Chancellor Brown gave the Bank of England its independence in 1997 because he wanted to demonstrate that his Labour government would not be characterised by perceptions of economic incompetence that had dogged predecessors. The Conservatives will not arrive in office with quite so much baggage, but the credibility that handing over some fiscal responsibility would bring might still have its attractions.

If, on the other hand, Labour were to win, might Alistair Darling be persuaded to do something similar? With Gordon Brown in Number 10, rather than Tony Blair, the Chancellor may find it harder to persuade his boss to give up further tools of economic management. Doing so, however, might go some way towards giving the markets the instant reassurance they will want that a Labour government can get on top of the nation's finances. Even Fitch might be satisfied.