‘How Labour should approach the role of the OBR in government’

The legislative programme of an incoming government is often packed with large and dramatic measures, and Labour’s first King’s Speech was no exception.

The new government wants to oversee a sea change in workers’ rights, establish a new National Wealth Fund, and set up a new state-backed energy company. But sometimes the smaller, more innocuous looking bills, turn out to be just as significant as the legislative leviathans. With that in mind the Budget Responsibility Bill deserves a closer look.

The Bill forbids the government from making tax and spending changes at fiscal events without an accompanying set of forecasts from the Office for Budgetary Responsibility (OBR) and is an attempt to draw a dividing line on fiscal responsibility with the Conservatives.

Looking at the past

There is an element of deja vu here. The OBR was itself introduced in the early days of the Coalition government precisely to make a point about fiscal discipline in an attempt to paint Labour as a party of reckless spending. It is a measure of the profound impact that the OBR has had on our economic policy discourse that, only a decade after its invention, dispensing with its forecasts was seen as so sacrilegious in the Liz Truss mini-budget.

As currently drafted, the Bill would certainly prevent some of the worst excesses of the Truss/Kwarteng experiment. However, as it stands, the Bill does not do enough to prevent future governments from putting short-term expediency ahead of the long term financial stability and wellbeing of the country.

The Truss mini budget was the low point in a pattern of repeated reckless fiscal policy-making over the last decade. Another was the blatant gaming of its own fiscal rules by the last government, pencilling in huge spending cuts that it knew were impossible to deliver. This was described as  ‘fiscal fiction‘ by economic experts, and while the OBR raised an arched eyebrow, it was unable to prevent it.

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More broadly, we know that issues such as the climate crisis and deteriorating health outcomes pose huge risks to the sustainability of our public finances. Failing to tackle these risks, for example by investing in decarbonisation and public health and social care provision  is evidently grossly fiscally irresponsible.

And yet the absence of this narrative from assessments of Budgets, where the OBR’s role is limited to assessing individual policy measures and judging whether the government is meeting its self-imposed fiscal rules on a simple pass or fail basis, means that Chancellors are rarely held to account for underfunding the measures we need to take to mitigate these, in the OBR’s own words “large, and potentially catastrophic, sources of fiscal risks”.

The power of the OBR lies in the mirror it holds up to government economic policy, forcing Chancellors to cost their policies, and preventing the Treasury from marking its own homework. But its limited official role also warps the debate on fiscal sustainability.

This is not the place to rehearse arguments about whether the fiscal rules themselves are the right ones, and Rachel Reeves has signalled some welcome changes towards a more sensible and sustainable approach. But the obsessive focus on those rules and the ‘headroom’ under them focuses the spotlight on the short-term and incentivises governments of all colours to play deceptive games with the public finances.

What happens next?

As it stands, this Bill will only partially solve these problems, preventing future Chancellors from sidelining the OBR entirely, but leaving the country vulnerable to irresponsible fiscal policy decisions which fail to take account of longer-term impacts.

It is tempting to recommend massively expanding the role of the OBR to prevent this, and some have done so, but this could end up encroaching too much into areas which are really political decisions and ushering in what the IFS’ Paul Johnson has described as ‘fiscal technocracy’. Instead, Labour should consider strengthening the Bill in a way which would help ensure more helpful public scrutiny on fiscal policy and reshape the incentives for politicians, without drawing the OBR too much into the politics.

The OBR has had a big impact because it can shine a light on things that might otherwise be kept in the dark, so why not make the beam shine a little wider?

As well as requiring the OBR to produce its usual forecasts and budget assessments, the Bill should require the Office to integrate their judgements of wider fiscal risks into a new, much broader, fiscal sustainability statement which sets out whether the government’s policies are adequately addressing the larger risks it has identified. This statement should be read out by the Chancellor in parliament in their Budget speech.

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This would allow the OBR to be clear about when governments are meeting their rules but ignoring longer term fiscal sustainability risks, and take the focus away from the rules themselves which after all are arbitrary and have been subject to frequent changes.

Similar measures have been supported by prominent experts like the Institute for Government  before, and would hugely improve the quality of political debate around Budgets. Former OBR Budget Responsibility Committee member Andy King has also recommended that the OBR be able to undertake more modelling of possible scenarios implied by government spending plans, for example to force more scrutiny of a government that pledged large cuts in the future but refused to say where those cuts would fall.

This small tweak to the proposed legislation could actually have a dramatic impact on the quality  of policy-making, focusing the political debate on whether policy measures are truly in the long term interests of the country and widening the understanding of fiscal responsibility beyond short-term debt management to encompass the broader health of the economy. It’s an opportunity Labour should grasp with both hands.

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