Written evidence submitted by Economic
Perspectives Ltd
1. THE REMIT
OF THE
OBR
1.1 Independent assessments of public finances
and the economy
There are essentially two approaches to macroeconomic
forecasting: one which insists upon a coherent framework of economic
analysis as the basis for forecasting and the other whose objective
is to make the best possible forecasts for each of a range of
variables, irrespective of the apparent conflicts between them.
The advantage of the former approach is that it presents the forecast
as a credible whole. Its weakness is that, when the forecast is
seriously inaccurate, all aspects of the forecast share this malaise.
My recommendation to the OBR is that it adopts an eclectic approach
in making its assessments that does not derive from a single analytical
framework (such as the Dynamic Stochastic General Equilibrium
model). Rather, that it constructs individual multivariate models
of the key forecast variables and examines the robustness of these
models using out-of-sample testing.
1.2 Uncertainty analysis
The appropriate bands of uncertainty to set around
the central forecasts should reflect not only the standard errors
of the individual forecasting models, but also their out-of-sample
errors. To the extent that a conventional macro-model framework
is used to make forecasts, the uncertainty analysis should explore
a variety of scenarios rather than merely the confidence intervals
around each forecast variable in the central forecast.
1.3 Public sector balance sheet analysis
An audit of the evolution of the complete public
sector balance sheet extending back 20 years should be carried
out and published as a separate report, to enable the contributions
of ageing, public sector pensions and asset price movements to
be clearly identified. This would then provide the appropriate
context to consider projections of the balance sheet for the next
20 years based on a variety of assumptions and policy changes
(eg state retirement ages).
2. APPROPRIATE
MEANS OF
ENSURING BOTH
INDEPENDENCE AND
ACCOUNTABILITY
2.1 Independence
While the OBR will necessarily remain dependent
on the Treasury and other government departments for technical
advice and detailed models of taxation and other public finance
variables, it is important that the OBR establish a separate identity
in a separate building. Preferably, the OBR will make a clean
break with the forecasting process used by the Treasury and published
in the Budget Report and pre-Budget Report for the past several
years. These have become stale and lifeless documents, divorced
from the realities of a complex, credit-driven and interconnected
global economy.
2.2 Accountability
The permanent officials of the OBR should be subject
to a similar process of regular (possibly twice-yearly) examination
and questioning as the members of the Bank of England's Monetary
Policy Committee.
3. APPROPRIATE
RESOURCES FOR
THE OBR
3.1 Staffing
Based on its remit and the resources available
to other comparable bodies in other developed countries, I would
suggest a total headcount of around 40 people would be sufficient
to carry out the task.
3.2 Other resources
The OBR should live in a modest and functional building
within a mile of HM Treasury. It should pay salaries comparable
to those of HM Treasury, rather than those of the Bank of England
or the Financial Services Authority. It should have a budget to
allow for specialist external work to be commissioned and may
find it helpful to establish a Panel of External Advisors. The
OBR should have rights of access to unpublished data sets of the
Office for National Statistics and have the right to insist that
the ONS remedy any data gaps or discontinuities that hinder its
analysis.
August 2010
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