Office for Budget Responsibility - Treasury Contents


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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