Is the Office for Budget Responsibility Gaining Too Much Power?

Currently, a particular blue book is drawing significant attention. More specifically, it is a substantial report filled with graphs that evaluates the Budget and analyzes the financial implications of government initiatives, produced by a group operating from a less-visible section of the Ministry of Justice building—an entity largely unknown to those outside its confines.

Nevertheless, this organization wields considerable authority over economic policy.

A growing conversation is emerging regarding whether this modest department, referred to as the Office for Budget Responsibility (OBR)—composed predominantly of youthful analysts and civil servants—has indeed amassed excessive power, with some asserting it is effectively co-managing the government’s economic strategy.

Concerns Over OBR’s Influence

Questions arise as to whether Richard Hughes, the OBR’s chair and a Harvard alumnus with a background in the Treasury, has gained a stature comparable to that of the actual Chancellor.

Lou Haigh, a former Labour minister, referred to the OBR as an “unelected body dictating the parameters of government ambition.” Recently, the Trades Union Congress labeled the OBR as an “unaccountable institution” that constrains growth.

As the Budget approaches, one must consider whether the OBR is indeed steering the Treasury or if Labour’s alterations to its role have contributed to this situation.

Response from the OBR

In March, following the Spring Statement, I inquired about the prevalent criticism of the OBR’s perceived dominance. Richard Hughes, responding with a hint of irritation, asserted, “The only powers we possess are those granted by Parliament through legislation.”

He elaborated, stating their responsibilities include producing forecasts, evaluating the costs of government initiatives, and determining if the Chancellor is adhering to her fiscal guidelines.

According to Hughes, the Chancellor determines the policies she intends to pursue, sets her own rules, and retains the authority to modify both the rules and the policies as she sees fit.

The Role of the OBR

Formally, the OBR is tasked with overseeing the UK government’s financial strategies and performance, issuing economic forecasts semiannually alongside the Budget and the Spring Statement, which gauge the likelihood of the government meeting its financial targets.

Interestingly, the timing of these inquiries into the OBR’s sway follows the Chancellor’s decision to enhance the forecaster’s independence and authority.

Additionally, she appoints the three members of the Budget Responsibility Committee, who oversee the OBR, with the Treasury Select Committee’s approval.

Legislative Changes and OBR’s Powers

Upon Labour’s arrival in power in 2024, a new statute was enacted, empowering the OBR to initiate forecasts independently, even without a government request. This change was a response to the Conservative mini-Budget of September 2022, which proposed substantial tax reductions without clarifying their funding, unsettling financial markets.

At that time, it was reported that then-Chancellor Kwasi Kwarteng had dismissed the OBR’s offer for an official forecast, which could have either reassured markets about the thoroughness of the plan or impeded the Truss government’s ability to announce those policy shifts. The new statute ensures such a scenario does not recur.

Implications of OBR’s Forecasting Power

The updated legislation grants the OBR authority to scrutinize government spending assumptions, a power it previously lacked, and allows direct access to Treasury data for these evaluations.

Empowering the OBR was, in fact, part of Rachel Reeves’s strategy. The Chancellor believed that bestowing greater independence and authority to the forecaster would enhance the credibility of UK tax and spending policies, likely influenced by the fallout from the Truss-Kwarteng mini-Budget.

However, by September of this year, reports emerged indicating the Treasury’s dissatisfaction with the OBR’s performance.

Chancellor’s Perspective

When I questioned the Chancellor about a statement from the OBR, which claimed that “promises made are consistently unfulfilled” regarding tax and spending, Reeves responded, “The OBR has an essential role to play, which is to produce economic forecasts—not to provide ongoing commentary on government policy.”

The sentiments expressed by Richard Hughes indicated that the OBR’s actual influence may not be as substantial as its critics assert.

Concerns from Fiscal Experts

Prior to Labour’s legislative changes, Paul Johnson, then director of the Institute for Fiscal Studies, cautioned against the shift towards a “more powerful fiscal technocracy.”

He acknowledged that while the OBR has introduced discipline and transparency into the fiscal policy-making process, there is a risk of having too much of a beneficial aspect. He emphasized that decisions regarding taxation, expenditure, and borrowing are inherently political rather than merely technical.

Current Economic Forecasts and Their Impact

As of late October, just a month before the Budget, the OBR reportedly downgraded its productivity forecast by 0.3 percentage points. This metric is critical for long-term growth predictions and can significantly affect Budget choices.

The Institute for Fiscal Studies has indicated that each 0.1 percentage point reduction in productivity forecasts could lead to an increase in government borrowing by £7 billion in the 2029-30 financial year, implying that a 0.3 point cut could inflate Rachel Reeves’s Budget deficit by £21 billion.

Such adjustments have far-reaching implications for any Chancellor. For instance, if this downgrade had occurred under Jeremy Hunt’s leadership, the current Treasury suggests it would have been exceedingly challenging—if not impossible—for the Conservatives to implement the National Insurance cuts announced in March 2024.

Debate on Government Credibility

Another pressing issue is how much acknowledgment the government deserves for its “pro-growth measures,” such as reforming planning laws or simplifying post-Brexit trade with Europe. The more these initiatives are anticipated to bolster medium-term growth, the narrower the Budget gap becomes.

Some members of the Labour left argue that the OBR is a fundamental structural barrier preventing a government with a substantial majority from acting decisively on its instincts. This perspective has also begun to resonate among some factions on the Labour right.

Criticism of the OBR’s Role

Praful Nargund, director of the Good Growth Foundation, who previously contested against Jeremy Corbyn in the last general election, remarked, “The Office for Budget Responsibility was established to impose austerity. However, in its quest to regain credibility, it has driven us deeper into the cycle of spending cuts with no end in sight.”

He further asserted, “A body created to enforce reductions is now being tasked with overseeing a growth strategy, which it is not equipped to handle.”

Final Thoughts on OBR’s Authority

Nonetheless, Richard Hughes maintained in March that he was merely reporting the facts, emphasizing that it is the Chancellor and Parliament that possess authority over the £3 trillion annual decision-making regarding revenue generation or expenditure.

The inception of the OBR can be traced back to a seemingly obscure pamphlet published by the Conservative Party in late September 2008, amid the onset of a severe financial crisis that deeply affected the UK. This pamphlet outlined best practices in fiscal policy, setting the stage for the OBR’s creation.

Originally established by the coalition government in 2010, the OBR was given permanent statutory status in March 2011. However, Chancellor George Osborne had predicted that the appointment of independent economists could lead to complications for the coalition government.

Historical Context and Future Dynamics

The fallout from Robert Chote, the former chair of the OBR, releasing data indicating the lowest spending levels since the 1930s triggered significant media scrutiny. This contributed to a narrative of austerity reminiscent of George Orwell’s critiques of living conditions in northern England.

Former Prime Minister Liz Truss suggested that a “deep state” was involved in undermining her short-lived government, describing it as “the economic establishment that fundamentally resists change to the status quo.”

Truss had once commented on the OBR, stating, “Treasury officials transition from the Treasury to the Bank of England, to the OBR to the Resolution Foundation. It’s the same individuals.”

During the Johnson-Sunak administration, the OBR also produced analyses indicating rising tax burdens not seen since World War II, which the government would likely have preferred to avoid.

Future of the OBR

The Labour government has fortified the OBR, and the impressive credentials of its Budget Responsibility Committee members bolster its credibility. Richard Hughes and Tom Josephs both held prominent roles in fiscal policy at the Treasury, while Professor David Miles served on the Bank of England’s monetary policy committee and was chief economist at Morgan Stanley.

Insiders have indicated that significant adjustments are forthcoming regarding the OBR’s interaction with the Treasury. Moving forward, the OBR’s assessment of available fiscal flexibility—known as “headroom”—will occur only once a year, beginning with this Budget. This change aims to alleviate the incessant speculation surrounding tax increases.

Supporters of the OBR contend that the challenges facing the forecaster should not be attributed to its role. The International Monetary Fund advises the UK that expanding headroom is the best way to mitigate the cycle of tax increase speculation that negatively impacts consumer and business confidence.

The Chancellor has virtually disclosed her strategy to enhance headroom figures in the upcoming Budget, a detail that will be closely monitored by financial markets.

Ultimately, the 2022 mini-Budget underscored the OBR’s respected position in the markets, a fact emphasized by the Bank of England’s governor during crucial emergency discussions in Downing Street amid that crisis.

Even if the OBR did not exist, the government’s Budget choices would still be influenced by market reactions. The UK relies heavily on external investors for its debt, and as the Chancellor observes, these investors are increasingly likely to be foreign hedge funds rather than domestic pension or insurance companies.

Those advocating for a reduction in the OBR’s influence must provide alternative and compelling arguments to establish their credibility, both in terms of financial accuracy and the political authority to implement their policies. Nevertheless, other nations operate effectively without similar institutions. Therefore, as the Budget approaches, a critical discussion is emerging—not solely about the Chancellor’s policies, but also about the role, performance, and future of the OBR.

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