Appendix 2: Office for Budget Responsibility
Response
I am writing in response to the Committee's report
on Budget 2014. You had two main recommendations regarding the
work of the OBR:
· First,
"it is important that the OBR cost the long term implications
of Budget measures", and;
· Second,
"that, when Budget announcements are not submitted before
the OBR's deadline, the OBR should scrutinise major uncosted policies
as soon as reasonably possible thereafter and publish its findings".
Costing the long-term implications
of Budget policies
We very much agree that it is important to highlight
the long-term impact of Budget policy measures on the public finances,
especially where this differs significantly from the impact over
the usual five-year forecast horizon. As you noted in your report,
we highlighted four such policies in the March Economic and
Fiscal Outlook:
· the
pension withdrawals measure, which brings forward income tax receipts
but has a small steady-state cost in the long term;
· voluntary
NICs, which increases NICs receipts in the short term but also
increases long-term state pension costs;
· the
temporary annual investment allowance increase, which raises the
amount of tax relief that can be claimed until December 2015,
but then reduces it thereafter, largely recouping the scorecard
costs, and;
· accelerated
payments related to tax avoidance schemes, which brings forward
receipts from future years.
As we illustrated in the EFO, and as you noted in
your report, the net effect of these measures is to increase receipts
over the scorecard horizon by £1.2 billion a year on average,
but the revenue raised then drops sharply in 2019-20 and averages
only £0.2 billion a year over the 15 years beyond the scorecard
horizon.
Given the uncertainty associated with costing these
policy measures over a 5-year horizon, the longer-term implications
will also be subject to considerable uncertainty.
Figure 1:
Revenue raised by selected Budget policy measures
Source: HM Treasury, OBR
We are glad that you found this analysis useful,
and I can confirm that we will produce similar analysis at future
fiscal events if confronted with policy decisions that have similar
implications.
Costing of policy decisions submitted
after agreed deadlines
We share your frustration that the Government did
not inform us of the decision to extend childcare support to all
families on Universal Credit (and not just those paying tax) in
time for us to scrutinise and certify the costing in the March
Economic and Fiscal Outlook.
As I noted at our press conference following the
Budget statement:
"The Government claims that the cost of this
measure will be around £200 million a year. It would have
been much better for this costing to have been subjected to proper
scrutiny and to be included in our forecasts, along with every
other policy measure that affects the public finances. To say
that the cost to the Exchequer will be offset later by some as-yet-unidentified
changes to Universal Credit is no excuse. We will look at this
measure, and any accompanying measures, very closely in the run-up
to the Autumn Statement."
But while I am disappointed that the Government chose
to announce an uncosted and unscrutinised policy in this way,
I would not in general wish to publish costings for such announcements
between fiscal events—as I fear this would only encourage
the Government to repeat the offence. It might also encourage
it to exploit our costing function in other ways, for example
by asking us to publicly endorse the costing of policy announcements
during party conferences.
Agreeing firm and transparent deadlines with the
Government—and then sticking to them—is essential
to the integrity of the forecast and policy costing process, and
of our assessment of progress against the fiscal rules. It means
that our EFO forecasts can be trusted as comprehensive assessments
of the totality of announced Government policies, not just a subset
of the Government's choosing. I would not want to institutionalise
an arrangement in which the Government could announce policies
at high-profile fiscal events and then have the costings dribbled
out over succeeding weeks, when public attention has moved on
and after your committee has finished taking evidence from us
and the Treasury on the fiscal event in question.
At the end of the day, it is of course for the Government
to decide whether to behave in this way—and there will doubtless
be occasions when late policy announcements are unavoidable. As
we have said in the past: "We do have some flexibility to
adjust the final forecast for late policy decisions and economic
information emerging closer to publication. But it is clearly
in everyone's interests that, wherever possible, policy decisions
are taken in a timely way that facilitates adequate scrutiny and
incorporation in the full-scale forecast."[1]
I hope that the committee will join with us in encouraging
the Government to stick to the deadlines that it agrees with us—and
will continue highlighting the regrettable occasions on which
it does not.
1 http://budgetresponsibility.org.uk/wordpress/docs/OBR-response.pdf
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