Labour’s costings, like the fiscal costings found in all party manifestos, are flaky. But there’s a solution

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery."

General elections tends to turn journalists and broadcasters into Dickens's Mr Micawber, albeit without the charm. Do the promises of the parties add up? Is there a gap? Is there to be happiness or misery? The questions ring in our ears.

In many ways it's a silly and unedifying spectacle. As the economist Chris Dillow has pointed out, it's a sham to imply that such "costings" exercises can tell us anything about the how the public finances will evolve under any particular government.

That depends far more on the state of the economy. And to the extent that the costings obsession of journalists at election time distract attention from bigger questions of macroeconomic management, it's harmful.

If growth is crushed because the government imposes excessive austerity while interest rates are still at rock bottom - something close to what we saw in 2010 under the Coalition - even the most honest of manifestos and most accurate of costings are not going to help the deficit.

In 2010 the Conservative manifesto pledged to eliminate "the bulk"of the current structural budget deficit by 2015. In fact it was still £45bn in that year, mainly because the economy performed so badly.

Yet at the same time, political parties should not be allowed to promise higher public spending or redistribution without acknowledging the costs and trade-offs. If that sounds like an anti-progressive conspiracy, consider how right-wingers are prone to making assertions about how cutting taxes will magically pay for themselves by turbo-charging growth. The fiscal credibility question cuts both ways. Or at least it ought to.

Labour's tax costings today are a mixed bag. The income tax (£6.4bn) and corporation tax (£19.4bn) raising figures by 2021-22 look broadly reasonable because they are based on a HMRC "ready reckoner" document, which allows anyone to estimate what changing headline tax rates would mean for revenues.

But the assertion that Labour would bring in £6.4bn by clamping down on tax avoidance is simply a madeup number, in the sense that it's an aspiration, rather than being based on any kind of programme that can be evaluated. We saw precisely the same made-up numbers in the 2015 manifestos from both Labour and the Conservatives.

Falling between those two extremes are Labour's estimates that an "excessive pay levy" would raise £1.3bn or that introducing a new financial transactions tax would bring in £5.6bn, to take just two examples. This is speculative because we cannot say with any confidence how the public's behaviour would change in response to the introduction of such new taxes because we have no history to go on.

Would firms simply soak up the new pay levy in the form of lower profits and carry on rewarding top staff in the same way? Or would they curb salaries, meaning the levy raised negligible amounts for the taxpayer? The same applies to the proposed transaction tax. Perhaps asset managers and financiers would trade less in response to the levy, meaning it doesn't produce much money. Incidentally, given Labour regards both excessive pay and excessive financially trading as undesirable, it logically ought to welcome a strong behavioural response - although that would create a problem for its costings.

It's true, of course, that new taxes are introduced by governments all the time. And governments, when they do this, always make an estimate of how much money it will end up raising, taking into account behavioural change. Yet there's a check on over-optimism now in the shape of the Office for Budget Responsibility. The OBR tells the Treasury and HMRC to think again if it isn't convinced by their estimates. And it highlights the uncertainty of particular costings.

The obvious and sensible solution to the issue of election manifesto costings is to allow the OBR to perform the exercise - applying the same uncertainty scale on individual tax proposals as it does at Budgets.

This isn't a particularly radical suggestion. The OBR's equivalent in the Netherlands already costs the manifestos of parties that submit their proposals to it in good time. And the head of the OBR, Robert Chote, has said his organisation is willing to do the job, provided its resources are significantly expanded.

The former Chancellor George Osborne deserves credit for establishing the OBR in 2010. The watchdog has helped restore credibility and transparency to Budgets. But Osborne turned down a proposal from Labour in 2014 to allow the OBR to cost all the party manifestos.

Whoever forms the next government would be wise to revisit this. The results for the voting public might not be Micawberite ecstasy, but we would certainly be better informed about the choices available to us than we are now.'

INTERVIEW: Steve Nickell

Stephen Nickell is “slightly miffed” at Mervyn King.

It’s nothing to do with the former Bank of England Governor’s quixotic views on Brexit. It’s nothing to do with any disagreement the two men might have had when they both served on the Bank’s Monetary Policy Committee in the years before the 2008 financial crisis. It’s nothing to do with King’s supportive noises towards George Osborne’s austerity policies.

This grudge is more ancient than any of that stuff.

As young academics, both Nickell and King signed the letter from 364 economists to The Times in March 1981 warning that the Thatcher government’s austerity budget would make the recession, then raging, still worse. The letter is widely cited by Thatcherites as a historic blunder by the profession due to the fact the British economy exited recession shortly after it was printed.

Nickell has repeatedly publicly defended the letter from the ridicule it has attracted from gloating right-wingers, pointing out that despite the return to growth the UK economy continued to expand well below its previous trend and unemployment continued to rise.

This, he argues, bears out the warning in the letter that Thatcher’s deflationary policies would do unnecessary harm.

“I wanted to point out that a recession getting worse doesn’t mean negative growth, it means growth has to be below trend,” he says.

It’s an entirely sound economic argument: all competent economists consider the counterfactual.

But Nickell feels a bit like the boy who stood on the burning deck whence all but he had fled in making the counter-case to the idea that the 364 economists got it horrifically wrong thirty six years ago.

“I always feel slightly miffed because Mervyn King was also a signatory – but he never likes to bring it up!” he laughs.

Nickell stepped down from the three person committee at the summit of the Office for Budget Responsibility last month, after six years serving on the watchdog-cum-forecaster established by George Osborne.

The role of Nickell, a distinguished academic economist and experienced policymaker, was to add some gold-plated economic credibility to the new institution.

He played the wise consigliere to its younger chair, Robert Chote. And he looks back on his time there with fondness. “We had a lot of fun,” he says in his first interview since leaving the OBR. “It’s nice to be involved in something where you have a clear cut job.”

But the job comes with limitations too.

It obviously meant Nickell couldn’t express his personal views on Government fiscal policy as he had in 1981.

Yet he must have had views.

I suggest to him that his own criticism of that Thatcher budget could equally be applied, just as reasonably, to Osborne’s 2010 austerity budget.

Yes, the economy grew – which Osborne seized on as vindication of his cuts – but wouldn’t it have grown more without them?

Which is, of course, what Labour under Ed Balls – and any number of Keynesian economists – argued.

But Nickell dodges the suggestion that he was secretly gnashing his teeth at the OBR’s (former) Victoria Street headquarters.

“We didn’t go about thinking too much about what the Government should do. Basically because we’re not supposed to think what the Government should do. And secondly.... [there are] many, many people whose job it is to complain about that,” he says.

Some critics argued that the OBR underestimated the size of the UK’s “fiscal multipliers” – the negative impact of each unit of public austerity on the overall growth rate – and that explained why its growth forecasts in 2011 and 2012 were so off the mark.

The International Monetary Fund made waves a few years ago when it conceded that it had badly underestimated its own multipliers in relation to austerity in places such as Greece and Spain.

But Nickell says the IMF never really made its mind up in relation to the UK.

“The IMF had four different measures of multipliers, depending on which branch [you talked to].... The Great Britain team had multipliers very similar to ours. Olivier [Blanchard – the former chief economist of the IMF] wanted to have much bigger multipliers.”

And Nickell stresses that he is still “perfectly happy” with the OBR’s original judgements on this front.

Nickell’s also bullish about the OBR’s Brexit impact forecasts from November’s Autumn Statement, the last round of major projections in which he had a hand.

Brexiteers decried the implied cumulative £59bn hit to the public finances as a result of Brexit highlighted by the OBR’s calculations as far too pessimistic.

“We did get criticised by some people,” says Nickell.  “On the other hand other people said we were rather too optimistic. What can you do?”

He takes come comfort that the Treasury Select Committee didn’t rubbish the OBR’s conclusions.

“Even Jacob Rees-Mogg was not overly hostile”, he says, referring to the most combative Brexiteer on the TSC.

But Nickell argues that the most serious threat hanging over the British economy is not so much Brexit as productivity growth, which has been “abysmally low” since the financial crisis.

“We continue to forecast an improvement in productivity growth sometime in the next four of five years – but it’s a bit of an act of faith that it will revert to its average level of the past 50 or 100 years,” he says.

“What we do know is that if productivity growth doesn’t improve things don’t look good – either for the public finances or for the British people.”

​Nickell doesn’t have much truck with the fashionable idea that there’s a major “crisis” in economic modelling, something recently suggested by the Bank of England chief economist Andrew Haldane.

“I was very disappointed when I heard Andrew Haldane say he thought people behaved ‘irrationally’, ” he says.

“My thinking about these things is that by and large people don’t behave randomly and there are reasons why they do things. They may be thought of as irrational in some sense – left to their own devices people don’t save enough for their retirement because retirement is a long way away and people would rather have jam today rather than jam tomorrow. It seems to me much better to focus on these biases. People have always been like this. It shouldn’t be hard to model.”

There is likely to be more modelling to come. Nickell, 72, is an honorary fellow of Nuffield College, and even has a permanent office and car parking space there as a former warden.

“Not retired,” he stresses as he leaves.

If anyone is looking for some gold-plated economic expertise, they know who to call.

This article appeared in The Independent on 25/1/17