Magazine article Public Finance

It's the Politics, Stupid

Magazine article Public Finance

It's the Politics, Stupid

Article excerpt

The chancellor has a new weapon in the battle of political ideas. It's called 'dynamic scoring5. An approach to assessing the costs of budget measures, it uses the latest economic knowledge, state-of-the-art economic theory and the best available computer technology. What's more, it tends to show that tax cuts aren't as costly to the public purse as conventional assessments suggest. So what's not to like?

Sadly, George Osborne's new toy risks undermining an emerging political consensus about the appropriate limits of politics.

Some questions are legitimately political - questions of values, about which there is no 'right' answer. Others are, at least in principle, matters of fact. But political debate too often dominates the latter. Values start to shape 'facts' which, freshly minted, are deployed to buttress arguments in favour of the values that spawned them.

When it comes to assessing something as important as the economic impact of different tax and spending policies, there should be no doubt that it's best to leave the politics out. For example, many on the Left struggle to accept that returning to a top income tax rate of 50p might conceivably reduce the amount paid by the well-heeled. Small state devotees, on the other hand, have tended to argue that spending cuts in pursuit of deficit reduction boost economic growth. Neither of these views is sustained by the bulk of evidence.

So establishing the Office for Budget Responsibility has been one of this government's most important - and hopefully enduring - institutional reforms. Part of the watchdog's role is to keep the Treasury honest when it comes to assessing its own tax and spending plans. As an effort to depoliticise questions that are not legitimately political we should all welcome the OBR as evidence of progress. Its immediate acceptance by all the main parties is an encouraging sign of its likely durability.

More's the pity, then, that the chancellor has recently been talking up a series of analytical papers the Treasury is writing to showcase its new dynamic scoring approach to determining the budgetary cost of tax cuts. The first two papers have looked at the costs of cutting fuel duty and corporation tax - two of the government's big giveaway policies.

Under conventional scoring, the assessment of tax cuts must take account of how behavioural changes among those affected will alter the cost of the change. So if duty on fuel is cut, the anticipated revenue loss must reflect the fact that people will drive more because fuel is cheaper. That reduces the cost of the cut compared to a situation where drivers' behaviour is assumed not to change.

Dynamic scoring takes the idea of accounting for behavioural responses a stage further, and then some. A complicated computer simulation of the entire economy seeks to trace all the subsequent behavioural changes people might make in response to the duty cut. Paying less for fuel, drivers now spend more on other goods, increasing VAT receipts, for example. And the resulting higher demand raises investment and employment across the economy, boosting corporation and income tax receipts. A chain reaction of these and thousands of other such relationships brings the entire economy to rest in a new place, with a substantial chunk of the lost fuel duty revenue offset. …

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