Well, first of all a welcome to Robert Chote at the Office for Budgetary Responsibility, as foreshadowed in these columns last week. He is widely accepted to have done a formidable job as director of the Institute for Fiscal Studies, particularly in the run-up to the General Election, steering it through the political debate with rigour and impartiality. This was an important post to get right and it's good to see that just sometimes the best person for the job actually gets it. (And if that sounds partial, well, long-term readers of these papers may recall that many years ago he worked on the Indie's business team and should know he was admired here then.)
The appointment matters because the OBR has to be built into something much bigger. You might almost say we need a custodian of government finances, reporting in a sense to the nation, not just to the Government or to Parliament. It has to be seen as reporting to the nation because politicians by their very nature have to appeal to the electorate of the day, rather than to the citizens of the country in the future.
One of the silver linings of the present clouds has been a growing awareness of the need for fairness between generations. The debts run up by the present generation have either to be paid back by the next one and the one after that, or stolen from savers by giving them a negative real return. A few of us have been writing about the potential tension between young and old for some time. David Willetts and Ed Howker have recently published books on the subject. And just last week Nick Clegg spoke of the way his generation and the one before it had been unfair to the coming ones. So there is progress, though to listen to some of the debate about the forthcoming cuts in public spending you might think yourself trapped in the mentality of the 1960s.
So how might the OBR develop? It has got off to a good start under Sir Alan Budd. It hit a couple of avoidable bumps and has been just a trifle undermined by people eager to attack the Coalition. But it is a decent enough base from which to build. It now has to demonstrate independence as well as competence.
This will be – and should be – a gradual process. The best parallel, I think, was the development of an independent monetary policy following the great inflation of the 1970s and early 1980s. The first step was paying attention to growth of the money supply – publishing money-supply forecasts. Then these become more than a forecast but not quite a target. Then they became targets and by the late 1980s we had inflation more or less under control. Then we goofed, trying to keep the money targets but also target the exchange rate. Policy failed and we were ejected from the ERM. We shifted to an inflation target, and to an independent monetary committee at the Bank of England to set policy to achieve it.
This all took 20 years. Now apply the parallel to fiscal policy. Gordon Brown took the first step of setting fiscal rules but that approach failed. So we have a new attempt. For now, the OBR merely does medium-term forecasts and monitors policy so that the policy is, as far as possible, consistent with the forecasts. I could see in the future it taking a much greater role, making sure that fiscal policy is sustainable over a generation or more.
For example, someone ought to be looking at the implications for taxation of the public-sector pension liabilities. We need to look at the contractual obligations that have been taken on under the various public/private partnerships. And we need to plan for another cyclical recession, or at least an economic slowdown, that on past form should arrive some time around 2017.
This government has managed, to its credit, to regain a sense of control over fiscal policy. We can now borrow relatively more cheaply than we could a year ago, whereas countries such as Greece have to pay a much higher premium to cover their debts. This has led to complacency, the "of course we can finance the deficit, who else can they lend to?" mentality, that I find arrogant and dangerous. Leading Cabinet figures are well aware that we came within a whisker of a collapse in confidence during the time the Coalition was being formed and just afterwards. We are, of course, going to get the spending review. But no government can credibly think beyond this Parliament. That is where the OBR's role will lie.
We have to get back to normal interest rates. You cannot cane savers forever. We have lower official interest rates than at any time in the past 300 years. Now I accept that the policy is correct and that further measures may need to be taken to boost money supply. But these policies cannot be sustained for long without huge damage.
Indeed people's caution in borrowing shows that we don't believe in these low interest rates lasting. They have done the job of halting the collapse in asset prices and have bumped UK house prices up a bit. House prices are now more than 4.5 times average earnings, against an average of about 4 times over the past 30 years. But if house prices are a bit high compared to long-term trends, share prices are a bit low, still below their longer-term averages as measured on a price-earnings ratio.
Yet despite the fact that the Bank has been overshooting inflation targets in recent years, and despite its role in helping finance the housing bubble, it still has, just about, retained its credibility as a custodian of sound monetary policy. It is a tribute to it that we retain that sense of trust, even if the elastic is pretty stretched.
Now apply this to the position of the OBR. It is where the monetary committee was in 1997. It needs a decade where it is seen to be genuinely independent. That, I suspect, will be reasonably straightforward. But it has to do something more, that the Bank failed to do. That is to look beyond its specific terms of reference and look at the stability of the fiscal system as a whole. It is a big task, and Robert Chote and his colleagues deserve a fair wind.
Horror stories apart, it will take just one mis-step to plunge Europe back into crisis
It has been a scruffy week for Europe, or at least Europe seen through the prism of financial markets. The euro has fallen back quite a bit, mainly it seems on fears for the stability of the banking system. These fears in turn come from worries about the ability of the weaker eurozone members in the medium-term to service their debts, and in the short term to carry on funding their financial needs.
I have been hearing all sorts of horror stories, from medicines disappearing off the shelves in Greece because people fear the country won't have the money to import them, to German banks concealing bad debts on shipping leases, to Ireland's ability to keep underpinning its banks.
The difficulty is to separate the signals from the background noise, but on this last point the plain fact is that Ireland has to pay 3.75 per cent more than Germany for 10-year money. Not good, and, I think, a bit unreasonable, given that it has been very responsible in its handling of the crisis, however lax it was in the run up. But once market sentiment runs against you it's very hard to turn the tide. Money is cowardly. It flees at the first sign of danger.
There are several tests coming up. One is whether, or at least on what terms, the Continent's banks will be able to raise new capital. Another is whether Hungary will be able to keep borrowing from the markets, for it is seen as being lax in its economic policies. And another is the extent to which peripheral European economies can keep growing – I am a bit worried about Italy. All Europe needs is for one of these tests to go wrong and we will be back to the crisis atmosphere of the spring.
The brighter aspect to all this is that the euro is likely to weaken further and that will underpin growth in the countries that can benefit from global demand, most notably Germany. What a pity the weakening euro is coming too late for our summer holidays – but there is always next year.Reuse content