How the Office for Budget Responsibility became a lightning rod for criticism

Last week, it was announced that the Office for Budget Responsibility will only check if the government is meeting its fiscal rules once a year, instead of twice (though it will continue to publish two sets of forecasts annually, to accompany the Spring Statement and the Budget). That change, according to analysts, was a recognition that the everchanging economic outlook has contributed to economic uncertainty and rampant speculation about future tax rises. The disastrous leak of last week’s Budget on the OBR website, meanwhile, has piled pressure on the watchdog.

On Monday, it said the leak had been the “worst failure” in its 15-year history; and admitted that a previous report, published in March alongside the Spring Statement, had also been accessed “prematurely”. Its chair, Richard Hughes, resigned.

Why was the OBR set up?

The OBR was created by David Cameron’s coalition government, in 2010. Before then, the Treasury had produced its own economic and fiscal forecasts ahead of Budgets and spending reviews; being produced by the chancellor’s own staff, these were vulnerable to political manipulation and were consistently over-optimistic. In opposition, George Osborne had promised to set up a new official independent economic and fiscal watchdog. This, he said, would be made up of “wise men” who would “hold up a yellow card when the chancellor steps out of line”.

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Osborne vowed that it would “change the way Budgets are made for ever”; and in the 15 years since, the OBR has emerged as one of Westminster’s most powerful bodies.

What does it actually do?

It monitors the government’s spending plans and provides forecasts for the economy and public finances covering the next five financial years – typically issuing them twice a year, at the Budget and Spring Statement. The forecasts assess possible changes to gross domestic product (GDP); population and employment rates; migration; productivity; borrowing costs; and inflation. It also evaluates the government’s performance against the fiscal targets it sets itself. (This government’s main fiscal rule is that day-to-day costs should be met by revenues by 2029/30, at which point it should only be borrowing to invest.)

The OBR issues a “pre-measures” forecast to the chancellor two or three weeks ahead; then a “post-measures” forecast assessing tax and spending plans, which is published on the day. It also assesses, at least twice every two years, the long-term sustainability of the public finances. The forecasts it produces are hugely influential: they move financial markets, and can leave governments scrambling to fill yawning gaps projected in the public finances.

Are its forecasts accurate?

It is widely regarded as one of the more credible official forecasters. Over one to three years, the OBR’s assessment of GDP growth tend to be “more accurate than the average of other official forecasters in Europe”, according to a 2023 review, and certainly better than the historic Treasury forecasts, which were plagued by optimism bias; though it has also had a tendency to underestimate government borrowing, and, in the longer term, to overestimate GDP growth.

Professor David Miles of the OBR likens its forecasts to a satnav estimate of a long journey: they are probabilistic long-term predictions, easily thrown off by changes in real conditions, and unlikely to be 100% right – but still a useful guide.

Why has the OBR been criticised?

Forecasts are obviously speculative and partial. Some argue that the OBR – an unelected body – exercises disproportionate influence over major fiscal decisions, reducing the scope for democratic debate or political discretion. On the Left, think-tanks such as the New Economics Foundation say the OBR has consistently underestimated the benefits of large public investments and bold social spending – that it has a structural bias towards austerity or “status quo” economics. But it has critics on the Right, too.

Kwasi Kwarteng, who refused to consult the watchdog before his infamous mini-Budget of September 2022, said recently that the OBR focuses too much on balancing the books, and not enough on growth. William Hague has complained that its five-year forecasts encourage short-term thinking.

Is the OBR too powerful?

Arguably. In April, the FT’s Chris Giles warned that we were already “witnessing a terrible spectacle of the fiscal watchdog’s tail wagging the government dog”, citing the example of Rachel Reeves announcing a package of welfare cuts (later abandoned) in response to an OBR forecast downgrade. “It is unacceptable,” he added, “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.”

Giles redoubled his criticisms this week, following the leak of the entire Budget 45 minutes before Reeves announced it to the House of Commons, saying: “As the Budget showed, the fiscal watchdog’s predictions indirectly set our taxes. The minimum we require in return is competence.”

What’s the case for the defence?

That the OBR’s powers are conferred on it by Parliament, and that chancellors retain the right to set the fiscal rules by which they will be judged – they can change the assessment criteria if they wish – and also have a say in who fills the positions in the OBR’s top team. It was the current chancellor who chose to give the OBR more responsibility and independence, by allowing it to produce forecasts even when the government does not ask it to – an apparent response to the Truss mini-Budget. Besides, many of the fiscal problems encountered by Reeves in the past year could have been averted if she’d left herself more fiscal “headroom” in her first Budget, as previous chancellors have done.