Written evidence submitted by the National
Institute of Economic and Social Research (NIESR)[4]
1. The Treasury Select Committee has asked
for written evidence on the role and responsibility of the Office
for Budget Responsibility (OBR). The enquiry will consider alternatives
and international experience, and has asked for evidence on the
remit, the resources and the means for ensuring the independence
of the OBR. The Chancellor intends that the OBR take on responsibility
for undertaking independent forecasts and auditing the ability
of the government to fulfil its Fiscal Mandate. The Fiscal
Mandate and the tax and spending decisions associated with
it are to be left to politicians.
2. The Fiscal Mandate at present involves
a plan for fiscal consolidation and a target for the budget deficit.
The Mandate embeds a concept of sustainability, and the
OBR needs to assess this concept. Sustainability is not a unique
concept. Fairness between generations and a commitment to pay
back debts that are raised may be seen as the core of sustainability,
but fairness gives a wide range of possible levels of borrowing,
and there are a large number of paths for the deficit that involve
repaying debts. The Fiscal Mandate can be changed by a
new government, and the OBR would be best set up to manage such
a change. Given this structure, its role should perhaps be reserved
to producing independent forecasts and comments on and analysis
of government policy. As such its role would be closer to the
long-standing Netherlands Bureau for Economic Policy Analysis
(or CPB) than to the recently established Fiscal Policy Council
in Sweden. Indeed we would caution against copying small countries
such as Sweden and New Zealand as their institutions in this area
may reflect the size of the relevant profession rather than the
optimal structure for the UK.
3. The major remit of the OBR will be to
produce an independent forecast from within the public sector.
This has been difficult in the last 40 years because Chancellors
and their advisors have often had strong views on both how the
economy operates and what the prospects for growth will be. Both
Gordon Brown and Nigel Lawson believed that their policies had
changed the way the economy would operate, and were convinced
growth going forward would be stronger than an analysis of the
past would suggest. These views coloured their Budget forecasts.
It would be wise if this link were broken. However, complete separation
from the Treasury would be unwise. The OBR suggests that links
with the public sector forecasting groups at the Treasury, HMRC
and DWP should be maintained. In our view this is essential if
the macroeconomic forecast is to be well founded. The degree of
expertise and the scale of effort in these bodies would be impossible
to replicate. However, it has always been possible to build a
technical wall between the inputs of the public sector forecasters
and the overall macro economic forecast, and this link will not
endanger independence.
4. The remit of the OBR should reflect that
use of resources over time during a forecasting exercise. Given
there is a structure in place in order to produce a forecast it
should take no more than six weeks from setting the starting point
to publishing a finished document.[5]
This leaves a good amount of time outside the forecast for background
analysis, improvements to tools and writing papers on policy related
in particular to the public finances. Such activities should be
included in its remit. However, the remit should be flexible enough
to ensure the OBR can set its own research agenda while remaining
focused upon the Fiscal Mandate of that particular time. These
activities can be supplemented by commissioning background work
from the relevant academic community. The choice of tools to use
should be under scrutiny from parliament, but not prescribed in
the remit. The Treasury model is itself an adequate tool for forecasting,
but it provides neither a wider perspective on the global economy
nor an ability to undertake a variety of policy-related scenario
analyses. These are not needed in the Budget forecast, but they
are central to making decisions. There are flexible independent
tools available for this purpose.
5. The independence of the OBR will depend
in part on the structure of its management committee of three
councillors. At least one should have experience of the detailed
process of forecasting, much as Geoffrey Dicks has, otherwise
independence from Treasury influence would be more difficult.
This knowledge is common among Treasury officials even at the
highest grades, but it is not common outside the public sector.
Most City forecasts are small scale operations, and very few academics
understand what a large scale macro-economic forecast involves.
6. The perception of independence is vital
to the effective operation of the OBR. As such the permanent OBR
should be established in a building that is separate any from
government departments. The relatively transparent approach to
the appointment of the three permanent members of the Budget Responsibility
Committee (BRC) is a welcome innovation. Clearly much has been
learned from the evolution of the process of appointing Monetary
Policy Committee (MPC) members. The policy of MPC members commenting
on the current and future state of the UK economy should also
be undertaken by BRC members, as this would enable them to enhance
the public understanding of their role. Expert commentary on the
state of the public finances should not be left to twice-yearly
forecasting rounds.
7. Interaction with the Treasury is inevitable,
in part because forecasters have to be involved in the process
of policy making by advising on the consequences of actions taken
in the Budget. However, this process should be managed with care.
An extra degree of openness about contacts with special advisors
is perhaps essential to ensure independence. It is not that they
should be absent, but that they should be noted and reported on
to Parliament.
12 August 2010
4 Professor Barrell was an Economic Advisor involved
in the forecast team at the Treasury in the 1980s, and has been
in his current post since 1990. He is currently Director of Forecasting
at NIESR, and President of the AIECE, the European Association
of Foresting Institutes. Simon Kirby is the lead UK forecaster
at NIESR. Back
5
The Institute forecast published in our Review in July 2010, for
instance, took a team of eight five weeks to produce. This included
writing the forecast material from page F2 to F65. Back
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