Why Britain’s fiscal watchdog is under pressure to reform: CNBC UK Exchange

This report is from this week’s CNBC’s UK Exchange newsletter. Each Wednesday, Ian King brings you expert insights on the most important business stories from the U.K. and other key developments you won’t want to miss. Like what you see? You can subscribe here.

Few institutions in Britain over the last decade and a half have avoided losing public confidence. Parliament, the Royal Family, the National Health Service, the BBC, the Church of England, the police service and the media have all been rocked by scandals.

One institution that has remained largely above criticism, though, is the Office for Budget Responsibility. This non-departmental public body, answerable to the House of Commons Treasury Select Committee, has by and large come through the last 15 years with its reputation intact.

But now things are changing and, for the first time in its existence, the OBR is under fire like never before.

First, some history. The OBR was born in May 2010 when the coalition government formed by the center-right Conservatives and the centrist Liberal Democrats succeeded Gordon Brown’s Labour government.

George Osborne, the incoming chancellor, called for the fiscal framework to be reformed as the new government — which had inherited a deficit to GDP ratio of 10% deficit — battled to maintain the confidence of the bond markets in the wake of the global financial crisis.

Fleshing out the proposals earlier that year in the annual Mais lecture, Osborne argued Brown’s fiscal rules had failed because “they were backwards looking, so that past surpluses could be used to justify present deficits” and were “adjudicated by the Treasury with no independent oversight, undermining their credibility.”

He said credibility could be restored by a fiscal council bringing “independent and forward-looking scrutiny to bear on governments” along the lines of bodies in Sweden, Denmark and the Netherlands.

The OBR chair for its first three months was the respected economist Alan Budd — who had also been a founding member of the Bank of England’s Monetary Policy Committee — and he was succeeded by the no-less distinguished Robert Chote, who held the role for a decade before handing over in 2020 to the current incumbent, Richard Hughes.

The OBR has largely done the job it was mandated to do: its economic and fiscal forecasts are seen as credible and independent to the extent they now shape both budget decisions and public debate on the nation’s finances.

That hard-earned reputation is currently under attack from politicians on both the left and right.

Among the latter, its sternest critics include former Prime Minister Liz Truss, whose short-lived administration famously sidelined the OBR before embarking on a disastrous ‘mini Budget’ in September 2022.

She has demanded the OBR be abolished, telling The Spectator magazine in February 2023: “The OBR and its position is taken very seriously by the market, so it effectively constrains what the government can do.

“It’s very important that forecasts are honest, but I think we have ended up in a place where they’re done so separately of government that it ends up driving fiscal policy.”

That analysis is shared by many on the left, particularly following the announcement by current Chancellor Rachel Reeves in March on extra welfare cuts after the OBR questioned whether a previous package of cuts would save as much as Reeves was claiming.

That angered many of the government’s own MPs, among them Debbie Abrahams, chair of the Commons Work and Pensions Committee, who said the cuts — later watered down — was a “dog’s breakfast… driven by the need to get four points to the OBR to enable it to be scored for the budget.”

Other influential voices on the left agree. Paul Nowak, general secretary of the Trades Union Congress, the federation of Britain’s unions, said in March this year it was time to review the OBR’s role, telling the website PoliticsHome: “Short-term changes in forecasts should not be driving long-term government decision-making. Decisions that affect millions of people’s lives must be made with care – not as a last-minute response to changed fiscal forecasts.”

And The New Statesman, a house magazine of the British left, recently accused British governments of recasting “difficult choices as necessities required by the spreadsheet — and forced the OBR to be… a de facto Department for Austerity.”

For its part, an external reviewer appointed by the OBR, concluded in February that it had “successfully navigated a series of unprecedented economic and fiscal challenges” and “that it emerges stronger from the period.” It also highlighted that since 2020 the OBR has “worked to broaden and deepen its credibility with partner institutions, academics, and across different parts of the economic, fiscal and political landscape.”

This debate is likely to intensify in coming months as Reeves prepares her autumn Budget, amid signs the OBR is set to downgrade its economic forecasts, forcing the Chancellor to raise taxes again to meet her fiscal rules.

The big question for the OBR’s critics is how they would replace the current arrangement. One regular barb leveled at the OBR is that it has been poor at predicting U.K. productivity — a key element of its forecasts — but, in fairness, so have most economists.

Rupert Harrison, a former Osborne advisor who helped design the OBR, has argued the problem is not the organization itself but politicians who “only have to respond to small forecast changes because they choose to give themselves so little headroom.”

Yet it would be an odd move from a chancellor, particularly one expecting to lose the next election, to leave their successor plenty of scope for either raising spending or cutting taxes.

Another alternative was floated last week by The New Economics Foundation, a left-leaning think tank whose former chief executive, Miatta Fahnbulleh, is now a Labour minister. It suggested replacing the OBR with a new Office for Fiscal Transparency that would publish its own forecasts alongside the Treasury. Arguing the OBR currently enjoys “an effective veto on fiscal policy decisions” and has “a power that has received little democratic scrutiny,” it said a new fiscal policy committee of nine economists could assess differences in the Treasury’s forecasts and the new body.

There are attractions to these proposals and, in particular, the way they seek to address concerns about unelected officials having too big a say over important tax and spending decisions.

But with markets still extremely nervous about the U.K.’s fiscal position — yields on 30-year inflation-linked gilts last week hit their highest level since 1998 — it would be a brave chancellor that would tamper with the current arrangement.

James Sproule, chief U.K. economist at Handelsbanken, discusses the latest British inflation data and its impact on the Bank of England’s rate cut trajectory.

CNBC’s Ritika Gupta explores whether there is enough data to determine if the wealthy are leaving London en masse due to non-dom tax rules.

Florian Ielpo, head of macro at Lombard Odier Investment Managers, discuss sticky inflation in the U.K. and why the situation is different on the European continent.

— Holly Ellyatt

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