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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Letter from Donetsk: ice cream, bustling bars and missiles in eastern Ukraine

In Donetsk, which has been under the control of Russian backed rebels since April 2014, the propaganda has a hermetic, relentless feel to it.

Eighty-eight year-old Nadya Moroz stares through the taped-up window of her flat in Donetsk, blown in by persistent bombing. She wonders why she abandoned her peaceful village for a “better life” in Donetsk with her daughter, just months before war erupted in spring 2014.

Nadya is no stranger to upheaval. She was captured by the Nazis when she was 15 and sent to shovel coal in a mine in Alsace, in eastern France. When the region was liberated by the Americans, she narrowly missed a plane taking refugees to the US, and so returned empty-handed to Ukraine. She never thought that she would see fighting again.

Now she and her daughter Irina shuffle around their dilapidated flat in the front-line district of Tekstilshchik. Both physically impaired, they seldom venture out.

The highlight of the women’s day is the television series Posledniy Yanychar (“The Last Janissary”), about an Ottoman slave soldier and his dangerous love for a free Cossack girl.

They leave the dog-walking to Irina’s daughter, Galya, who comes back just in time. We turn on the TV a few minutes before two o’clock to watch a news report on Channel One, the Russian state broadcaster. It shows a montage of unnerving images: Nato tanks racing in formation across a plain, goose-stepping troops of Pravy Sektor (a right-wing Ukrainian militia) and several implicit warnings that a Western invasion is nigh. I wonder how my hosts can remain so impassive in the face of such blatant propaganda.

In Donetsk, which has been under the control of Russian-backed rebels since April 2014, the propaganda has a hermetic, relentless feel to it. If the TV doesn’t get you, the print media, radio and street hoardings will. Take a walk in the empty central district of the city and you have the creeping sense of being transported back to what it must have been like in the 1940s. Posters of Stalin, with his martial gaze and pomaded moustache, were taboo for decades even under the Soviets but now they grace the near-empty boulevards. Images of veterans of the 1941-45 war are ubiquitous, breast pockets ablaze with medals. Even the checkpoints bear the graffiti: “To Berlin!” It’s all inching closer to a theme-park re-enactment of the Soviet glory years, a weird meeting of propaganda and nostalgia.

So completely is the Donetsk People’s Republic (DPR) in thrall to Russia that even its parliament has passed over its new flag for the tricolour of the Russian Federation, which flutters atop the building. “At least now that the municipal departments have become ministries, everyone has been promoted,” says Galya, wryly. “We’ve got to have something to be pleased about.”

The war in the Donbas – the eastern region of Ukraine that includes Donetsk and Luhansk – can be traced to the street demonstrations of 2013-14. The former president Viktor Yanukovych, a close ally of Vladimir Putin, had refused to sign an agreement that would have heralded closer integration with the EU. In late 2013, protests against his corrupt rule began in Maidan Nezalezhnosti (“Independence Square”) in Kyiv, as well as other cities. In early 2014 Yanukovych’s security forces fired on the crowds in the capital, causing dozens of fatalities, before he fled.

Putin acted swiftly, annexing Crimea and engineering a series of “anti-Maidans” across the east and south of Ukraine, bussing in “volunteers” and thugs to help shore up resistance to the new authority in Kyiv. The Russian-backed rebels consolidated their power base in Donetsk and Luhansk, where they established two “independent” republics, the DPR and its co-statelet, the Luhansk People’s Republic (LPR). Kyiv moved to recover the lost territories, sparking a full-scale war that raged in late 2014 and early 2015.

Despite the so-called “peace” that arrived in autumn 2015 and the beguiling feeling that a certain normality has returned – the prams, the ice creams in the park, the bustling bars – missiles still fly and small-arms fire frequently breaks out. You can’t forget the conflict for long.

One reminder is the large number of dogs roaming the streets, set free when their owners left. Even those with homes have suffered. A Yorkshire terrier in the flat next door to mine started collecting food from its bowl when the war began and storing it in hiding places around the flat. Now, whenever the shelling starts, he goes to his caches and binge-eats in a sort of atavistic canine survival ritual.

Pet shops are another indicator of the state of a society. Master Zoo in the city centre has an overabundance of tropical fish tanks (too clunky to evacuate) and no dogs. In their absence, the kennels have been filled with life-size plastic hounds under a sign strictly forbidding photography, for reasons unknown. I had to share my rented room with a pet chinchilla called Shunya. These furry Andean rodents, fragile to transport but conveniently low-maintenance, had become increasingly fashionable before the war. The city must still be full of them.

The bombing generally began “after the weekends, before holidays, Ukraine’s national days and before major agreements”, Galya had said. A new round of peace talks was about to start, and I should have my emergency bag at the ready. I shuddered back up to the ninth floor of my pitch-dark Tekstilshchik tower block. Shunya was sitting quiet and unruffled in his cage, never betraying any signs of stress. Free from Russian television, we girded ourselves for the night ahead.

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war