Bold move from Osborne – but other reforms needed as well

AS INEVITABLE as spring following winter, so has come the charge from the Conservative/Liberal Democrat government that its predecessor had hidden the economic truth from the public in the run-up to the election, making the task of the new administration in clearing up what it will call "Labour's mess" all the more difficult.

The claim, made yesterday by the Chancellor, George Osborne, was dismissed almost immediately by Alistair Darling, the previous incumbent at the Treasury, as the oldest trick in the political book, and there is little doubt that the new man in charge of the country's finances is trying to soften up the country for the eye-wateringly difficult spending decisions ahead.

However, most observers believe there is some truth in Mr Osborne's assertion, and so the Chancellor's decision to set up an independent Office of Budgetary Responsibility, which will take over the job of making economic forecasts from the Treasury, deserves a cautious welcome.

For many years, the Treasury economic forecasts, though sometimes better than those of the City, have been fallible, to say the least, and having a new body which will tell it like it is and be used by the government to inform its decisions, including those for the emergency Budget of 22 June, is a positive step.

Establishing such an institution, however, is a double-edged sword for Mr Osborne, for it will take huge items, like PFI commitments and public-sector pensions, on to the government's books, a move which some City analysts predict will add more than 200 billion to the nation's debt.

While there might be a danger this could have some effect on the perception of the UK's debtworthiness in the markets – though the City has known about these liabilities for some time – it is of benefit to the country for the new government to start with a clean sheet, even if it is one which exposes our excruciating levels of debt.

Mr Osborne, therefore, deserves praise for taking such a bold step, but there are other areas where he could, and should, make reforms which will be to the long-term economic benefit of the country. One would be to insist that house prices should be included in the measure of inflation which the Bank of England uses to determine interest rates.

By including property costs, the Bank would have a better idea of whether the economy was over-heating – as it did during much of the past decade – and be able to act to prevent the country living under the illusion of a prosperity generated by a house-price bubble that eventually, inevitably, bursts.

Less than a week in office, Mr Osborne has got off to a good start, but we will only be able to judge him once we know the details of the 6 billion public spending cuts to be announced next Monday and, more importantly, have studied next month's Budget, informed as it will be by his new creation.