The future of Britain’s fiscal watchdog

Robert Chote and the Office for Budget Responsibility have been virtually synonymous in its decade-long life. But before long the OBR’s chairman will be moving on—his second five-year term ends this October—and the Treasury is looking for someone to replace him. That decision will now be taken by Rishi Sunak rather than Sajid Javid, following Boris Johnson’s ruthless power grab over the Treasury. So what lies ahead for the fiscal monitor under its new chair and a chancellor who has been appointed in so controversial a fashion?

Would-be candidates have until 20^th February to apply for the role. According to the Treasury’s job advert, they must have “deep expertise in economic and fiscal analysis” and be “independently minded.” They must “command broad respect for their objectivity in dealing with issues of political sensitivity” while also possessing “outstanding communications skills.”

Assuming such a Chote-like surrogate exists (it would be even better if that person is as level-headed and approachable as Chote), he or she will inherit an outfit that has already made its mark. George Osborne’s creation of the OBR (temporarily headed by veteran economist Alan Budd) in May 2010 was in some respects the fiscal equivalent of Gordon Brown’s decision 13 years earlier to make the Bank of England free to set interest rates. Both institutions are independent, though in a crucial distinction the OBR does not have the power over fiscal policy that the Bank has over monetary policy.

The formation of the OBR was part of a wave of budgetary watchdogs established in the wake of the global financial crisis of 2007-08, as public deficits and debt swelled. Until then there had been only a handful, the oldest of which was a Dutch body set up in 1945. But now there are around 40 worldwide, predominantly in Europe where fiscal councils multiplied in response to the financial and ensuing euro crisis. As they spread, the Organisation for Economic Cooperation and Development (OECD), a club of mainly advanced economies, set up a coordinating network, which Chote has chaired since 2018.

What makes the OBR distinctive as a fiscal monitor, he said when I interviewed him on 10^th February (before Thursday’s dramatic cabinet reshuffle), is that it alone provides the official economic and fiscal forecasts that underpin budget-making. A quarter of the fiscal watchdogs belonging to the OECD network do their own forecasts but the OBR is unusual (along with those in the Netherlands and more recently Scotland) in being the “monopoly provider.”

That is possible because the OBR is part of the government machine as well as an independent watchdog. Whereas the National Audit Office works for parliament and its head is an officer of the House of Commons, the OBR is a non-departmental public body sponsored and funded by the Treasury. The chancellor appoints the chair of the OBR and his two colleagues on the budget responsibility committee, who specialise respectively in economic and fiscal matters.

There are both advantages and disadvantages in being such a hybrid institution. On the one hand, as the provider of the forecasts used in budgetary policy the OBR is indispensable to government, which means it has access to all the information it needs. On the other hand, the set-up risks being seen as too close to the Treasury.

Chote argues that there is no master template for fiscal monitors: what is right for one country will not necessarily be right in another. In Britain the Institute for Fiscal Studies (which he formerly headed) already fulfilled the function of a fully independent watchdog, missing in other countries. What was and is more important in Britain, he says, is an effective check on the Treasury, whose power has sprung historically from its command of information that is not accessible to outsiders.

Whatever the theoretical doubts about the design of the OBR, it has worked in practice. As well as winning a reputation for independence in Britain, the OBR has been ranked first internationally in an index of independence calculated by the OECD. It also comes top compared with similar institutions in EU countries, according to an index compiled by the European Commission which measures the scope of what fiscal watchdogs do. In a report in November 2016 on Britain’s fiscal transparency, the IMF cited the OBR’s reporting of risks related to the economy and long-term fiscal sustainability as an example of advanced practice. Its main criticism—the lack of analysis focusing on specific risks (such as those arising from the financial sector)—has since been met through a new fiscal risks report, the second of which was published last July.

Transparency has been crucial in establishing the OBR’s credentials and Chote says that enhancing it has been central to his work there. Every year it sets out an analysis showing how and why its forecasts have fared in their collision with reality. In effect it shows “its workings” like a good maths pupil. The OBR presents its main reports at press conferences, where Chote provides an initial summary and then takes a stack of questions. He and his colleagues on the budget responsibility committee are regularly quizzed by MPs. So important is openness that Chote says he would have preferred the OBR to have been called the Office for Budget Transparency.

Such a rename is not going to happen. But the OBR is now operating under a new political regime. Austerity has been abandoned and spending particularly on infrastructure is the order of the day. Chote says that this switch in fiscal priorities is not intrinsically a problem for the OBR, which unlike some watchdogs does not make recommendations about fiscal policy.

What it does do is keep tabs on whether the government is on course to meet its fiscal rules. The most binding one is an electoral commitment to run a balanced current budget (which excludes investment) within three years. This may now be qualified in such a way that it becomes a less effective constraint. But judging whether the government is complying with the fiscal rules, however they are reformulated, will still be a potential flashpoint for the OBR. Johnson’s governing philosophy is to have his cake and eat it. In budgetary terms that means spending freely without presenting the bill in higher taxes, while still remaining within the fiscal rules.

Chote has shown the importance of an individual in shaping an institution. Sunak will appoint his successor, subject to the approval of MPs on the Treasury Committee. His choice will be revealing about whether he is his own man at the Treasury, and in turn whether Johnson is prepared to live with a genuine fiscal watchdog.