Office for Budget Responsibility

Office for Budget Responsibility

The Office for Budget Responsibility (OBR) is an executive non-departmental public body of HM Treasury.[i] It was established in 2010 to provide independent and authoritative analysis on the sustainability of the UK’s public finance.[ii] The Office was placed on a statutory footing through the Budget Responsibility and National Audit Act 2011. This statutory right grants OBR full access to all Government information relevant to its analysis together with the Treasury’s macroeconomic, forecasting and analytical models.[iii] George Osborne’s intention was to restore public faith in official economic and fiscal forecasting when a run of persistently overoptimistic projections for public borrowing under previous governments has undermined the Treasury’s credibility.[iv]

Contents:

Structure
Main Responsibilities
Relationship with UK Government
Criticism and Controversies
Future of OBR
Further Reading
References

Structure

The Office consists of a Budget Responsibility Committee (BRC), an Oversight Board, an Advisory Panel of economic and fiscal experts, and 18 permanent civil servants. The BRC is chaired by Robert Chote and include Steve Nickell CBE and Graham Parker CBE. They carry out the core functions within the office and have full discretion over the scope and nature of its judgements on the forecasts. [v] OBR’s Oversight Board saw the inclusion of two non-executive members into office. They monitor and assess the effectiveness of OBR’s operational and governance arrangements.[vi]

Main Responsibilities

The 4 main tasks outlined in the Parliamentary Legislation:

To publish at least two five-year fiscal and economic forecasts each year which includes the likely impact of any tax and spending measures announced by the Chancellor. (Economic and Fiscal Outlook)
To assess whether the Government is on course to meeting the fiscal targets that it has set itself and the possible risks that may be involved. (Economic and Fiscal Outlook)
To scrutinize and comment publicly on the Treasury’s costing of tax and welfare spending measures. (Forecast Evaluation Report)
To analysis and report on the health of the public sector’s balance sheet and the long term sustainability of the public finances on existing policies[vii] (Fiscal Sustainability Report)

It differs from other economic forecasters and agencies, because the OBR is more focused on using variables such as nominal GDP and its component in explaining public finances[viii] and it provides ex-ante projections rather than ex-post audits of expenditure. [ix]

Relationship with UK Government

A Memorandum of Understanding (MoU) establishes a transparent framework for cooperation between the OBR and HM Treasury, the Department of Work and Pensions and HM Revenue and Customs.[x] It sets out the working relationship between each body based on three guiding principles of accountability and transparency, effective co-ordination and regular information exchange.[xi] This memorandum, however, does not constitute a legally binding agreement[xii]. The OBR is funded via Grant-in-Aid from HM Treasury’s supply estimate, which is subject to Parliamentary control. The OBR agreed a four year, flat cash funding allocation of ?1.75 million per year with the Treasury during the 2010 Spending Review.[xiii]

Criticism and Controversies

Despite the OBR’s stance of full transparency around its analysis and projections[xiv], some have questioned its credibility. When the OBR got embroiled in a complicated row about government employment forecasts, it raised doubts about just how independent it really was.[xv] The creation of the OBR was seen as a modest institutional change since control over fiscal policy remains firmly in the hands of the Chancellor.[xvi]

The credibility of the OBR regarding it’s accuracy have also been under attack constantly. When the OBR admitted that its forecast on the economy’s size in 2015 was out by ?65billion[xvii], Treasury Select Committee member Jesse Norman commented on the “illusion of technocratic expertise” in the OBR and predictions often involve “a very high level of guesswork”.[xviii] Former Monetary Policy Committee member David Blanchflower have also criticized the OBR’s growth forecasts in the 2012 Budget submission, to be too “widely optimistic” and citing that the OBR have frequently needed to revise downwards from its initial forecast.[xix] The OBR’s assessment over the estimated policy impact has also, in some instances, undermined currently enacting policies such as those relating to immigration in UK.[xx]

Future of OBR

OBR has played an increasingly important role in assessing the Government’s performance in other areas. OBR is undertaking additional responsibilities related to the welfare gap, assessing and opining on government’s performance against the cap and whether the relevant spending is forecast to stay within the cap.[xxi]

In December 2013, Current Shadow Chancellor Ed Balls announced his belief that OBR should play an important role, not just for the current government but for prospective governments.[xxii] He proposed the OBR to take up the role of assessing Labour’s tax and spend policies before the next General Election in 2015. [xxiii] The role of the OBR has increasingly been compared with similar independent fiscal institutions such as the US Congressional Budget Office (CBO).[xxiv] Colin Talbot, Chair of Public Policy and Management at University of Manchester, believes that by undertaking this additional role, it will potentially make financial debates during elections more factual based. [xxv] Andrew Tyrie, Chairman of the Treasury Select Committee, added that it will “enhance the quality of debate on tax and spend”.[xxvi] Former Number 10 Policy Unit special adviser Dan Corry, similarly, argues that getting the OBR to cost Labour’s policies ahead of the election would be a step forward for UK democracy.[xxvii] But this will require a change in the governing Charter of Budget Responsibility. [xxviii] However, some people have denounced this proposal stating the fear that OBR may end up being abused and used as a political tool.

Word Count: 879 (Excluding Further Readings and References)

Further Readings

List of other similar fiscal watchdogs:

Swedish Fiscal Council Report 2013
The role of Australia’s Parliamentary Budget Office
The World’s Oldest Fiscal Watchdog: Netherlands Bureau for Economic Analysis
Case Studies of Fiscal Councils – Functions and Impact

Other areas which has required OBR expertise

4G spectrum auction
UK Swiss tax agreement
Anti-avoidance measures

References

[i] https://www.gov.uk/government/organisations/office-for-budget-responsibility. Retrieved 22 February

[ii] Official Office for Budget Responsibility Website

[iii] Memorandum of Understanding between Office for Budget Responsibility, HM Treasury, Department for Work and Pensions and HM Revenue & Customs, April 2011

[iv] The new forecaster in chief, The Economist, 9 September 2010. Retrieved 22 February 2014

[v] Examination of the forecasts prepared by the interim Office for Budget Responsibility for the emergency Budget 2010, 22 June 2010. Retrieved 22 February 2014

[vi] Office for Budget Responsibility’s Annual report and accounts 2011-2012, 19 June 2012

[vii] Memorandum of Understanding, April 2011

[viii] Office for Budget Responsibility’s Economic and fiscal outlook, March 2012

[ix] Independent Fiscal Institutions: Developing Good Practices by George Kopits

[x] Memorandum of Understanding, April 2011

[xi] Memorandum of Understanding, April 2011

[xii] Memorandum of Understanding, April 2011

[xiii] Letter from Robert Chote to Lord Myners “Re: Costs and staff arrangements at the Office for Budget Responsibility”, October 2011

[xiv] Office for Budget Responsibility’s Annual report and accounts 2011-2012, 19 June 2012

[xv] The new forecaster in chief, The Economist, 9 September 2010. Retrieved 22 February 2014

[xvi] “The new forecaster in chief”, The Economist, 9 September 2010. Retrieved 22 February 2014

[xvii] Wintour, Patrick (6 December 2011), “OBR attacked by MPs over economic forecasts”. Guardian (UK). Retrieved 22 February

[xviii] Wintour, Patrick (6 December 2011), “OBR attacked by MPs over economic forecasts”. Guardian (UK). Retrieved 22 February

[xix] Blanchflower, David (22 March 2012), “David Blanchflower: The OBR’s credibility is in tatters”. The Independent (UK). Retrieved 22 February

[xx] Kirkup, James (14 January 2014), “Immigration has a positive impact, says Office for Budget Responsibility head”. The Daily Telegraph, Retrieved 22 February

[xxi] Letter from George Osborne to Robert Chote, 3 December 2013

[xxii] Letter from Ed Balls to Robert Chote, 22 September 2013

[xxiii] Johnstone, Richard (23 September 2013), “Labour proposes OBR scrutiny of spending plans”, Public Finance, Retrieved 22 February

[xxiv] Von Trapp, Lisa (7 June 2011), The Role of Independent Fiscal Institutions, Budgeting and Public Expenditures Organization for Economic Cooperation and Development

[xxv] Talbot, Colin (24 September 2013), “Balls, Budget and OBR-plus”, Public Finance, Retrieved 22 February

[xxvi] Watt, Nicholas (15 October 2013), “Andrew Tyrie confirms support of Ed Balls’ plan for monitoring spending”, Guardian (UK). Retrieved 22 February

[xxvii] Corry, Dan (26 September 2013), “OBR audit: don’t expect miracles”, Public Finance, Retrieved 22 February

[xxviii] Letter from Robert to Ed Balls, 23rd September 2013