Russell Lynch: Fiscal watchdog barks again, but Government isn’t listening

Robert Chote’s fiscal watchdog, the Office for Budget Responsibility, needs a new name. When a Government doesn’t appear to be remotely responsible, or care that much about budgets, something more pungent is needed.

The Office for Bullshit Rebuttal has a nice ring to it; keeping the same initials might save on the stationery, too.

Chote is supposed to be the headteacher marking the homework, but repeated swishes of the cane don’t seem to bring about any change in behaviour. Instead the errant pupils are more interested in scrapping among themselves at the back of the classroom, as demonstrated by this week’s Parliamentary warfare.

The OBR’s latest Fiscal Sustainability Report is a case in point. Theresa May set out plans for an extra £20.5 billion in health spending by 2023, funded by a “Brexit dividend” and “us as a country contributing a little more”. But in this post-truth age May appears to be taking lessons from her “fake news” counterpart across the Atlantic. The dividend — regaining EU contributions — doesn’t exist, the OBR says, destroying the myth with cold numbers.

Take away the £7.5 billion cost of leaving from our £13.3 billion contribution in 2023 and you have £5.8 billion, which will probably have to be spent on other things apart from health.

Clearly the “contributing a little more” part will be doing the heavy lifting on the health bonanza; Chancellor Philip Hammond will doubtless make this plain in our diminishing payslips after November’s Budget.

And in any case, the whole ‘Brexit dividend’ concept is a fantasy, as “it is more likely to weaken the public finances than strengthen them over the medium term, thanks to its likely effect on the economy and tax revenues”.

The recent spree heaps yet more pressure on the longer-term public finances, already burdened with an ageing population needing extra health spending.

In the absence of corrective measures, the OBR estimates net debt at a phenomenal 282% of GDP by 2068, and a deficit of £176 billion a year in today’s terms. But these are problems far off in the future, when the PM is measuring her lifespan in days, like the proverbial mayfly. How else do you explain this Government’s fast and loose treatment of the public accounts?

Another issue exercising Chote this week is the accounting treatment of student loans, which gives the Treasury another fiscal free hit. That’s because the current accounting rules state that if student loans are sold off at a loss before they are written off after 30 years, there’s no impact on the deficit.

That creates a “huge incentive” for the Government to finance higher education with loans that can be sold off, says the Treasury Select Committee. Mischievously, Chote said a more realistic accounting approach to tackle this “fiscal illusion” — treating some of the loans as genuine loans, and the ones unlikely to be paid back as grants — could raise the deficit by £15 billion.

That, coincidentally, is roughly the same amount as the Chancellor’s headroom against his target of cutting the deficit to 2% of GDP by 2021.

Rather than do something about this accounting fiddle the Government looks set to embrace it further, especially with £12 billion of loan sales in the pipeline. Its mealy-mouthed response to the OBR’s report talks about “taking account of their impact on both sides of the government balance sheet” although it doesn’t go as far as suggesting a change in the rules.

But then this administration has been shameless in its treatment of fiscal conventions for years, such as its reclassification of housing associations to the private sector last November. That trick removed up to £81 billion from the UK’s debt pile and nearly £4 billion a year from the deficit, largesse which Hammond could spend elsewhere.

That’s despite the OBR saying the change had “no material effect on the underlying health and riskiness of the public finances” because ministers would be forced to stand behind associations, whatever their classification, in the event of financial difficulties.

Chote has a good line in plain-speaking sarcasm but the warnings of his organisation remind me of former Bank of England Governor Mervyn King’s complaints a decade ago; when it came to banks, he only had the power to “issue sermons and organise burials”.

If the Government keeps ignoring the OBR’s sermons, it’ll soon be burying the public finances.