Having been established by the government to take the politics out of fiscal and economic forecasting, the independence of the Office for Budget Responsibility is fundamental to its credibility and legitimacy. The appointment of Robert Chote as Chair in 2010 appears to have enhanced the OBR’s standing in this regard, but has not completely swept away all concerns about the OBR’s relationship to government. On the day the OBR releases its latest analysis of the UK’s public finances, Craig Berry and Richard Berry ask whether the agency has yet been able to break free from the political grasp of the Treasury

Berry, Craig

Berry, Richard

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demo crat icaudit .co m http://www.democraticaudit.com/?p=1278Ho w ind e p e nd e nt is  the  Office  fo r Bud g e t Re sp o nsib il i ty? Cre d it: Ho ward  Lake  (CC BY-SA 2.0)By Democratic AuditHas the Office for Budget Responsibility achieved genuineindependence from government?Having been established by the government to take the politics out of fiscal and economic forecasting, theindependence of the Office for Budget Responsibility is fundamental to its credibility and legitimacy. Theappointment of Robert Chote as Chair in 2010 appears to have enhanced the OBR’s standing in this regard,but has not completely swept away all concerns about the OBR’s relationship to government. On the day theOBR releases its latest analysis of the UK’s public finances, Craig Berry and Richard Berry ask whether theagency has yet been able to break free from the political grasp of the Treasury.The Of f icef or BudgetResponsibility (OBR) was established to help ensure the government’s f iscal and economic f orecasts arecredible and transparent. The key innovation designed to achieve this objective was that the OBR would beindependent of  the Treasury, and theref ore outside direct ministerial control. When Robert Chote wasappointed as the second Chair of  the OBR in 2010 – an appointment approved by Parliament – it appearedto conf irm that the agency would be genuinely independent. Indeed, there is no reason to doubt theimpartiality of  the OBR’s analysis. The idea that the OBR acts with complete autonomy, however, is highlyquestionable – it remains a very small organisation, integrated almost seamlessly with the Treasuryapparatus. Three years af ter its creation, claims about its polit ical and operational independence stillrequire investigation.Powers of appointmentFor an agency that was supposed to de-polit icise economic and f iscal f orecasting in the UK, the OBR’searly history is not terribly encouraging. The OBR was init ially a Conservative Party organisation, set up byGeorge Osborne in 2009 when he was Shadow Chancellor as a way of  highlighting f laws in the previousgovernment’s f orecasting. Af ter the 2010 election Osborne put the OBR onto a statutory f ooting – this hadalways been the intention, but it was still remarkable to see a government transpose one of  its own polit icalparty organs directly into the machinery of  the state. The f irst chair of  the OBR, Sir Alan Budd, was thesame person who had been doing the job f or the Conservatives in opposition – the only dif f erence beingthat post-election his salary was f unded by the taxpayer.There was no way to interpret Budd’s appointment – despite his wealth of  experience in the f ield – asanything other than polit ical. This strongly suggested that the OBR would not be as independent asOsborne had promised. Arguably, giving the Chancellor any role at all in the appointment of  the OBR’s headmeant that government f orecasting would become less independent than it has been previously. When theTreasury was in sole charge of  f orecasting, the Chancellor was in overall charge of  the process and had tosign of f  any new f orecasts. But at least Treasury mandarins did not need to worry about their jobs whendelivering bad news to the Chancellor. The OBR is dif f erent: it does not need f ormal Treasury approval f orits f orecasts, but its leaders owe their posit ions to the Chancellor.Osborne seemed to put these f ears to rest, however, when Budd resigned just a f ew months af ter theelection, and was replaced by Robert Chote. As director of  the Institute f or Fiscal Studies, Chote became atrusted, independent voice on f iscal and economic af f airs, and a well-known thorn in the side of  polit iciansof  any creed. Osborne even took the novel step of  promising that Parliament – via the Treasury SelectCommittee – could have a veto over Chote’s appointment and any f uture appointments to the OBR’sexecutive committee (the Budget Responsibility Committee). This power has now been f ormalised, andconf irmed in the Budget Responsibility and National Audit Act 2011 .Although Parliament has more authority over OBR appointments than f or most other public bodies,theref ore, there are still practical and polit ical limits to it powers:Parliament very rarely rejects a minister ’s choice. Select committees have been holding pre-appointment hearings f or major public appointments since 2007, but on only two occasions haveMPs ref used to endorse a candidate: Dr Maggie Atkinson as Children’s Commissioner in 2009 andProf essor Les Ebdon as chair of  the Of f ice of  Fair Access in 2012 (both were subsequentlyappointed). Between 2007 and 2010, 83% of  proposed appointments received unanimous supportf rom MPs.The Treasury Committee’s power to veto OBR appointments does not extend to its non-executivemembers. These appointments are made by the Chancellor, based on nominations f rom the OBR. Inthis, the governance of  the OBR dif f ers f rom that of  similar public bodies, f or instance the NationalAudit Of f ice (NAO): the non-executive members of  the NAO board are appointed by Parliament, viathe Public Accounts Commission.Operational independenceThe OBR’s independence appears very f ragile when we consider its posit ion within Whitehall and thecontent of  its recent work. It is dif f icult to avoid the conclusion that it is subservient to – or at the veryleast, completely enmeshed with – the Treasury. At just 17 civil servants, the permanent staf f  of  the OBR istiny, considering the scope of  its duties. In these circumstances it is inevitable that it relies on the supportof  the Treasury and other agencies. Indeed, a Memorandum of  Understanding between the OBR, Treasury,HM Revenue & Customs and the Department f or Work & Pensions sets out in detail how the work of  thesebodies is to be coordinated and resources shared between them.The Chancellor decides the timing f or the publication of  the OBR’s f iscal and economic f orecasts. This isset out in both the Charter f or Budget Responsibility and the Memorandum of  Understanding, neither ofwhich require the Chancellor to consult with the OBR about publication dates. This is an area where thegovernment has already f aced crit icism, af ter the OBR brought f orward the planned release of  employmentprojections so they could be quoted by David Cameron during Prime Minister ’s Questions.Despite the obvious interf erence with the timing of  reports, there is lit t le reason to assume the content ofOBR f orecasts is deliberately more f avourable to the Treasury.  In 2011 the OBR’s f orecasts f or grossdomestic product (GDP) growth were too optimistic, but in the previous year they had been toopessimistic.  Similarly, the OBR slightly under-predicted public sector net borrowing (PSNB) in 2011/12,having over-predicted it in 2010/11. In both cases the OBR was broadly in line with the average of  otherf orecasters, as shown in the agency’s evaluation of  its own f orecasts and the charts below.Figure One: Forecasts and outturns for GDP growth in 2011Figure Two: Forecasts and outturns for PSNB in 2011/12Changing the output gap methodologyQuestions about the OBR’s independence emerged when in December it changed its methodology f orcalculating the ‘output gap’ – the dif f erence between what the economy could have produced and what ithas actually produced over a given period – in a way that appears to suit the Chancellor ’s polit ical interests.The key dilemma f or the OBR, at this t ime, was how to interpret the upturn in economic growth. A purelycyclical upturn would make no dif f erence to analysis of  the budget def icit (and theref ore borrowing) relatedto structural f actors. But the OBR concluded that evidence of  growth showed that the economy was not asdamaged as it appeared by the events of  2008 and the subsequent recession. It theref ore revised its modelto produce a larger output gap, thus revising down the structural def icit – allowing Osborne to showausterity was working. As Ian Mulheirn, f ormer director of  the Social Market Foundation argued at the time:“[The OBR] has controversially moved the goalposts a big step closer to George Osborne’s ball.By ditching its models for working out how much of the deficit is permanent – and hencerequires tax rises or spending cuts to eliminate – the watchdog made it much easier for theChancellor to hit his target of eliminating the structural deficit within five years.”The OBR’s decision here is not bad economics; many other f orecasters have also revised their output gapassessments. Still, the OBR altered the course of  polit ical debate by taking a decision that bolstered thegovernment’s credibility by making the austerity agenda slightly more f easible – even though nothing ineconomic reality had actually changed, only the OBR’s interpretation of  that reality. The upturn in growth –which is still weak in historical terms f or this stage of  a recovery – is likely to see the OBR make a similardecision this at this year ’s Autumn Statement. The consequences of  this could be even more polit icallycharged; if  the OBR shows austerity is now ahead of  schedule, they will gif t the Chancellor a justif icationf or polit ically advantageous tax cuts just in t ime f or the next general election.Independence and accountabilityThe claims made about the independence of  the OBR make it dif f icult to determine how to hold the agencyand the government to account in relation to economic and f iscal f orecasting.If  we could def init ively show the OBR was independent, there would be no controversy over decisions suchas the change to the way the output gap is calculated. One way to bolster the OBR’s actual and perceivedindependence would be to enhance Parliament’s powers of  appointment f urther, distancing the Chancellorf rom the process. The government could then be held to account f or its interpretation of  f orecasts. Theagency’s decisions may still be subject to debate, but they would be much less likely to be seen as beinginf luenced by the government or any particular polit ical agenda.Alternatively, we could take the view that economic and f iscal f orecasting should be subject to polit icaloversight by the elected government, as it was bef ore 2010. It is hard to argue that this is inappropriate,especially considering how important the OBR’s f orecasts are in shaping government policy. This wouldmean accepting that the government is primarily responsible f or appointing the leadership the OBR and willexert some degree of  inf luence over its output. The Chancellor would then be accountable to Parliamentand the public in a very transparent way f or the OBR’s perf ormance.Note: this post represents the views of the authors, not those of Democratic Audit or the London School ofEconomics.Craig Berry will take up a post at the Shef f ield Polit ical Economy Research Institute (SPERI)in September 2013. He completed a PhD at the University of  Shef f ield in 2008 and hisbook Globalisation and Ideology in Britain was published in 2011. He has experience of  publicpolicy research, particularly in pensions and the economy, f rom roles at the InternationalLongevity Centre, HM Treasury and the TUC, and was previously a Lecturer at the Universityof  Warwick. He tweets at @craigpberry.Richard Berry is Managing Editor of  Democratic Audit.  His background is in public policyand polit ical research, particularly in relation to health and local government. In previous roleshe has worked f or the London Assembly, JMC Partners and Ann Cof f ey MP. Richard is alsothe f ounder of  the public policy blog Modest Proposals. He tweets at @richard3berry.

Has the Office for Budget Responsibility achieved genuine independence from government?

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