It's Time To Scrap The OBR

Without a manifesto commitment, Tony Blair and Gordon Brown immediately surrendered democratic political control of monetary policy. The Liberal Democrats forced the creation of the Office of Budget Responsibility. The Conservatives created the short-lived Economic Advisory Council out of thin air, and Rachel Reeves reconstituted a Council of Economic Advisers with at least one of the same people on it. Yet on none of those occasions have the salaries of the First Lord of the Treasury, of all other Treasury Ministers, and of all senior Treasury civil servants been halved, as they should have been. Andrew Neil is correct in his central premise:

The premature publication of the Budget by the Office for Budget Responsibility was just about the only reason for a chuckle in what was a pretty grim day for the country and the economy. The OBR mistakenly posted online its Budget forecast and analysis, which contained all the measures about to be announced – before Chancellor Rachel Reeves was even on her feet in the Commons to deliver them.

The bungling beancounters tried frantically to retrieve the situation. But it was too late – the cat was well and truly out of the bag. There was a certain justice about the blunder. The Treasury, with Reeves’ complicity, had flown enough pre-Budget kites to blot out the sun. So many leaks came from official sources that we already knew most of what was in the Budget. It somehow seemed both logical and fitting that we should be given the whole caboodle in advance. It is all a huge embarrassment for the OBR, of course, which normally toils away in relative obscurity. But its credibility is undermined far more by being consistently wrong in its forecasts – which matters hugely because these forecasts shape the tax-and-spend policies of government.

As a result the OBR, unaccountable and unelected, has over the years acquired a pivotal role in the Budget process, which politicians can hide behind and which defies proper democratic scrutiny. There have been times when it has directed Chancellors down the wrong road – and other times when it has stopped them doing the right thing. Of course, all economic forecasters get their predictions wrong. It is hardly an exact science. But even its former boss, Robert Chote, has admitted that the OBR’s forecasting errors are frequently larger than those of the Treasury, the Bank of England or reputable private-sector analysts.

The OBR was established by George Osborne, who became Chancellor of the Tory-Lib Dem Coalition after the 2010 general election. Gordon Brown, Chancellor for most of the New Labour years under Tony Blair, had become notorious for fiddling the figures to make it look as if he was still sticking to his fiscal rules. The OBR was meant to provide independent scrutiny of the Treasury’s number-crunching and keep Chancellors honest with impartial forecasts of the consequences of their policies.

It got off to an inauspicious start. After embarking on its work in the so called era of austerity it often overestimated how much borrowing was needed, forcing the government to implement deeper public spending cuts than necessary. At other times it was overly optimistic, encouraging the government to think it could expect revenues that never actually materialised. In March 2012 it forecast a robust recovery which overestimated GDP growth over three years by 30 per cent, forcing the government to borrow more.

Its recent track record is no more encouraging. In March of this year it predicted the fiscal deficit for the financial year 2024-25 would be £137 billion. It turned out to be £150 billion. Its March forecast for this year’s deficit (2025-26) was £117 billion. Now it says it will be £138 billion. Back in March it forecast borrowing of £97 billion for 2026-27. Now it thinks £112 billion. So borrowing forecasts made only eight months ago for last year, this year and next year have already turned out to be a total of £50 billion out.

Note in particular that forecast for 2024-25, made when the financial year was in its final month. You might think a decent forecaster would have a fair idea about the full year’s budget deficit. But it was out by £13billion. If the OBR can’t get right, by a long chalk, a forecast for a year that’s almost over then why would you give a moment’s notice to what it thinks borrowing will be in 2030? Yet it is on that fragile forecast that Reeves has sculpted her plans for tax rises, more spending and extra borrowing, so that she is seen to be within her self-imposed fiscal rules by 2030. It is a ludicrous way to conduct economic policy.

The OBR should have been cut down to size by now. But it was given a new lease of life by the reckless economic policies of Liz Truss in the autumn of 2022. She attempted to go round the OBR and borrow billions to cut taxes without consulting it for a forecast of the consequences. The bond markets turned on her. So did the whole economic establishment, led by Reeves, virtue signalling as usual. Suddenly the OBR became the symbol of all that was fiscally prudent, sensible and reliable – a vital tool of economic policy which no government should dare to defy. Truss was forced out after 49 days as Prime Minister. Reeves promised to enhance the OBR’s power, which she did on becoming Chancellor. You get the feeling she now regrets that. She has discovered the hard way that when you endow the OBR’s forecasts with too much significance you are, in effect, giving it a veto over government policy. 

It’s not just forecasting the OBR gets wrong. It has misled governments on a number of crucial matters. It has seriously overestimated the positive impact of mass migration on economic growth. It consistently ignores the dynamic contribution of supply-side reforms, such as lower taxes and less red tape. It never foresaw Britain becoming a job-creating machine because of tax changes over a decade ago. It does not see the potential of welfare reform to spur growth. It underestimates the impact of high taxes on the wealthy, encouraging many of them to flee for the door. Yet for 15 years it has overestimated productivity growth – despite endless warnings – leading governments to think the economy would grow faster than it did. Something it only started to put right this week, much to Reeves’ chagrin since it reduced Treasury revenues and she had to find more tax.

Nor is the OBR truly impartial. It embodies the same mainstream social democratic ethos and outlook of so much of Britain’s economic establishment, from the Treasury to the Institute for Fiscal Studies to most of the main economic think tanks. It is collectivist in culture and suspicious of the animal spirits of capitalism.

It is time to scrap the OBR. Invented for the best of reasons, it has become a hindrance to good economic policy not its guarantor. Its core product – medium-term economic forecasts – is not fit for purpose. We should revert to Treasury forecasts (as before 2010), with rigorous external scrutiny from a handful of respected outside bodies such as the Institute for Fiscal Studies (IFS), the UK’s leading independent economics research institute. They will soon discover if the Chancellor is cooking the books, Brown-style.

No other advanced economy has anything like the OBR. Yes, America has the Congressional Budget Office and France its High Council for Public Finances. They have the power to scrutinise fiscal policy and to publish their findings. They are taken seriously by ministers and commentators. But they don’t have the power to change economic policy or determine budgetary constraints. Nor should they. In the end, the best guarantor of honest government and fiscal discipline is the market. If those who lend us billions suspect the Treasury is cooking the books, they have the power to exact a terrible price, either by refusing to lend any more or by demanding penal interest rates.

It’s also time to junk the fiscal rules of which Reeves is so proud. The bond markets have little interest in what the deficit might be in five years’ time. They know it’s the difference between two massive figures – total revenues and total spending – neither of which can be accurately calculated so far in advance. So to think anyone can divine the difference between them is a fantasy.

The OBR and the fiscal rules have had their day. It is time to return the responsibility for fiscal policy and the forecasts that go with it to the Chancellor and the Treasury – for, unlike the OBR, we can hold them to account when it all goes wrong.