It was not meant to be like this. The independent Office for Budget Responsibility was established to ensure UK governments fixed their finances instead of fiddling the figures. But 15 years on, we are witnessing a terrible spectacle of the fiscal watchdog’s tail wagging the government dog.
Rachel Reeves did not cut welfare benefits last month because she thought it was the right thing to do, but in response to an OBR forecast downgrade. This became painfully apparent when the chancellor added to the cuts announced only a week earlier because OBR officials disagreed with ministers over how much the original plans would save. Of course, the chancellor’s plans were only given a pass mark against her fiscal rules at all because the OBR view of the UK’s long-term economic potential is more optimistic than every other forecaster.
It is unacceptable that public services and taxes are set not in the ballot box, but by unelected and barely accountable officials in a small office above the Ministry of Justice. The OBR is not even an expert in its most important judgment, assessing the UK’s likely productivity growth. As David Miles, one of the three officials in charge, openly admitted last year, this assumption is “no more than an educated guess, and maybe not even terribly educated”.
I am making no criticism of the OBR or the government here. It is the UK’s fiscal framework, its incentives and its operation in practice that has resulted in this unacceptable outcome. There are four potential solutions.
First, as Rupert Harrison, formerly chief of staff to chancellor George Osborne and one of the architects of the current framework, has argued, OBR forecasts would be far less important if governments (both Conservative and Labour) allowed themselves more leeway against their fiscal rules. Then, it would not matter if interest rates moved up or the OBR became more pessimistic about the outlook. Policy would not need to change and the headroom would bear the slack.
Sadly, the incentives in the system militate against such an outcome. Why generate leeway only for ministers to campaign to spend it? Why leave headroom for another government after you’ve lost an election? The fiscal framework fails because everyone knows ministers will run tight against the rules and blame the OBR when they are forced to take difficult tax and spending decisions.
Second, we could beef up the OBR so that its forecasts for thousands of variables were not produced on a shoestring by 52 staff making not terribly educated guesses. The watchdog is so skint, I am told, that it cannot afford one subscription to any news organisation. If you are walking around in Westminster, you might also spot a junior OBR official wandering over to the Treasury to sit down at its single Bloomberg terminal to note down market prices.
This is happening when I also understand that the Bank of England’s “sizeable” increase in staffing for its forecasting process will add something like 100 new roles. The BoE refused to confirm or deny that figure. This combination is a grotesque misallocation of public resources, although I do not see that more money for the OBR will solve the underlying accountability problem.
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Third, governments could be a bit more grown up about forecast changes. The OBR calculated that Reeves was 54 per cent likely to pass her main fiscal rule in 2029-30 after her welfare cuts, but only 48 per cent likely before the policy measures. These are distinctions without a material difference. The government should be more comfortable with these forecast changes to deficits five years hence, but I suspect we have the Liz Truss episode to blame for Labour’s jumpiness.
Since none of the above is likely, the other solution is to hand the guesswork over productivity growth back to ministers. The OBR would still use its expertise in evaluating the fiscal consequences of any economic forecast. No one else in the UK can do this task remotely as well as these officials. But the chancellor would have to take responsibility for the most consequential part of her forecast.
Reeves would need to convince markets that the government’s core economic assumption was reasonable. The risk, of course, is that the forecasts might lose credibility with markets and we all pay a price.
But that risk is lower than the threat to democratic legitimacy posed by unelected officials being responsible for the most sensitive tax and spend decisions. Very reluctantly, I have come to the view that ministers should again have the right to set their own productivity forecasts. They need to take responsibility for getting them right.
chris.giles@ft.com
