The independent European Fiscal Board, created to examine the EU fiscal framework and aggregate policy stance, has reviewed the work of the OBR in its Annual Report. It argues that the OBR has retained “a high degree of public trust in its ability to provide objective assessments of the macroeconomic outlook and public finances”.

Read the 2018 European Fiscal Board Annual Report


Relevant excerpts

While the UK is set to leave the EU, the OBR offers insights that transcend the country case and can be of interest to the IFI universe as a whole. It was set up in 2010 by an incoming government determined to unmistakably break with the damaging practice followed by previous executives. More specifically, the OBR can be seen as a strong and uncompromising commitment device to restore the credibility of budgetary plans by fully outsourcing budgetary forecasts to a group of independent experts whose impartiality is beyond doubt. The degree of autonomy originally granted to the OBR in preparing budgetary forecasts is unrivalled in the EU, and the OBR has been helpful in preparing realistic and credible budgetary plans. (page 42)

Several organisations have developed databases and indices to measure the key characteristics of IFIs. Three main indices can be highlighted: the scope index of fiscal institutions (SIFI) published by the European Commission, the IMF’s signal enhancement capacity index (SEC), and finally the OECD’s index of IFI independence. The first focuses on the scope of responsibilities and tasks assigned to individual councils in the EU, the second gauges the capacity of fiscal councils to inform the general public about fiscal policy and the third the degree of independence (68).

In the latest available SIFI (2016), the OBR came first in the ranking with a score of 77 out of 100. In the 2017 SEC index, the OBR ranked first when considering only EU members. Finally, according to the 2017 OECD’s independence index, the OBR ranks first. Therefore, the OBR consistently ranks at the top in all three indices. (page 43)

The OBR was created in 2010 because of a particular need to ‘address past weaknesses in the credibility of economic and fiscal forecasting and, consequently, fiscal policy’. In the 2000s, fiscal forecasts published by the Treasury were regarded as too optimistic, and the authorities were seen as exploiting their prerogative of not only deciding but also making discretionary changes retroactively to the starting and end dates of the economic cycle over which budgetary targets were judged. The fiscal forecasts were the formal responsibility of the Chancellor of the Exchequer, who was entitled to adopt any figures he wanted, but there was a widespread perception that they were more upbeat than they would have been had Treasury civil servants been left to produce them on their own. As for the methodology, the forecasts were undertaken following a somewhat backward-looking approach; this increased the risk of potentially abrupt revisions during the budget year. Finally, fiscal deficits and debt were not reduced as decisively as in most other industrial countries in the years prior to the crisis, and in its aftermath they systematically increased.

These perceptions and developments led to a loss of credibility for the government’s fiscal management and the general conviction that official forecasts were politically motivated and thus carried an intrinsic positive bias. For these reasons, the incoming coalition government opted for the creation of an independent fiscal institution that, among other duties, would be in charge of producing the official forecasts for the economy and public finances, with the government no longer publishing any forecasts of its own. This specific part of the mandate points to the heterogeneity among IFIs. Thus the official forecasts produced by the OBR need to encapsulate the government’s policy decisions, while at the same time being perceived as independent.

More broadly, the OBR is legally regulated by the Budget Responsibility and National Audit Act of 2011 with the role ‘to examine and report on the sustainability of the public finances’. The specific duties of the OBR are: (i) to produce the official forecasts for the economy and public finances (twice a year); (ii) to assess whether the government has met its fiscal targets; (iii) to examine the fiscal impact of the measures announced in the budget bill or autumn statement; and (iv) to analyse the strength of the public sector balance sheet and the long-term fiscal sustainability. Since its creation, the OBR’s mandate has been widened to include an annual assessment of the outlook for welfare spending, a biennial report on fiscal risks (to which the government is legally required to respond) and regular forecasts for tax receipts devolved to the constituent nations of the UK.

For all of the above, the OBR has the legal right to draw on the institutional capacity of the government to provide detailed evidence of individual tax or spending forecasts and measures. The government conducts the costing for the proposed measures, which the OBR scrutinises and to which it suggests amendments during the budget planning process. At the end of this process, the government decides what costing to publish in its own budget documents, but — knowing that any disagreement would be public — to date it has never published an estimate different from that which the OBR has chosen to assume for the purposes of its forecast. The right to draw on civil service expertise across government is highly important, especially in the production of the budgetary forecasts, which involves a vastly disaggregated process that tends to be resource-intensive. In practice, the OBR’s role as monopoly provider of the official fiscal forecast has helped it avoid the difficulties some fiscal councils have faced in securing access to official information, as creating difficulties for the OBR in this regard would make the process of budget preparation more difficult and unpredictable for the government itself.

The main challenge that emanates from the legislation regulating this institution comes precisely from the fact that, to fulfil its duties, the OBR needs to maintain constant contact with fiscal authorities — especially in the weeks running up to budgets and other fiscal events — and this may put its independence into question. This close relationship is particularly essential when gathering the information and data needed to perform the Office’s mandate.

Four characteristics are intended to safeguard the OBR’s independence.

  • Firstly, the OBR is fully transparent about all its substantive interactions with diverse public officials during the forecasting and costing process. Information on these interactions is timely published on the institution’s official website.
  • Secondly, the OBR operates on a multiannual budget that has the advantage of being fully transparent, helping to safeguard against political interference. The multiannual budget is agreed with the Treasury, which hosts a specific budget line for the Office. In 2017, its annual budget was slightly over EUR 3 million, the fifth largest budget among European IFIs in 2017.
  • Thirdly, the competence and expertise of staff enhances the external perception of independence. This is particularly important in the initial phase of the development of an IFI, when the confidence in the output produced by such an institution is firmly tied up to the reputation of its senior leadership team and competence.
  • Finally, while the OBR has a dual accountability to the UK Parliament and the government, neither of these bodies has the right of direction over the Office’s analysis. At most, they can request additional analyses and it is the OBR’s prerogative to decide whether to comply with such requests or not.

A series of mechanisms were put in place to ensure a proper supervision by Parliament and help protect the Office’s independence. Parliament examines the OBR’s budget (via the National Audit Office), and the Treasury Select Committee (TSC) of the House of Commons has the right to veto any appointments or dismissals of the members of the Budget Responsibility Committee (BRC), which leads the OBR. Furthermore, the OBR must send all its reports to Parliament after publication, and its staff must answer parliamentary questions and appear before parliamentary committees. In particular, members of the BRC appear before the TSC to be questioned about forecasts, and Parliament requires the OBR to evaluate the accuracy of its forecasts each year in October. Finally, all responses to parliamentary questions must be published by the OBR to help enhance the transparency of the Office.

The OBR is also subject to external and Treasury reviews. The first external review was delivered in 2014 and concluded that ‘the OBR [had] succeeded in reducing the perception of bias in fiscal and economic forecasting and [had] increased the transparency of its products’. The review also acknowledged that these improvements were mainly due to the leadership of the BRC and the capability of the institution’s staff. The 2015 HM Treasury review praised the improvements derived from the creation of the Office, in line with the 2014 external review. It was intended to assess the effectiveness of the Office in enhancing fiscal credibility and to consider ways to strengthen it. The list of recommendations touched upon several important areas such as legislation, the operational framework, forecast performance, transparency and accessibility of information.

The OBR was also externally reviewed in the IMF’s Fiscal Transparency Review of the UK in November 2016. The IMF concluded that the depth and breadth of its economic and fiscal analysis ‘can be considered as best-practice, and could be used as a benchmark by other advanced countries’ and that ‘while it is still relatively early in its track record, the OBR’s forecasting record indicates a lower degree of bias than under the Treasury forecasting regime’.

Some tentative lessons can be drawn from the OBR.

  • First, the institutional role and the structure of an IFI depend significantly on the public perception and particular events that preceded the establishment of the institution. The distinctive features of the OBR were therefore calibrated to account for the ever-increasing recognition of the past deficit biases and adapted to fit in the national institutional environment, where usually the Executive is powerful relative to Parliament and the Treasury powerful relative to the rest of the Executive in fiscal policymaking. Furthermore, the boundaries of the OBR’s mandate were influenced by the a priori electoral discussions on the size and composition of the planned fiscal consolidation. The incoming coalition hoped that the newly created OBR’s assessment of the fiscal position that it had inherited would strengthen its argument that consolidation was necessary.
  • Second, recent experience has shown that IFIs can only achieve credibility through a comprehensive policy of openness and transparency. Full transparency in their work and the way they conduct their operations provides IFIs with the most significant safeguard of their independence and enables them to foster institutional trust and credibility with the public.
  • Third, in their initial phase of development, the confidence in the products released by IFIs is firmly tied to the reputation of its senior leadership team and to the competence of its supporting staff rather to than its legal bedrock. The reviews of the OBR so far have recognised that stakeholder confidence was principally ascribed to these features. The OBR has also managed to expand its influence by using an effective communication strategy and by fostering the goal of reaching out to a broader audience, beyond the expert fiscal community. Remarkably, the OBR has retained, in the contentious environment of the 2016 referendum on UK membership of the EU, a high degree of public trust in its ability to provide objective assessments of the macroeconomic outlook and public finances.