The strange disappearance of UK fiscal risk


I can understand that few took the OBR's July magnum opus on fiscal risk to the beach as summer reading. But tanlines are long gone and still it lies neglected.

A few specialists—Chris Giles, Tony Yates, and Simon Wren-Lewis—noticed it, opining respectively that it was creditably frank, but that things dubbed risks are why the fiscal exists in the first place and that it's all just a patsy for more austerity.

Otherwise, nothing.

Think about that. Risks with deep fiscal implications loom anywhere you care to look in the world, Brexit or no, so one might imagine that an assessment thereof from an outfit of the OBR's calibre and standing would be a primary focus.

But no. And contrast that with the wall-to-wall fuss—even an Andrew Neil "harrumph"—that greeted the latest IMF downgrade to the UK outlook published at the same time, even though, as Jonathan Portes noted, "we learned nothing from it."

This state of affairs cannot be laid at the feet of the OBR authors. They applied their customary dispatch and diligence to complete the given task within the resources allocated. Instead, it is by design and resourcing of their given task.

That starts with the instruction to define risk as "anything that could happen to above- the-line fiscal". Encompassing bases, rates, effective rates, elasticities, demograhics, compliance, takeup, deflators, contingencies, devolution, macro, micro, the whole nine yards, on all individual revenues and expenditures into the misty future, the inevitable result is a dogs breakfast (well over 300 pages thereof) all in econo-splaining prose. Even the 12 page summary presumes much about the attention span of executives.

The rubric also obligates an assessment of risks arising from finance. But little finance analytical capacity is provided to the preternaturally fiscal types in the OBR to do that.

So Chapter IV delivers a breathless essay, of which an excitable 2nd year undergraduate would be proud, on how finance and regulation can and have messed up in ways unimaginable to econ 101, followed by this total abrogation (emphasis added): "On the basis of the FPC’s judgement, we see a low, but not very low, risk of the financial sector experiencing another crisis in the medium term" (# 4.45). So much for the OBR's independence as it is forced to wash its hands on this key issue in favor of the judgement of an institution which declared loudly, on GFC's eve, that all was well.

This discomfort with matters financial also deeply infects the "stress test" of the fiscal hit from the Big Kahuna—a major macro crisis. This approach sounds neutral and authoritative because it hides behind the skirts of the Old Lady of Threadneedle Street, no less.

But so much is wrong here. No recent banking crisis, including the GFC, occurred without prior stress tests saying "no problem"; so much for them being authoritative. Then, there is no established hurdle—some drop-dead debt-to-GDP ratio—against which to measure fiscal robustness under stress; so all we learn is that if things are bad, then things are bad, hence the "patsy" critique. Moreover, focussing the Big Kahuna discussion on the fiscal and not the macro is bizarre, akin to stress testing in 1910 how the paint would corrode over a century should the Titanic hit an iceberg—its a question but its hardly the question. And this multi-faulted discussion is hidden well away in the penultimate chapter, a severe test of your stamina to get anywhere near it.

One might think that "at least nothing gets missed" by such an encyclopedic survey of fiscal matters. But even beyond the self-highlighted gaps—including climate change—very significantly not: risks arising from inadequacies in the fiscal rule itself are overlooked, and the identified risks are all treated as independent of each other; potential interactions between them—which could attenuate and/or greatly amplify overall dangers—are completely unaddressed.

Last, the report setup foresees a government response, their return of serve, a year after this service, a formidable bid (amongst many) for dullest spectator sport of all time. And by my running count, under that setup the government is now faced with a whopping 58 questions from this report—each as encompassing as "the economic risks from Brexit" and "preparing for future shocks"—for its response. To adapt a saying, "It takes a library ..."

With this rubric, resourcing, and setup, no wonder even experts largely tuned out.

But that negates the whole point in giving the OBR the task in the first place. If the fiscal moles at HMT alone engage with the exercise, they might as well have done it themselves.

And the whiff of "Yes Minister" is unmistakable in all this: the government meets international (IMF) requirements to study fiscal risks; the work, released midway between the two major annual budget events, sinks in media silly season and gets no effective scrutiny; everyone vaguely gets the fiscal bejesus scared out of them; and the OBR's potentially much more embarrassing watchdog tasks are done in by the burden. Bingo!

But its no joke. The UK can ill afford such Sir Humphreyisms, but they silenced the OBR ahead of the Brexit referendum and buried its firm endorsement of Mrs. May's manifesto commitment to abolish the triple lock well out of sight in this opus.

The UK loves to pose as best-practice examplar to the world. But with all these rubric and resourcing failings, this form of fiscal risk exercise is a burden that others elsewhere in the world should emphatically not put on their own Independent Fiscal Institutions.

For the UK, there never was any hope of the IMF jumping all over these arrangements because the exercise, effectively form over substance as it is, ticks one of their boxes.

But the Treasury Select Committee could and should have done so. With some prodding, it might yet do so, perhaps along the following lines:

  • Risks judged to have a high probablity have no place in such work; they belong in the baseline—the OBR's macro outlook underpinning the annual budget. This alone would dispense with well over half the material in this report.
  • Post-crisis, risk focus should—one would think self-evidently, and this is key—be not on fiscal but on macro (Titanic paint etc). Sources of macro risk are of much more concern than merely figuring out scope for fiscal to weather various adversities.
  • Such macro risk assessments by OBR could not be done by "stress testing", not least for lack of established hurdles in that (as in fiscal risk) work. They require scanning dark corners of the global economy and identifying the implications in real time.
  • They also require focus on below-the-line fiscal. If the government can readily finance itself without inflation across a various global shocks, then the macro is very different from the case where it cannot do so, regardless of what is going on above the line.
  • All that would require the OBR to tool up properly on global and financial matters. The proposed macro and below the line fiscal analysis goes well beyond what the FPC does and would constitute an essential second public opinion to it.
  • Such work is also meaningless, even misleading (patsy), if restricted to discussion of government policies "as is": specific alternatives, including options to address tradeoffs between identified risks, are needed, not least to focus the official response.
  • Such OBR reports should be ruthlessly prioritized. Accounting for interactions, they should address only the top three or so risks outside the baseline and offer associated policy options. Leave the rest to HMT, the relevant ministries, and ordinary politics.
  • Publish the reports at the same time as the annual budget, even if, as with the macro assumptions, they are submitted to HMT confidentially in advance. This would establish the budget as the formal vehicle for the government response.
  • And prose doesn't have to go all the way to my sort of fire-branding: Simon Wren- Lewis's blog and anything published by Susan Schadler model macroeconomic writing with brevity, accessibility, and flair.

All this would significantly refashion this report, as well as the OBR itself. But such is sorely needed for these and for rest of the considerable hangovers from Gordon Brown's and even moreso George Osborne's macrofinancial setup.

And if you had such a report to look forward to in this Wednesday's budget, you'd pay attention; you might even take it with you on your winter break.

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