What is the OBR?
The Office for Budget Responsibility (OBR) is the UK’s official independent economic and fiscal forecaster. This means the OBR provides forecasts on how economic measures (like GDP and inflation) and fiscal measures (like tax and spending) will change in the future.
These forecasts are typically used as the basis for the government’s fiscal policy decisions – the Treasury does not produce its own forecasts. However, the chancellor is not obliged to accept the OBR’s forecasts. He or she can choose to base policy on different assumptions about the future path of the economy and public finances.
The OBR provides independent scrutiny of the performance of the government in meeting its fiscal rules.
Why was the OBR created?
The OBR was set up in 2010. Before its creation the Treasury produced its own economic and fiscal forecasts for budgets and spending reviews. These forecasts were signed off by the chancellor. This put the Treasury at risk of political manipulation, to forecast higher rates of economic growth and stronger growth in tax revenues; Treasury forecasts were consistently over-optimistic.
What are the responsibilities of the OBR?
The OBR’s current main tasks are:
- Producing, at least twice every fiscal year, at the request of the chancellor, a forecast for the economy and public finances covering at least the next five financial years.
- Evaluating the government’s performance against the fiscal targets the government sets itself alongside each forecast produced.
- Assessing, at least twice every two years, the long-term sustainability of public finances and evaluate fiscal risks from the economy and the financial system. This is currently done through the fiscal risks and sustainability report.
- Scrutinising the government’s tax policy costings at each budget.
- Producing a welfare trends report, at least once a year, to examine the drivers of welfare spending.
- Producing a forecast evaluation report, at least once a year, to assess the accuracy of previous OBR forecasts.
The above responsibilities are UK-wide. Regarding the devolved administrations, the OBR is responsible for producing forecasts for taxes for the Welsh and Scottish governments.
How is the OBR structured?
The OBR is led by the three-member Budget Responsibility Committee (BRC) who sign-off the semi-annual economic and fiscal forecasts as well as the other reports mentioned above. The term length of appointed BRC members is usually five years, though once their term is over they may be reappointed. 28 Treasury Committee, Appointment of Professor Sir Charles Bean to the Budget Responsibility Committee of the Office for Budget Responsibility, 13 September 2016, https://publications.parliament.uk/pa/cm201617/cmselect/cmtreasy/642/64207.htm The current chair is former Treasury official Richard Hughes. The committee is supported by a permanent staff of 35 officials.
New members of the Budget Responsibility Committee are appointed by the chancellor, but these appointments (and any dismissal) can be vetoed by the Treasury Select Committee. 29 Keep M, Office for Budget Responsibility, House of Commons Library, 26 September 2023, https://researchbriefings.files.parliament.uk/documents/SN05657/SN05657.pdf These are the only appointments over which the Treasury Select Committee’s has veto power, making this an unusual additional layer of protection for the OBR’s independence.
There are also two non-executive directors who sit on the OBR’s oversight board alongside the three members of the Budget Responsibility Committee. In the OBR’s own words, the oversight board is responsible for ensuring “effective arrangements are in place to provide assurance on risk management, governance and internal control”. 30 Office for Budget Responsibility, How is the OBR structured?, 10 May 2016, https://obr.uk/faq/how-is-the-obr-structured/
The OBR also has an advisory panel consisting of nine economic and fiscal experts drawn from academia, the private sector, and think tanks. They provide technical scrutiny of the OBR’s research programme and methods. 31 Office for Budget Responsibility, Who we are, https://obr.uk/about-the-obr/who-we-are/
The OBR is a non-departmental public body that is accountable to both parliament and the chancellor and therefore lays its reports before parliament. The BRC, in particular, are expected to appear before the Treasury Select Committee about the decisions behind OBR forecasts, thereby helping parliament hold the government to account for its fiscal policies. As the OBR is a statutory body, it would require primary legislation to abolish it, as opposed to being abolished merely at the whim of a minister. 32 HM Treasury, Office for Budget Responsibility and HM Treasury: framework document, March 2019, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/784039/OBR_HMT_framework_document_2019_update_web.pdf
How does the OBR produce its economic and fiscal forecasts?
The OBR usually requires 10 weeks’ notice from the government to prepare its twice yearly economic and fiscal forecasts. These forecasts will go through several iterations, with the OBR presenting several draft versions to the chancellor over those 10 weeks. During this process the government will provide the OBR with details of any proposed policy changes so the OBR can incorporate these into its forecast.
On some occasions the period for the OBR to prepare its forecast has been shortened due to events, such as during the coronavirus pandemic. In August 33 Letter from OBR chair Richard Hughes to Mel Stride MP, 'Potential emergency budget', 26 August 2022, https://obr.uk//docs/dlm_uploads/Letter_to_TSC_Potential_Emergency_Budget.pdf and October 34 Office for Budget Responsibility, Forecast timetable: 31 October 2022, https://obr.uk/docs/dlm_uploads/31-October-forecast-timetable.pdf 2022, the OBR indicated it was ready to provide a forecast at short notice for the new government.
The OBR uses a macroeconomic model for its forecasts which is jointly owned by the Treasury. When producing its forecast, the OBR relies on data, analysis and other support provided by the Treasury and other government departments – in particular, the Department of Work and Pensions (DWP) and HM Revenue and Customs (HMRC). A memorandum of understanding between the OBR, Treasury, DWP and HMRC sets out the agreed working relationship between the OBR and government, to protect the OBR’s independence.
Can the OBR publish a forecast without a request from the government?
No, the OBR can only publish a forecast once asked to do so by the chancellor. The chancellor is required to ask the OBR for a forecast at least twice in a fiscal year. It is up to the chancellor when those forecasts should be provided, but one must be published alongside the budget each year.
In September 2022, the OBR indicated that it was ready to provide a forecast to accompany Kwasi Kwarteng’s ‘mini-budget’, but the chancellor did not ask the OBR for one and so the fiscal event went ahead without forecasts. The Institute for Government strongly criticised the government for proceeding with such a large package of tax cuts and other measures without an OBR forecast, arguing that this has undermined the credibility of the UK’s economic institutions and policymaking process.
How successful has the OBR been at fulfilling its responsibilities?
The OBR has generally been viewed as a successful innovation and has enhanced the credibility of the UK’s economic and fiscal forecasting. The IMF have praised the OBR for its rigorous, detailed, and highly transparent approach to macroeconomic and fiscal forecasting. 38 International Monetary Fund, United Kingdom: Fiscal Transparency Evaluation, 16 November 2016, www.imf.org/en/Publications/CR/Issues/2016/12/31/United-Kingdom-Fiscal-Transparency-Evaluation-44395
Despite extremely turbulent economic times since 2010, the OBR’s forecast errors have been smaller on average than the Treasury’s in the decade before. 39 Office for Budget Responsibility, Forecast evaluation report, December 2019, https://obr.uk/docs/dlm_uploads/Forecast_evaluation_report_December_2019-1.pdf
The Budget Responsibility and National Audit Act 2011 requires that there should be a formal review of the OBR every five years. The second and most recent external review of the OBR was led by the Organisation for Economic Co-operation and Development (OECD) in 2020 which found that the OBR had succeeded in reducing the bias and improving the accuracy of official forecasts. 40 OECD, OECD Review of the Office for Budget Responsibility (OBR) of the United Kingdom, 24 September 2020, www.oecd.org/gov/budgeting/review-of-the-office-for-budget-responsibility-obr-of-the-united-kingdom.htm The OECD's review did however assess the progress of the OBR on meeting the recommendations made by the Treasury’s 2015 review noting that the OBR needs to be prepared in meeting the challenges of increased fiscal devolution, changes to OBR membership and turnover of long-standing OBR staff.