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The Office for Budget Responsibility is a valuable institution and should be preserved

Sajid Javid is right that the OBR’s role should be preserved, and defended it alongside the Treasury as a ‘credible institution’

Sajid Javid has implied that the OBR’s role should be preserved, and defended it alongside the Treasury as a ‘credible institution’. He is right, writes Thomas Pope

In 2010, then chancellor George Osborne set up the Office for Budget Responsibility (OBR) “to address past weaknesses in the credibility of economic and fiscal forecasting and, consequently, fiscal policy”. It has undoubtedly succeeded on these terms, and has improved the quality of both fiscal forecasts and public debate.

The OBR is widely respected among its international peers. But when the recently resigned chancellor is moved to defend it alongside the Treasury and the Bank of England as “credible institutions…[through which] we arrive at sensible decisions which are in the national interest”, the implication is that the Johnson administration is not as enamoured with the OBR as its predecessors.

The OBR has not always pleased government, but has produced accurate and transparent forecasts

Any frustrations recent governments might have had with the OBR’s forecasts, or its monitoring of the fiscal rules, are testament more to the difficult fiscal realities of the past decade than to its being an interfering public body. Abolishing the OBR, or undermining its independence, would be irresponsible. And it would not make the facts any kinder to government.

The OBR has led to a much-improved forecasting process than when this function was carried out by the Treasury. Previous Treasury forecasts – which were ultimately the responsibility of the chancellor and so influenced by political considerations – were plagued by optimism bias. The OBR’s forecasting record is not perfect (it has not been helped by consistently weak productivity growth), but it is better than what came before.

Forecasts have also become more transparent. At each fiscal event, the OBR clearly sets out the assumptions underlying its forecast; it then produces a ‘forecast evaluation report’ to examine and explain any discrepancies between the final outturn and the original forecast. This makes its forecasts more credible. Its position as an independent forecaster also means that genuinely good fiscal news can be taken at face value, so improvements are trusted as representing a genuine uptick in the outlook rather than a government attempting to ‘make the numbers add up’.

The OBR’s work has improved the quality of debate

A more reliable set of forecasts has allowed public and parliamentary debate to focus on the substance of policy, rather than on debates as to the forecasts’ accuracy (a feature of many pre-2010 discussions).

This debate is enhanced further by the other reports the OBR publishes. Its annual Fiscal Sustainability Reports have highlighted important factors, such as demographic change and others, that will apply upwards pressure on health and pensions spending in the next 50 years. Its Fiscal Risks Reports have similarly provided useful information, such as on specific risks to the public finances from shrinking tax bases and higher interest rates.

This work is important. Combined, these reports present a more comprehensive picture of the health of the UK’s finances – and the policy changes necessary to mitigate risks – than government has the time, or the impartiality, to produce.   

Side-lining the OBR would not make difficult fiscal questions go away

Johnson may believe that the opportunity to change regulations and strike new trade deals afforded by leaving the EU will lead to a surge in economic growth. The OBR, on the back of a strong consensus among economists, is unlikely to reflect this view – in the March budget its forecasts are likely to remain sluggish. This will limit the government’s ability to increase spending while remaining compliant with its fiscal rules.

However, there is no sense in which a more optimistic forecast would actually make the underlying fiscal situation any better, or make difficult questions go away. Basing spending plans on unrealistically optimistic forecasts could lead to the government to borrow more than it intended, possibly requiring corrective action further down the line. This is not in anyone’s longer-term interests.

The OBR does not create fiscal problems, it just articulates them. That it does this through rigorous, unbiased and transparent forecasts ensures that fiscal policy decisions are made, and public debate had, with those problems and risks in full view. This should be celebrated. In his first speech as chancellor, Osborne said that, by setting up the OBR, he would “change the way that budgets are made forever”. The OBR has achieved this over the past decade. The government should ensure it can continue its vital work.

Johnson government
HM Treasury
Institute for Government

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