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.

Jeremy Corbyn delivers a speech on the arts in north London on September 1, 2015. Photograph: Getty Images.
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Can Labour MPs force Corbyn to bring back shadow cabinet elections?

It is not up to the parliamentary party whether the contests are reintroduced. 

Soon after Jeremy Corbyn became the frontrunner in the Labour leadership contest, it was reported that he intended to bring back shadow cabinet elections. But as I later wrote, that's not the case. Corbyn has resolved that he will maintain the right to appoint his own team, rather than having it elected by MPs (as was the case before Ed Miliband changed the system in 2011). As he wrote in the NS: "Whoever emerges as leader on 12 September needs a shadow cabinet in place as soon as possible. I will appoint a strong, diverse shadow cabinet to hold this government to account from day one."

Now, ahead of his likely victory a week on Saturday, Corbyn is under pressure from some MPs to reverse his stance. Barry Sheerman, the former education select commitee chair, told me that he wanted a "serious discussion" within the PLP about the return of the elections. While some support their reinstatement on principled grounds, others recognise that there is a tactical advantage in Corbyn's opponents winning a mandate from MPs. His hand would be further weakened (he has the declared support of just 14 of his Commons colleagues). 

But their reinstatement is not as simple as some suggest. One senior MP told me that those demanding their return "had not read the rule book". Miliband's decision to scrap the elections was subsequently approved at party conference meaning that only this body can revive them. A simple majority of MPs is not enough. 

With Corbyn planning to have a new team in place as soon as possible after his election, there is little prospect of him proposing such upheaval at this point. Meanwhile, Chuka Umunna has attracted much attention by refusing to rule out joining the left-winger's shadow cabinet if he changes his stances on nuclear disarmament, Nato, the EU and taxation (a lengthy list). Umunna is unlikely to remain on the frontbench but having previously pledged not to serve, he now recognises that there is value in being seen to at least engage with Corbyn. Were he to simply adopt a stance of aggression, he would risk being blamed if the backbencher failed. It is one example of how the party's modernisers recognise they need to play a smarter game. I explore this subject further in my column in tomorrow's NS

George Eaton is political editor of the New Statesman.