The Office for Budget Responsibility

Today Chancellor of the Exchequer George Osborne announced the creation of the Office for Budget Responsibility.  Here is the section of his speech where he sets out how it will be constituted:

"So they can get to work immediately, the OBR will initially
operate on a non-statutory basis, just as the Monetary Policy Committee
operated before it was enshrined in legislation.

It will be headed by Sir Alan Budd, one of the most respected
fiscal and macroeconomic experts in our country.

He is a man of immense integrity and indisputable
independence, having worked for governments of both right and left, and
he was appointed as an inaugural member of the Monetary Policy Committee
by Gordon Brown.

I am very glad that he is here with us today.

He will be joined by two other independent experts, Geoffrey
Dicks and Graham Parker, and together they will form the Budget
Responsibility Committee.

With help from a secretariat of civil servants, they will be
in charge of making independent forecasts for the economy and the public

They will have direct control over that forecast.

They will make all the key judgements.

And they will produce the fiscal numbers that underpin
government policy in the Budget Red Book.

But I don’t think we can afford to wait until the Budget for
an independent assessment of the true state of the public finances.

So the first of the OBR’s forecasts will be produced ahead of
the emergency Budget.

Everyone will be able to see the scale of the problem to which
that Budget must provide the solution.

I have asked the Treasury to give Alan and the Committee full
access to all the data, assumptions, and economic models."

This is good news to the extent that it provides for decision making to be based on a more independent understanding of the fiscal constraints the Government is facing.  Left Foot Forward think that this "slurs [the] Treasury's integrity", which is a bit histrionic.  It is just that the same institution which produces a strategy for Britain's fiscal policy cannot be an effective arbiter assessing whether that policy is responsible.  There are two key reasons to think this will improve matters:

    1. Even before the financial crisis, Treasury estimates were routinely over-optimistic about the fiscal situation.  They overestimated tax revenues and underestimated spending.  See page nine in this report for the evidence.
    1. It is important that our fiscal projections are seen to be robust.  That will help underpin the credibility of our fiscal policy and reduce borrowing costs.  Mike Denham explains how borrowing costs are set to swallow up more and more of the money families pay in tax in this video:

There are potential problems with the OBR though.  What constitutes a fiscally responsible policy is often a highly contentious issues.  On one side, Keynesian economists often insist that increasing borrowing during a recession is more fiscally responsible as it will reduce the scale of a recession and thereby increase revenues over time.  On the other, economists looking at the dynamic effects of taxes will often argue that it is responsible to cut business taxes and expect a significant return over time as that attracts international investment and increases growth.

We have produced a number of reports finding that the dynamic returns to cutting taxes can be huge, and cuts in some taxes can mean higher revenues sooner rather than later.  Two reports produced by the CEBR and one produced by researchers here at the TPA suggest that cuts in corporate income taxes, in particular, will often lead to higher revenues over time.

Unelected appointees working at a quango can't be given the final say over what constitutes responsible government.  They need to look seriously at taking proper account of the dynamic effects of tax rises, so that they don't just entrench the Treasury's mistakes.  But they also need to understand that their role is ultimately to facilitate scrutiny from the elected Parliamentarians and ordinary taxpayers who need to have the final say.

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