So it was good to catch up with George Osborne yesterday and have a proper, grown-up chat about how the Tories plan to plug the crippling hole at the heart of the public finances and reform macroeconomic management – do read our page one story and the interview on page 15. Several important points emerged from our chat; all add context to the Tory position.
Mervyn King will remain as the Bank of England’s governor; Osborne dismissed as “complete nonsense” the idea that there could be a plan to remove him before his term expires in 2013. “I have a huge amount of respect and time for King”, he said. He also added that he speaks regularly to Adair Turner, chairman of the FSA (which will be folded into the Bank under Tory plans) and that “he’s a very talented person and I hope he’s going to be involved in the future.”
Osborne reiterated that the Bank will continue to target the consumer price index (CPI) – which excludes assets prices and therefore was entirely ineffective in fighting the bubble – but the reason for this is more one of continuity. The shadow chancellor seemed well aware of its deficiencies; he just doesn’t want anybody to think he’s undermining the Bank’s inflation-fighting credibility. Over time, however, Osborne would undoubtedly widen the CPI to make it more relevant.
While Tory deficit reducing plans remain sketchy, his proposed Office of Budget Responsibility looks more robust than many City commentators have realised. The Office would be set up immediately and would make its views known on the trend rate of growth and other crucial matters; by the time of the emergency budget, it would have torn to shreds Gordon Brown’s more implausible and over-optimistic projections for GDP, inflation and tax receipts – and Osborne would have little choice but to massively tighten spending to respond to its findings. The Office will have teeth and will represent a genuine transfer of power from the Treasury – and that would force Osborne to remain on the fiscal straight and narrow, whether or not he likes it. Big cuts would be inevitable.
At the moment a key problem with official Treasury growth and revenue forecasts is that they assume the economy barely responds to changes in tax rates. A key argument against high tax rates is that they kill off or chase away economic activity – and hence, paradoxically, tax receipts. Yet this isn’t reflected in the official Treasury models. Osborne won’t change this completely – he was at pains to describe himself as a “fiscal conservative” yesterday, rather than a supply-sider; but he wants the Treasury to produce an alternative, dynamic model of the economy, the findings of which would be published in tandem with those of the old models.
None of these changes go as far as some of us would hope; there is much that is wrong with many of the Tories’ other ideas. But taking the Tory policies as a package, it is now clear that a Chancellor Osborne would be much more radical than is usually realised.