The Treasury traces its origins back to the early 12th century. The Bank of England was established in 1694. But when Liz Truss blamed her downfall on the “leftwing economic establishment”, she singled out the Office for Budget Responsibility (OBR), set up by George Osborne in 2010, as a particular target.
And she’s far from wrong about the OBR’s influence on the policy debate. The way the political conversation about tax and spending is framed during this election owes more to the OBR and its interaction with the government’s “fiscal rules” than to either the Bank or the Treasury. So the creation of the OBR is indeed one of the most consequential economic policy decisions since 2010.
The OBR was ostensibly created to “provide independent and authoritative analysis of the UK’s public finances”, and to judge whether the government was meeting its own, self-imposed targets for debt and deficits. Some on both the left and right have argued it was actually meant to enshrine a narrow view of fiscal orthodoxy, stopping future governments from both cutting taxes and increasing spending. It’s certainly true that part of Osborne’s motivation was to justify austerity, not just publicly but to the rest of the cabinet. Getting the OBR to validate his numbers made it much harder for anyone to argue that he, or the Treasury, was exaggerating the scale of the fiscal gap.
But if short-term political expediency and the need to reinforce the case for immediate fiscal consolidation were the trigger, we might have expected the impact of the OBR to have faded over the years as the austerity debate has receded. Instead the opposite has happened. The OBR is now far more powerful than it was in 2010.
Truss’s view of the OBR as part of a deep state leftwing conspiracy against free market economics is paranoid fantasy. But she’s not wrong that the OBR’s remit and methodology bake in a specific approach to the public finances that militates against any radical policy changes – whether those are tax cuts or big public spending commitments. This is because the costs of such changes are reasonably easy to quantify, especially in the short term, whereas the benefits aren’t.
When you combine this with a “fiscal rule” that targets the debt or the deficit at a particular point in the future, that can certainly distort policy, and not in a good way. Take Sure Start. It was explicitly predicated on the idea that while improving the quantity and quality of childcare provision would cost money in the short term, it would have substantial long-term benefits, economic as well as social.
This was always a plausible argument, with a reasonable amount of research evidence to support it – but certainly not enough to put numbers on it in the sense of the ability to say clearly that a billion now in extra spending would yield a few billion extra in tax revenues in a decade or two.
So when Osborne cut Sure Start provision to the bone, the OBR scored those cuts as a budget “saving” – but it made no attempt to quantify the long-term costs. Thirteen years later, the Institute for Fiscal Studies (IFS) tells us that Sure Start delivered benefits, in terms of improved outcomes for education and health, that more than paid for itself. So the “savings” were entirely illusory – in fact, the ultimate result has been a higher deficit and debt.
By contrast, however, take immigration. At the moment the parties are falling over each other to tell us that immigration is too high and must come down. But changes to immigration policy impact the public finances. Without the OBR, the government could ignore that. But now it can’t – the OBR’s projections for migration feed directly into tax revenues, and the most recent OBR report observed that a “low-migration” scenario would widen the fiscal gap by £14bn or more. Here, the OBR’s approach will force government to recognise the economic costs, as well as the political benefits, of cutting migration. It’s hard to argue that this is a bad thing.
But there’s a bigger issue. The OBR forecasts growth, productivity, migration and tax revenues using its own independent models and judgment. Not so when it comes to public spending, where it is obliged to accept the Treasury’s own numbers – realistic or otherwise. Paradoxically, the fact that the OBR’s own forecasts are, if not necessarily accurate, transparent and objective means that politicians have an even greater incentive to fiddle the figures that they still control.
Hence the absurdity of the current election campaign, where both parties are promising to improve public services, with no further major tax rises, while still observing the fiscal rules – despite the fact that nobody, least of all the OBR itself, thinks the numbers will add up in the real world after the election.
So where does that leave us? Very few economists or policy wonks would now abolish the OBR. Yet equally few would argue that the current regime leans in favour of good policymaking. Meanwhile, the Truss implosion means no chancellor in the foreseeable future will want to be seen to be attacking it, and indeed the shadow chancellor, Rachel Reeves, has promised to further enshrine its centrality to tax and spending decisions.
Ideally, the next government will build on the OBR’s independence and credibility while at the same time reversing some of the perverse incentives of the present system. Without this, it will be impossible to tackle the debilitating legacy of underinvestment in the UK’s physical and social infrastructure.
Jonathan Portes is professor of economics and public policy at King’s College London
