Image credit: Shutterstock
The Office for Budget Responsibility has occupied a curious place in British life since its inception under George Osborne in 2010. Back then, it was heralded as a game changer: an independent and impartial scrutineer, above the petty vagaries of political conflict, carefully considering the government’s fiscal plans without fear or favour.
Since then, however, the OBR has found itself cast in a whole range of roles: fussy teacher marking the government’s homework, figleaf for various fiscal manoeuvres, and impartial (some might say toothless) judge running its rule over the latest offering from the Treasury.
Certainly, the past decade has seen extensive discussion about the extent to which the OBR has in the past underestimated the effects of austerity policy and its negative effects on growth while conversely underestimating the role that certain types of investments can have in boosting growth.
Lydia Prieg at the New Economics Foundation is one of many voices supporting the OBR but calling for reform of its mandate. “We certainly aren't in favour of abolishing the OBR,” she tells PF. “It plays an important role, but the way in which it's set up and its role isn't quite what it should be at the moment.”
Update required
However, she sees its relationship with the Treasury and the role that it plays in the fiscal framework as being especially anachronistic. Prieg’s principal critique centres on the relationship between the OBR’s power to play a significant role in guiding which policies the government chooses to enact through testing the policies against its assumptions.
“That would be fine if economists were all completely agreed on what those assumptions should be, but that is not the case,” she says.
“However, there’s actually a broad economic literature around all the assumptions about how various policies affect the economy, and in many cases of the OBR’s perspective – despite how it’s often reported in the media as being gospel – the assumption that they’ve made is actually quite controversial and there are many economists from different parts of the political spectrum who would disagree.”
She’s not alone in that assessment. There is a growing sense of frustration across the political spectrum encapsulated in Praful Nargund, director of the Good Growth Foundation’s recent description of the OBR as “a body designed to police cuts… now being asked to referee a strategy for growth, and it simply isn’t built for the task”.
Accounting for growth
James Browne agrees that the narrowness of the OBR’s economic worldview is a significant flaw in the current regime. As head of work, income and inequality analysis at the Tony Blair Institute for Global Change, he recently authored a paper calling for a re-think of how the OBR should operate.
“Although the OBR has a difficult job in the growth impacts of various policies are, it doesn't actually have a huge amount of resource available to do that, so perhaps inevitably as a result of that it focuses on measures where there is a good basis of evidence to suggest what the growth impacts of those measures are going to be, and then it effectively ignores other more speculative measures, which I think is fair enough given the constraints and the resources that they have.” However, this narrowness undermines the ability of the OBR to accurately assess the growth impact of government policy.
Given that, the TBI paper suggested the Treasury should provide a second forecast that includes some of these more speculative impacts. In doing so, the institute argued, voters would get a better sense of how the public finances would develop under that scenario where assuming all the policies that the government is introducing have the intended effect.
“Obviously the OBR could comment on whether it considers the evidence backing that up robust or not, but we think that would take you away from this situation we're in at the moment where everyone's focused on the tax and spend measures and trying to balance the books to ensure they’re meeting the fiscal rules under the central forecast,” Browne explains.
Bigger picture
So what would a more effective OBR look like? Browne says that while it’s reasonable for the OBR to focus on just those measures where there is that evidence base and to view claims that all these measures are going to have very large growth impacts with a good degree of scepticism,
“At the same time, if growth is the number one mission of the government, which they say that it is, we think you should be focusing a bit more on what the growth impacts of policies are going to be and look at more innovative measures that may well boost growth in the future, rather than just trying to game the system.”
In Prieg’s view, a tweaked OBR could deliver more value by broadening out its worldview: “I think by focusing less in terms of point estimates and more in terms of ranges in order to express the uncertainty that inevitably surrounds any of this modelling would be a huge improvement as well.”
