Written evidence submitted by Dr Frank
Eich, Senior Economist, Pension Corporation
You have asked me whether I would like to submit
written evidence on the future structure and remit of the Office
for Budget Responsibility (OBR). I would like to take up this
invitation.
Before doing so, I have to disclose that I am on
secondment from HM Treasury to Pension Corporation and that this
secondment will, as it stands, come to an end in mid-October.
I also led the Treasury's Long Term Unit in the past, which was
in charge of producing long-term public finance projections etc.
As such I might even have a professional interest in the OBR.
EXECUTIVE SUMMARY
Taking a cue from its title, the OBR should
help this and future Governments produce "responsible budgets",
which take into account known future trends and uncertainties,
to the benefit of today's and future generations. To achieve this,
the OBR should not only produce independent high quality economic
forecasts and long-term structural analysis but should also contribute
to a public debate on these issues by publishing understandable
documents and by engaging pro-actively with the public, whether
it is Parliament or the media. Given the importance of the issues
and to gain traction within Parliament going beyond this legislative
period, the OBR should report to Parliament directly. It should
be able to comment on fiscal policy within a longer-term context.
The OBR should have its own offices but should work closely and
congenially with Treasury and other government departments. Having
a senior civil servant run the OBR's secretariat, who will probably
be line managed by a more senior Treasury official, could create
conflicts of interest. The OBR also needs a success measure. The
precision of its forecasts should not be such a measure as forecasting
is not an exact science and depends on luck as well as good judgement.
Making clear what assumptions have been used and helping others
understand them and the uncertainties around forecasting would
be a success measure. Raising the quality of debate on these issues
would be a very good success over the medium to long term. Ultimately
all of this would help to hold politicians to account.
INTRODUCTION
What should be the role and structure of a permanent
OBR? The OBR's name suggests that its remit should go beyond just
producing independent forecasts and that the OBR should help this
and future Governments set "responsible" budgets. "Responsible"
in this context should mean that this and future Governments are
looking after the well-being of the British people, whether they
are part of today's or future generations, and that their actions
take account of known or likely future developments such as population
ageing while acknowledging uncertainties—just like a "responsible
person" would drive within his abilities, slow down ahead
of corners and adjust the speed to circumstances like bad visibility.
It is a desirable character trait, which instils trust.
MORE DETAILED
DISCUSSION
Measuring success
The OBR needs a success measure. The precision
of its forecast should not be considered a success measure as
it is not an exact science. Getting the forecast "right"
has as much to do with luck as with understanding the issues.
A more appropriate success measure would be an increase in the
transparency in the underlying assumptions used to generate the
forecasts, and to help others understand these assumptions and
the uncertainties around the forecasts better. The OBR could be
judged to be extremely successful if the quality of public debate—in
the media or Parliament—improved over the coming years as
a result of its work. Ultimately, all of this would help to hold
politicians to account. For example, the UK might not have entered
the recession with such high structural deficit had there been
more independent analysis and scrutiny.
On the OBR's remit
1. Given the importance of the work, the OBR
should submit its forecasts and analysis to Parliament. This would
encourage all MPs from across the parties to engage in these important
issues and would give the OBR much needed traction going beyond
this Parliament. It would also signal that the issues are not
only of a technical nature of interest to HM Treasury but potentially
affect every part of society.
2. There was a consensus at the seminar that
the OBR should not only focus on short- to medium-term forecasting
but should also conduct substantial and original work into longer-term
structural issues, including an assessment of the long-term sustainability
of the public finances. I agree with this view, not least because
there is no other institution in the UK doing this. The IFS, for
example, focuses more on short- to medium-term aspects of the
economy and Government policy. The importance of such a role should
be reflected in the number and seniority of staff asked to work
on these areas.
3. Related, and based on my previous experience,
I see a clear role for the OBR to help raise the quality of the
public debate on longer-term economic and public finance issues
relevant to everybody. In my view the quality is disappointingly
low currently. The OBR should conduct high-quality independent
work in these areas but should equally invest time and effort
translating its findings into something the interested general
public can understand. It could be a genuine value added and could
over time help raise the quality of policy making through the
democratic process. This could be achieved by:
— publishing discussion papers, which showcase
on-going research and explain in understandable terms what it
means. These could be published outside the fiscal events such
as the Budget; and
— organising workshops with journalists,
MPs and the Treasury Select Committee to explain the technical
work and the issues under consideration. Many of the issues are
not well understood outside expert circles and the mere presentation
of facts, figures and conceptual issues could genuinely help to
raise understanding. Not everything needs to be discussed in a
confrontational setting.
Such efforts might help to give the public a
better sense, for example, how "responsible" policies
could look like, which took account of the interests of future
generations.
4. There is in my view limited value in
producing ever more sophisticated analysis, which might please
a number of academics, when that fails to make any impact on the
public debate and policy making process. In my view the long-term
analysis published by the previous government was state of the
art, a view shared back then by external commentators such as
the OECD, European Commission or the IMF. Many longer-term issues
have by now been well analysed and are reasonably well understood.
However, its impact was only modest.
5. The original remit states that the OBR
should take account of government off-balance sheet items when
assessing the long-term sustainability of the public finances.
I agree with that. However, I would go further and would like
the OBR to consider the interactions between the public and private
sectors too. To give an example: even post reforms, UK state pension
spending, as a share of GDP, is projected to remain low over the
coming decades relatively to that in other developed countries.
The underlying assumption is that future pensioners will derive
large parts of their retirement income from other sources, including
occupational pensions. This contrasts with the underlying assumptions
used in many other countries, where it is assumed that the government
will remain the main source of income in retirement. Given the
decline of defined-benefit pension schemes in the private sector
in the UK and the failure of defined-contribution schemes to take
off (unlike in Australia for example, where the switch from DB
was into mandatory DC schemes), how realistic is the current assumption
and how much trust should we put into the current long-term projections
and as such any assessment of long-term sustainability? Pensions
are not the only policy area. Government and household debt would
be another example.
6. One point discussed at the seminar was
whether the OBR should be able to comment on the Government's
fiscal target(s). Some argued that this was fundamental to an
independent OBR; others thought that there were advantages from
staying out of this process (as the Bank of England does with
the inflation target). In my view the OBR should be in the position
to comment on the Government's target(s) in the context of longer-term
trends such as the mounting spending pressures arising from an
ageing population. For example, would the Government still be
able to achieve its targets with a 50 per cent or higher probability
in, say, 2020 or 2030? Or what type of fiscal adjustment (if any)
would have to be made in the future to achieve longer-term fiscal
sustainability given the current target(s) or what the current
target(s) imply with respect to inter-generational fairness. This
would be one way for the OBR to help this and future Governments
produce "responsible" budgets. A question, which has
not been answered successfully anywhere yet, is how to translate
our understanding of longer-term fiscal developments into medium-term
fiscal policy settings. The OBR could contribute to this important
debate though it would obviously be for Government to set its
objectives.
On the OBR's structure
7. With respect to the general functioning
of the OBR, I think it is important that the OBR will have its
own office but equally that OBR staff will continue to work closely
and congenially with HMT and other Whitehall colleagues, ONS etc.
There is no need to be confrontational to establish credibility
and independence. In any case, the OBR will rely heavily on others
for data and also ideas. While the OBR might be given a strong
enough remit putting it in the position to demand inputs from
others, it would be much better if good interpersonal relations
would facilitate such process.
8. The OBR ought to have a research budget, which
it can use as it pleases. HM Treasury's own macroeconomic research
budget might provide a good blueprint for this.
9. One way to strengthen its independence
and to ensure that the OBR benefits from the latest thinking would
be to have external experts such as City economists on one to
two-year secondments into the office.
10. In my view it is important to think
about the appropriate line management structure within the OBR.
It is my understanding that the OBR' day-to-day affairs will be
managed by a secretary who is a Senior Civil Servant. Will OBR
staff report to him/her who will then report to a more senior
manager within HM Treasury? Does that mean that OBR staff would
be appraised on the HM Treasury's appraisal system? Such an arrangement
could lead to potential conflicts of interest and might also make
it more difficult to recruit experts from outside the civil service
who do not wish to be drawn into civil service procedures and
structures. For example, more senior experts who could make a
very substantial positive contribution to the technical and other
output of the OBR might find it inappropriate to report to a team
leader-equivalent civil servant running the secretariat.
11. Related, I believe that the OBR's credibility
will depend on the expertise of its staff generally and not only
on the reputation of its chair and two main colleagues. Using
again the IFS as an example, its reputation is based on the excellence
and credibility of its staff generally and not only of its senior
management. This should be reflected upon in the general recruitment
process.
I leave it to others to comment on the structure
and remit relevant to the short- to medium-term forecasting process.
The only comment I would like to make here is that I see little
value in entering a race with commercial forecasters to provide
an ever higher frequency of "forecast updates".
August 2010
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