An opportunity for the OBR?

17 Mar 14
Clare Fraser

The Office for Budget Responsibility should eventually be given the power to adjust corporate, personal and VAT tax rates as well as National Insurance Contributions. This would ensure fiscal sustainability over the long term

On Wednesday George Osborne will announce his Budget. The Chancellor is well aware that it will not be enough to welcome the signs of growth and carry on as before. As he made clear over the weekend, ‘we have a lot more difficult decisions to come’.

This will continue to be true well beyond the next Parliament: The Office for Budget Responsibility (OBR) predicts that debt will rise from 75% of GDP today to 99% in 2062-63. As the UK climbs out of the deepest recession in UK history, it is crucial to secure the public finances over the long term.

New Reform research shows that the task is complicated by politicians’ inability to stick to their promises. Over the past 20 years the surplus during booms has been unable to balance the deficits during recessions. This means that debt has consistently risen more in recessions than it has fallen during booms. This ‘debt ratchet’ effect has added £124bn to the UK's debt over the past 20 years.

The Chancellor has recognised the need for a new fiscal framework. In this year’s Autumn Statement he is set to introduce a new Charter of Budget Responsibility, which will promise a budget surplus by the end of the next Parliament.

If he meets his target, it will be the first time this century that a forecast surplus has been realised. Since 2002, 21 out of 25 official government forecasts have predicted a return to surplus. The budget has remained in deficit the entire time. The systemic problems with the UK’s finances require long-term, institutional solutions.

The fiscal rules implemented by successive UK governments, however well-constructed, have been consistently broken or disregarded when circumstances have changed. The UK has tried fiscal rules before and yet they have been insufficient to guide governments to sustainable finances and have failed within the decade.

The problem is that rules are either too flexible to be effective or too rigid to be binding. The Chancellor must therefore look beyond rules to find an enduring solution for the long term.

Reform’s research suggests gradually developing the role of the OBR so that politicians are able to delegate responsibility for fiscal sustainability. Although it will take time to establish the security and credibility to take on this role, the OBR could eventually be given the power to adjust corporate, personal and VAT tax rates as well as National Insurance Contributions.

In order to ensure democratic accountability is maintained, the government would retain control of all spending decisions and responsibility for setting base tax rates.

Politicians have recognised that they are not best placed to manage the day-to-day operation of a range of policy areas from monetary policy to schools regulation. This separation of policy making and implementation could ensure fiscal sustainability and the ability to respond rapidly to changing conditions.

Most importantly, it would secure the UK’s finances over the long term so that, when recessions hit, the finances are strong enough to weather the storm.

Clare Fraser is a researcher at the Reform think-tank

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