The Office for Budget Responsibility (OBR) is a non-departmental public body funded by the UK Treasury that provides independent economic forecasts and independent analysis of the public finances.
It was formally created in May 2010 following the general election by the Cameron-Clegg coalition government and was placed on a statutory footing in 2011. It is one of a growing number of official independent fiscal watchdogs around the world.
Functions The OBR examines and reports on the sustainability of the public finances and provides analysis and forecasts on the economy at the time of the UK Government's Budget and Spring Statements.
The functions and responsibilities of the OBR are contained within the 2011 Act. It has four main duties:
Forecasts of the economy and public finances The OBR produces five-year forecasts for the economy and public finances twice a year. The forecasts accompany the Chancellor's Budget Statement and Spring Statement and they incorporate the impact of any tax and spending measures announced by the Chancellor. Details of the forecasts are set out in the Economic and fiscal outlook (EFO) publications. The annual Forecast evaluation report (FER) published each autumn, examines how the EFO forecasts compare to subsequent outturns. The OBR has published material describing its approach to forecasting the economy and public finances, and the macroeconomic model it uses.
Evaluation of the Government’s performance against its fiscal targets The OBR uses its public finance forecasts to assess the Government's performance against its fiscal targets. The Government has set itself two medium-term fiscal targets: first, a fiscal mandate for the cyclically-adjusted current budget to be in surplus by 2029-30, and second, a supplementary target to have public sector net debt, defined as public sector net financial liabilities, falling as a share of GDP in 2029-30. These are both until 2029-30 becomes the third year of the forecast, as which point the target becomes a rolling target to be assessed in the third year of the forecast. In the Economic and fiscal outlook, the OBR assesses whether the Government has a greater than 50 per cent probability of hitting these targets under current policy. Given the uncertainty inherent in all fiscal forecasts, the OBR also tests how robust this judgement is by using historical evidence, sensitivity analysis and alternative scenarios. Scrutiny of the Government’s policy costings The OBR conducts scrutiny and analysis of HM Treasury’s costing of tax and welfare spending measures. During the run-up to the Budget and the Spring Statement, the OBR subjects the Government's draft costings of tax and spending measures to detailed challenge and scrutiny. These are then stated in the EFO and the Treasury's policy costing documents with the OBR stating whether it endorses the costings that the Government finally publishes as reasonable central estimates. The OBR also assigns each certified costing with an uncertainty rating based on data quality, modelling and behavioural response. In March 2014, the OBR has published a briefing paper describing its role in policy costings and how they fit into the forecast process. The OBR and the September 2022 mini-budget In 2022, the OBR was notably not asked for a fiscal forecast by the short-lived Truss ministry prior to announcement of its ultimately controversial mini-budget by the then Chancellor of the Exchequer Kwasi Kwarteng which contained a large amount of tax cuts. The mini-budget ultimately had negative effect on the British economy dramatically decreasing the market value of the pound and forcing the Truss-led government to do a u-turn on most of the announcements made in the mini-budget with Kwarteng sacked and replaced by Jeremy Hunt as Chancellor. The decision of the Truss ministry to ignore the OBR and pursue large tax cuts was and remains widely derided by the political establishment and some figures in the British media. The mini-budget ultimately triggered the start of a government crisis which saw Truss forced to resign and replaced by Rishi Sunak as Prime Minister after just 49 days in office.
Assess the long-term sustainability of the public finances The OBR also assesses the long-term sustainability of the public finances. Its annual Fiscal sustainability report sets out long-term projections for different categories of spending, revenue and financial transactions and assesses whether they imply a sustainable path for public sector debt. The Fiscal sustainability report also analyses the health of the public sector's balance sheet using both conventional National Accounts measures and the Whole of Government Accounts as prepared using commercial accounting principles.
In October 2015 the UK Parliament approved a revised Charter for Budget Responsibility that required the OBR to produce a fiscal risks report at least once every two years and the Government to respond to it formally within a year of publication. In July 2017, OBR published a review of risks from the economy and financial system, to tax revenues, public spending and the balance sheet, and included a fiscal stress test.
Additional functions Devolved tax and spending forecasts In addition to these core responsibilities, the Government asked the OBR to forecast the Scottish receipts for four taxes that were devolved to the Scottish Government from April 2015 onwards; the Scottish rate of income tax, stamp duty land tax, landfill tax and the aggregates levy. Following the passing of the Scotland Act 2016, the OBR also forecast Scottish air passenger duty and aspects of Scottish social security that will be devolved. The OBR has published these forecasts since March 2012 alongside UK revenue forecasts. The OBR has a reciprocal statutory duty of cooperation with the Scottish Fiscal Commission in the production of forecasts of devolved Scottish taxes and welfare expenditure. In a Command Paper published with the Wales Bill 2014, the Government requested that the OBR produced forecasts for Welsh devolved taxes. Since December 2014, the OBR has been forecasting the Welsh rate of income tax, stamp-duty land tax, landfill tax and aggregates levy. From April 2019 the OBR is providing the Welsh Government with independent scrutiny of its forecasts.
Welfare spending analysis In March 2014, the Charter for Budget Responsibility was modified to include a new cap on welfare expenditure alongside the Government's fiscal mandate. The March 2014 welfare cap puts a limit on the amount that the government could spend on certain social security benefits in the years 2015-16 to 2018-19. The welfare cap was adjusted in December 2015Charter for Budget Responsibility: autumn 2015 update, HM Treasury, October 2015 and restructured in January 2017. The current cap is set against the OBR's November 2017 forecast for welfare cap spending in 2022-23 with adjustments made by HM Treasury in March and October 2018. The cap is preceded by a "pathway" with a growing margin of error to 3 per cent in the target year. The OBR is charged with formally assessing spending against the welfare cap and margin at the first Budget or fiscal update of each new Parliament and monitoring spending against the pathway and margin at each Budget and fiscal update before the formal assessment of the cap.
As part of this function, the OBR is required to produce a forecast for welfare spending in scope of the cap in its Economic and fiscal outlook. The welfare cap means that if spending exceeds a certain limit, then policy action must be taken, or the cap level must change, and Parliamentary approval must be obtained. The OBR is required to assess whether welfare spending above the cap is caused by movements in the forecast or by discretionary policy changes. The OBR is also tasked with producing an annual report on trends in welfare spending.
Briefing material The OBR undertakes a variety of research projects through the year. It publishes briefing material to inform the public about its work, and provides a same-day briefing on the public finances statistics. The Budget Responsibility Committee members and OBR staff also give talks and presentations at external events. Robert Chote has discussed the role of the OBR, and the difference that it made after its first three years in existence, in a lecture entitled Britain's fiscal watchdog: a view from the kennel on 9 May 2013. Its activities are summarised each year in its Annual Reports.
History Establishment The Conservative Party had previously set-up a shadow OBR organisation in opposition in December 2009. Upon entering office following the 2010 general election, Chancellor George Osborne announced the formation of the body in his first official speech. He criticised the economic and fiscal forecasts of the previous Labour government, and announced that the OBR would be responsible for publishing these independently of government in future. The objective underpinning its creation was to provide an independent assessment of national public finances before the coalition Government's emergency budget in June 2010, which outlined the size and pace of the fiscal consolidation plan inherited from the outgoing administration. The role of the Office is to advise whether the declared policy of the Government is likely to meet its targets
The OBR was initially chaired by Sir Alan Budd who, along with Geoffrey Dicks and Graham Parker, formed the Budget Responsibility Committee. Budd had been a founding member of the MPC; Dicks was chief economist at Novus Capital and former chief economist of the Royal Bank of Scotland; and Parker headed up the Treasury’s public sector finances team. The remainder of the initial team comprised eight staff seconded from the Treasury. The initial team provided recommendations to the Chancellor on the role of the permanent OBR.
The OBR produced its first forecast for public finances shortly before the June 2010 budget with the second at the June budget incorporating the impact of newly announced measures. Colin Talbot, Chair of Public Policy and Management at Manchester Business School and Treasury adviser on public spending, questioned the credibility of the new organisation. He said that the body could not be set up in time to judge the forecasts in the June 2010 United Kingdom budget. In his opinion, the OBR would not be sufficiently independent of politicians or the Executive to remove the politics from economic decision-making. The office made adjustments to its forecasts in the week before the June 2010 budget. These were thought to be politically favourable to the coalition government and so cast doubt on its independence.
In July 2010 it was announced that Budd would not continue in the role after his initial 3-month contract expired.Sir Alan Budd to leave the Office for Budget Responsibility, Daily Telegraph, 6 July 2010Alan Budd quits as government spending watchdog, Guardian, 6 July 2010 The Financial Times reported "His departure was expected and Sir Alan had let it be known privately that he had never intended to serve as chairman of the OBR for anything other than a short period. His contract spanned the emergency Budget, leaving enough time thereafter to advise on the legislation needed to establish the OBR on a permanent basis." Speculation on his successor had included Rachel Lomax, John Gieve, Andrew Dilnot, Robert Chote, Michael Scholar and Ruth Lea.