Office for Budget Responsibility - Treasury Contents

Written evidence submitted by staff of the International Monetary Fund

Please note that the views expressed in these comments are those of the IMF's staff, and not necessarily of its management or Executive Board.


  IMF staff appreciate the Treasury Committee's invitation to submit views on the OBR's future structure and remit. We broadly agree with the Interim OBR's advice on this issue. The comments below, prepared by the staff of the European Department and the Fiscal Affairs Department, focus on ways to further clarify the OBR's mandate and strengthen its independence and resources. These comments are organized around five "best practices" for fiscal councils (FC), based on IMF staff analysis of international experience with FCs.[11] Where applicable, we indicate in brackets examples of countries in which FCs employ a certain practice.

1.   Objectives and activities

FCs are typically intended to reduce deficit bias, enhance policy credibility, and improve fiscal outcomes while leaving full discretion for policymaking to the government. They can best do so by providing three types of output: (1) nonpartisan analysis of fiscal developments and long-term sustainability issues; (2) independent projections and forecasts for both budget and relevant macroeconomic variables; and (3) analysis of the implications of a particular fiscal stance, including the consequences for needed future adjustment to meet specified fiscal goals.

    Recommendations: The OBR's proposed focus on fiscal forecasts, economic analysis, and assessments of fiscal sustainability is consistent with the above objectives. However, it would be worthwhile to spell out more explicitly what this might entail. In this regard, the OBR's "judgment of the sustainability of the public finances" (paragraph 20) should include not only a discussion of the debt path that arises from announced fiscal policies, but also a discussion of the sustainability of policy measures and assumptions that underpin the debt path [Belgium, Hungary, Netherlands, Sweden, USA]. This could include discussing any key risks to the trajectory of policies assumed in the official forecasts and by producing alternative scenarios that show the projected path of fiscal variables under alternative assumptions regarding the path of future policies. Such scenarios and commentary by the OBR may reduce the incentive for governments to resort to questionable devices (such as assuming that an implausibly large fiscal adjustment will occur suddenly at some point in the distant future) to achieve balanced fiscal paths or to meet fiscal mandates only on paper. It would also be useful to clarify that the OBR would take a lead role in assessing compliance with any future fiscal rule that may be adopted to succeed the current fiscal mandate.

    2.   Role of forecasts and policy assessments

    An FC should prepare forecasts on a regular basis throughout the year. The FC's forecasts should be used in the budget preparation process, and the FC's analysis should be channeled into policymaking through explicit mechanisms. — Recommendations: We see merit in having both pre-budget and budget forecasts, as this would help clarify the effects of the new budget. These forecasts should be detailed and include, among other items, the scoring of key policy measures [Chile, Belgium, Netherlands], information on the main assumptions underpinning the forecasts, and information on how projections for key variables compare with outside (eg, consensus) forecasts. We also strongly support the proposed annual report on fiscal sustainability (paragraph 35). In addition to projecting the fiscal path under baseline policies, the annual sustainability report could also further public debate by scoring the fiscal savings from possible reform measures (eg, accelerating increases in the retirement age), based on proposals submitted by the government, opposition members, academia, and think tanks. To preserve its reputation as a nonpartisan agency without a political agenda, the OBR should refrain from explicitly advocating any specific tax or spending measure, but it could usefully discuss the likely effects of such measures on fiscal sustainability from a technical perspective. To provide the OBR with sufficient instruments of influence, it should also be empowered to issue other public reports and statements aimed at informing the public debate on fiscal policy [Sweden] and be provided with regular hearings in Parliament [Hungary].

    3.   Independence

      It is essential for an FC to operate in a manner free from political influence, requiring formal guarantees on funding and independence in decision-making. — Recommendations: It is essential that the OBR be fully independent from Treasury. Measures that would help guarantee de facto and de jure independence include (i) providing multi-year budget appropriations for OBR to reduce the government's ability to coerce the OBR through reduced appropriations; (ii) establishing the OBR as its own entity that is not an office or agency of the Treasury (paragraph 61), with a separate physical location; (iii) establishing sufficiently long fixed terms for members of the Budget Responsibility Committee, making removal of a member before expiration of his or her term difficult or impossible; (iv) adopting restrictive qualification requirements for members (eg, members could be required to have an advanced degree in economics or public policy and be chosen from a list proposed by the Treasury Select Committee, with current or former elected representatives excluded from consideration); and (v) framing the needed collaboration with Treasury in a way that is clear and transparent [Netherlands] and ensures that the OBR has unfettered access to Treasury fiscal data; a well-designed Memorandum of Understanding with Treasury (paragraph 56) will be critical in this regard.

    4.   Staffing

      Well-trained and adequate numbers of staff are key to the FC discharging its mandate and retaining credibility. — Recommendations: The OBR should be provided with sufficient staff resources to fully perform its duties. This will likely require a significant expansion over its current staff size, though this could be developed over time. To attract competent staff, the salary scale should be competitive [Hungary, Netherlands, USA]. To facilitate independence, staff should report solely to the OBR and not be seconded from Treasury. The OBR should also be tasked with maintaining a working culture that is supportive of providing nonpartisan technical advice devoid of any specific political agenda.

    5.   Accountability

      Formal mechanisms should ensure that the FC is accountable to the relevant Parliamentary Committees. — Recommendations: The OBR should ideally be accountable only to Parliament [Hungary, USA].

    August 2010

11   See Debrun, Hauner, and Kumar (2009), "Independent Fiscal Agencies", Journal of Economic Surveys, 23: 44-81. Back

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