Osborne's dynamic plan

How a technical change in Treasury forecasting could help scrap the 45p tax rate.

At the Treasury Select Committee yesterday, in between being quizzed by MPs angry at the extent of the pre-budget leaks, George Osborne revealed that he was planning to enable the OBR to make greater use of so-called "dynamic scoring" when they prepare their economic forecasts – but only when examining tax plans. It may not sound it, but if he made that change, it would be a huge coup for the right.

Dynamic scoring is the practice of including behavioural changes in economic forecasts. Without it, in a static model, changes to revenue after something like a tax hike are facile to calculate. If VAT at 17.5 per cent takes in (say) £175bn, then VAT at 20 per cent will take in £200bn. Similarly, if you are trying to calculate the effects on government revenues of spending £100m buying new trains for the east coast main line, then you can conclude that it will cost £100m – you buy the new trains, everyone carries on riding the line, and nothing changes.

What a static model says is that people are blind to the effect that government actions have when they are choosing what to do. Clearly, that is untrue. But it is also very easy to calculate, which is why it has stuck around for so long.

Dynamic models include all these changes of behaviour. So when looking at a dynamic model for rail investment, you can take into account the fact that nicer trains will make people more likely to travel, boosting ticket revenue; and when looking at a dynamic model for VAT rises, you bear in mind the fact that as prices rise, people buy fewer things, so that an 11 per cent rise in VAT won't lead to an 11 per cent rise in VAT revenue.

The problem for economists is that dynamic models are a lot harder to calculate. Not only are there far more variables to take into account, but you open yourself up to more avenues of attack from political opponents. The combined effect of all the assumptions you must make means that your conclusions can be deeply flawed if you get too many wrong, and, as the IFS says (pdf), can "[open] the door to large controversies if these guesses are made – or perceived to be made – in a politically biased way." While static models contain assumptions that are obviously false, dynamic models still contain assumptions, which can still be just as false. And unlike static models, we can't know which ones these are until it is too late.

So why does George Osborne want to introduce dynamic scoring into OBR models? Does he believe that the government's economists have uncovered a breakthrough understanding in behavioural responses to government intervention?

A clue can be found in HMRC's report into the 50p tax rate, which found that dropping the rate down to 45p would cost far less than expected, because of expected behavioural changes. Indeed, this sort of dynamic thinking is the cornerstone of the Laffer curve, the economic theory that, past a certain point, increasing tax rates reduces revenues.

What Osborne will be hoping is that allowing the OBR to make its models more dynamic still will strengthen the rationale for scrapping the 45p rate entirely, as well as for cutting corporation tax all the way down to 20p by the end of parliament.

Yet while the OBR will be "informed" by these new dynamic models when it comes to tax policy, they won't be taking account of the same information when examining the justification for government investment, where, far from strengthening Osborne's preferred policy, it would weaken it. If dynamic scoring is indeed implemented in this narrow fashion, Osborne will have scored a stealth victory for future Tory policy.

Money on the mind: A 19th century phrenology chart. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Jeremy Corbyn fans are getting extremely angry at the wrong Michael Foster

He didn't try to block the Labour leader off a ballot. He's just against hunting with dogs. 

Michael Foster was a Labour MP for Worcester from 1997 to 2010, where he was best known for trying to ban hunting with dogs. After losing his seat to Tory Robin Walker, he settled back into private life.

He quietly worked for a charity, and then a trade association. That is, until his doppelganger tried to get Jeremy Corbyn struck off the ballot paper. 

The Labour donor Michael Foster challenged Labour's National Executive Committee's decision to let Corbyn automatically run for leadership in court. He lost his bid, and Corbyn supporters celebrated.

And some of the most jubilant decided to tell Foster where to go. 

Foster told The Staggers he had received aggressive tweets: "I have had my photograph in the online edition of The Sun with the story. I had to ring them up and suggest they take it down. It is quite a common name."

Indeed, Michael Foster is such a common name that there were two Labour MPs with that name between 1997 and 2010. The other was Michael Jabez Foster, MP for Hastings and Rye. 

One senior Labour MP rang the Worcester Michael Foster up this week, believing he was the donor. 

Foster explained: "When I said I wasn't him, then he began to talk about the time he spent in Hastings with me which was the other Michael Foster."

Having two Michael Fosters in Parliament at the same time (the donor Michael Foster was never an MP) could sometimes prove useful. 

Foster said: "When I took the bill forward to ban hunting, he used to get quite a few of my death threats.

"Once I paid his pension - it came out of my salary."

Foster has never met the donor Michael Foster. An Owen Smith supporter, he admits "part of me" would have been pleased if he had managed to block Corbyn from the ballot paper, but believes it could have caused problems down the line.

He does however have a warning for Corbyn supporters: "If Jeremy wins, a place like Worcester will never have a Labour MP.

"I say that having years of working in the constituency. And Worcester has to be won by Labour as part of that tranche of seats to enable it to form a government."