Office for Budget Responsibility

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Office for Budget Responsibility
Formation May 2010
Purpose Independent analysis of the public finances ahead of the budget
Region served United Kingdom
Chairman Robert Chote
Website http://budgetresponsibility.org.uk/

The Office for Budget Responsibility (OBR) is an advisory non-departmental public body established by the UK government to provide 'independent' economic forecasts and 'independent' analysis of the public finances as background to the preparation of the UK budget.[1] It was formally created in May 2010 following the general election, although it had previously been constituted in shadow form by the Conservative party opposition in December 2009,[2] and was placed on a statutory footing by the Budget Responsibility and National Audit Act 2011.[3] It is one of a growing number of official independent fiscal watchdogs around the world.[4]

The office is currently headed by Robert Chote, formerly a director at the Institute for Fiscal Studies.[5]

Functions[edit]

The OBR was created by the UK government in 2010 with the purported goal of offering independent and authoritative analysis of the UK's public finances. To that end it produces two 5-year-ahead forecasts for the economy and the public finances each year, alongside the Budget and Autumn Statements.[4]

In its role in providing independent analysis the OBR has four main duties:[4]

Forecasts of the economy and public finances[edit]

The OBR produces five-year forecasts for the economy and public finances twice a year. The forecasts accompany the Chancellor’s Budget Statement and his Autumn Statement and they incorporate the impact of any tax and spending measures announced by the Chancellor. Details of the forecasts are set out in the Economic and fiscal outlook (EFO) publications. [6] The annual Forecast evaluation report (FER) [7] published each autumn, examines how the EFO forecasts compare to subsequent outturns. The OBR has published briefing papers describing its approach to forecasting the economy [8] and public finances,[9] and the macroeconomic model it uses.[10]

Evaluation of the Government’s performance against its fiscal targets[edit]

The OBR uses its public finance forecasts to assess the Government’s performance against its fiscal targets. The Government has set itself two medium-term fiscal targets: first, a fiscal mandate to balance the cyclically-adjusted current budget five years ahead, and second, a supplementary target to have public sector net debt falling in 2015-16.[11] In the Economic and fiscal outlook, the OBR assesses whether the Government has a greater than 50 per cent probability of hitting these targets under current policy. Given the uncertainty inherent in all fiscal forecasts, the OBR also tests how robust this judgement is by using historical evidence, sensitivity analysis and alternative scenarios.

Scrutiny of the Government’s policy costings[edit]

The OBR conducts scrutiny and analysis of HM Treasury’s costing of tax and welfare spending measures. During the run-up to the Budget and the Autumn Statement, the OBR subjects the Government’s draft costings of tax and spending measures to detailed challenge and scrutiny. These are then stated in the EFO and the Treasury’s policy costing documents with the OBR stating whether it endorses the costings that the Government finally publishes as reasonable central estimates. The OBR has published a briefing paper describing its role in policy costings and how they fit into the forecast process.[12]

Assess the long-term sustainability of the public finances[edit]

The OBR also assesses the long-term sustainability of the public finances. Its annual Fiscal sustainability report [13] sets out long-term projections for different categories of spending, revenue and financial transactions and assesses whether they imply a sustainable path for public sector debt. The Fiscal sustainability report also analyses the health of the public sector’s balance sheet using both conventional National Accounts measures and the Whole of Government Accounts as prepared using commercial accounting principles.

Other functions[edit]

In addition to these core responsibilities, the Government has asked the OBR to forecast the Scottish receipts for the four taxes that it plans to devolve to the Scottish Government from 2015 onwards; the Scottish rate of income tax, stamp duty land tax, landfill tax and the aggregates levy.[14] The OBR has published these forecasts since March 2012 alongside UK revenue forecasts. From autumn 2014, the OBR will publish similar forecasts for Welsh taxes.[15]

In March 2014, the Charter for Budget Responsibility was modified to include a new cap on welfare expenditure alongside the Government’s fiscal mandate.[16] The welfare cap puts a limit on the amount that government can spend on certain social security benefits in the years 2015/16 to 2018/19. The OBR is charged with assessing the Government’s performance against the cap at each Autumn Statement. As part of this assessment, the OBR is required to produce a forecast for welfare spending in scope of the cap in its Economic and fiscal outlook. The welfare cap means that if spending exceeds a certain limit, then policy action must be taken, or the cap level must change, and Parliamentary approval must be obtained. The cap features a two per cent forecast margin above the level of the cap that allows for small fluctuations in the forecast without corrective action being required. The OBR is required to assess whether welfare spending above the cap is caused by movements in the forecast or by discretionary policy changes. The OBR has also been tasked with producing an annual report on trends in welfare spending.

The OBR undertakes a variety of research projects through the year. It publishes briefing material [17] to inform the public about its work, and provides a same-day briefing on the public finances statistics.[18] The Budget Responsibility Committee [4] members and OBR staff also give talks and presentations at external events. Robert Chote has discussed the role of the OBR, and the difference that it made after its first three years in existence, in a lecture entitled Britain’s fiscal watchdog: a view from the kennel on 9 May 2013.[19] Its activities are summarised each year in its Annual Reports. [20]

History[edit]

George Osborne, the Chancellor of the Exchequer of the Conservative-Liberal Democrat coalition formed after the 2010 general election, announced the body in his first official speech. He criticised the economic and fiscal forecasts of the previous Labour government, and announced that the OBR would be responsible for publishing these independently of government in future.[21] The objective underpinning its creation was to provide and independent assessment of national public finances before the coalition Government's emergency budget in June 2010, which outlined the size and pace of the fiscal consolidation plan inherited from the outgoing administration.[19] The role of the Office is to advise whether the declared policy of the Government is likely to meet its targets [22]

The OBR was initially chaired by Sir Alan Budd who, along with Geoffrey Dicks and Graham Parker, formed the Budget Responsibility Committee.[23] Budd had been a founding member of the MPC; Dicks was chief economist at Novus Capital and former chief economist of the Royal Bank of Scotland; and Parker headed up the Treasury’s public sector finances team. The remainder of the initial team comprised eight staff seconded from the Treasury.[22] The initial team provided recommendations to the Chancellor on the role of the permanent OBR.[11]

The OBR produced its first forecast for public finances shortly before the June 2010 budget with the second at the June budget incorporating the impact of newly announced measures. Colin Talbot, Chair of Public Policy and Management at Manchester Business School and Treasury adviser on public spending, questioned the credibility of the new organisation. He said that the body could not be set up in time to judge the forecasts in the June 2010 United Kingdom Budget. In his opinion, the OBR would not be sufficiently independent of politicians or the Executive to remove the politics from economic decision-making.[22] The office made adjustments to its forecasts in the week before the June 2010 budget. These were thought to be politically favourable to the coalition government and so cast doubt on its independence.[24]

In July 2010 it was announced that Budd would not continue in the role after his initial 3-month contract expired.[25][26] The Financial Times reported "His departure was expected and Sir Alan had let it be known privately that he had never intended to serve as chairman of the OBR for anything other than a short period. His contract spanned the emergency Budget, leaving enough time thereafter to advise on the legislation needed to establish the OBR on a permanent basis."[27] Speculation on his successor had included Rachel Lomax, John Gieve, Andrew Dilnot, Robert Chote, Michael Scholar and Ruth Lea.[28][29]

In September 2010, Chancellor George Osborne announced that Robert Chote had been appointed as the new Chairman of the Budget Responsibility Committee (BRC). The two other members of the BRC were Stephen Nickell, a former member of the Bank of England Monetary Policy Committee and Graham Parker, who formerly headed up the Treasury's public sector finances team.[4] An Oversight Board was also created comprising the three BRC members plus two external members acting as non-Executive Directors.

Governance[edit]

Budget Responsibility Committee[edit]

The OBR is led by the three members of the Budget Responsibility Committee (BRC) who are appointed by the Chancellor of the Exchequer following an appointment hearing at the Treasury Select Committee. They have executive responsibility for carrying out the core functions of the OBR, including responsibility for the judgements reached in its forecasts. They are: Robert Chote (Chairman), Stephen Nickell CBE, Graham Parker CBE.[4]

Oversight Board[edit]

The OBR's Oversight Board ensures that effective arrangements are in place to provide assurance on risk management, governance and internal control. It consists of the three members of the BRC, plus non-executive members. The non-executive members are Lord Burns and Kate Barker CBE.[4]

Advisory Panel[edit]

The OBR’s Advisory Panel of economic and fiscal experts meets regularly to advise the OBR on its work programme and analytical methods. Currently members come from the Bank of England, the Institute for Fiscal Studies, academia, and other bodies.[30]

Legislation and related material[edit]

The OBR’s formal rights and responsibilities are outlined in four documents:

• The Budget Responsibility and National Audit Act 2011 [3]

• The Charter for Budget Responsibility [31]

• The OBR/HM Treasury Framework document [32]

• A Memorandum of Understanding between the OBR and government departments with which it interacts most frequently and closely: HM Treasury, HM Revenue and Customs and the Department for Work and Pensions. [33]

The Budget Responsibility and National Audit Act [3] sets out the overarching duty of the OBR to examine and report on the sustainability of the public finances. It also gives complete discretion to the OBR in the performance of its duties, as long as those duties are performed objectively, transparently and independently and takes into account the sitting government’s policies and not alternative policies. The Charter [31] outlines the OBR’s independence which includes complete discretion to decide:

• The methodology underpinning the OBR’s forecasts, assessment and analyses;

• The judgements made by the OBR in producing these outputs;

• The content of the OBR’s publications; and

• The OBR’s work programme of research and additional analysis.[19]

The Charter [31] also specifies material that the OBR have to include in its forecasts and gives the Chancellor the right to determine the length of the forecast horizon – subject to a minimum of five years. The Charter states that the Government remains responsible for policy decisions and costings and the OBR “should fnot provide normative commentary on the particular merits of Government policies”.[34] It also gives the OBR right of access to all Government information which it may reasonably require for the performance of its duties. Under the Memorandum of Understanding where it is not possible to reach agreement, issues may be escalated to the Chair of the OBR and the Permanent Secretaries as appropriate.[19] The Framework document sets out the OBR’s governance and management arrangements. As a non-departmental body under the aegis of the Treasury, the OBR is formally accountable to the Treasury Select Committee of the House of Commons. This accountability to parliament takes a number of elements:

First the four core publications the OBR is required to publish each year have to be laid formally before parliament;

Second, the Treasury Select Committee can call on the OBR to give evidence on its work at any time;

Third, the Treasury Select Committee has a role in determining the membership of the Budget Responsibility Committee. When a new member has to be appointed, the Chancellor of the Exchequer names his preferred candidate following a formal application and interview process run by the civil service. The Treasury Select Committee holds confirmation hearings with the candidate and can veto the Chancellor’s choice.[19]

See also[edit]

References[edit]

  1. ^ Osborne to give details of £6bn spending cuts next week, BBC, 17 May 2010 
  2. ^ Conservatives launch Office for Budget Responsibility, BBC, 8 December 2009 
  3. ^ a b c The Budget Responsibility and National Audit Act 2011 (Commencement No.1) Order 2011 SI 2011/8 
  4. ^ a b c d e f g What we do, OBR, retrieved 4 May 2014 
  5. ^ "Robert Chote to head Office for Budget Responsibility". BBC News. 9 September 2010. 
  6. ^ Economic and fiscal outlook - March 2014, OBR, retrieved 4 May 2014 
  7. ^ Forecast evaluation report - October 2013, OBR, retrieved 4 May 2014 
  8. ^ Briefing paper No. 3: Forecasting the Economy, OBR, October 2011 
  9. ^ Briefing paper No. 1: Forecasting the public finances, OBR, January 2011 
  10. ^ Briefing paper No. 5: The macroeconomic model, OBR, October 2013 
  11. ^ a b Budget Forecast: June 2010, HM Treasury, June 2010 
  12. ^ Briefing Paper No. 6: Policy costings and our forecasts, OBR, March 2014 
  13. ^ Fiscal sustainability report - July 2013, OBR, retrieved 4 May 2014 
  14. ^ Scotland Act 2012, 2012 
  15. ^ Wales Bill: Financial Empowerment and Accountability, March 2014 
  16. ^ Charter of Budget Responsibility March 2014 update, HM Treasury, March 2014 
  17. ^ Briefing Papers, OBR, retrieved 4 May 2014 
  18. ^ Monthly public finance data, OBR, retrieved 4 May 2014 
  19. ^ a b c d e Chote (9 May 2013), Britain's fiscal watchdog: a view from the kennel 
  20. ^ Annual Report, OBR, retrieved 4 May 2014 
  21. ^ "George Osborne promises spending cuts plan next week". BBC News. 2010-05-17. Retrieved 2010-05-17. 
  22. ^ a b c Mixed reaction to Office for Budget Responsibility, Public Finance, 17 May 2010 
  23. ^ Speech by the Chancellor of the Exchequer, the Rt Hon George Osborne MP, on the OBR and spending announcements, HM Treasury, 17 May 2010 
  24. ^ Chris Giles (July 8, 2010), "Late OBR changes shrank job loss figure", Financial Times 
  25. ^ Sir Alan Budd to leave the Office for Budget Responsibility, Daily Telegraph, 6 July 2010
  26. ^ Alan Budd quits as government spending watchdog, Guardian, 6 July 2010
  27. ^ http://www.ft.com/cms/s/0/65ccae4c-88c8-11df-8925-00144feab49a.html
  28. ^ "How about Sir Michael Scholar for the OBR?". The Daily Telegraph (London). 7 July 2010. 
  29. ^ Martin, Iain (6 July 2010). "Ruth Lea in at the OBR PDQ?". The Wall Street Journal. 
  30. ^ OBR names expert advisory panel, OBR, 23 March 2011 
  31. ^ a b c Charter of Budget Responsibility March 2014 update, HM Treasury, March 2014 
  32. ^ Office for Budget Responsibility and HM Treasury Framework Document, OBR, April 2011 
  33. ^ Memorandum of Understanding between Office for Budget Responsibility, HM Treasury, Department for Work and Pensions and HM Revenue & Customs, OBR, April 2011 
  34. ^ Charter for Budget Responsibility March 2014 update, page 12, para 4.12, HM Treasury, March 2014 

External links[edit]