OBR can no longer shock us

The Office of Budget Responsibility (OBR) has been the subject of much comment since Wednesday’s Autumn Statement. But the fact that its remit has been changed seems to have passed largely unnoticed.

Tucked away among the hundreds of pages of supporting documents is a revised draft Charter for Budget Responsibility. The charter fulfils a dual role, setting out both the government’s fiscal rules (the “fiscal mandate”) and the duties of the OBR. The proposed changes relate partly to the government’s proposed revisions to the fiscal rules, which have, like the OBR itself, been the subject of much comment in the press. But there is one change that seems to go further.

Old charter

Under the old charter (which remains in operation until the new charter is voted in by Parliament) the OBR has, in addition to various duties around forecasting, a duty to assess whether the government has a more than 50% chance of meeting its fiscal rules, and a further duty to assess whether a “significant negative shock” is occurring, has occurred or is likely to occur during the forecast period. Under the old fiscal rules, such a “shock” was defined in very specific terms, as real growth in GDP of less than 1% on a rolling four-quarter basis.

If the OBR assessed that such a shock had occurred or was likely, that provided the government with an “escape clause” to the fiscal rules. The Treasury would then have to review the appropriateness of its targets, any changes having to be approved by Parliament.

In fact, the OBR confirms in its Economic and Fiscal Outlook: November 2016 (EFO) that it did not assess that there was such a “shock” in the context of this week’s Autumn Statement. Its view of the likelihood of growth being low enough to trigger the “shock” definition during the forecast period was around 35% (EFO paragraph 5.14). As a result, there was no triggering of the “escape clause”, and the OBR judged that the government was “not on course to meet the existing target on current policy”.

In the absence of a triggering shock, the proposed change to the fiscal rules was presumably proposed by the Treasury itself, through the statutory process for changing the charter and, with it, the fiscal rules (see paragraph 3.7 of the old charter, which refers to s.1 of the Budget Responsibility and National Audit Act 2011).

New charter

Under the new charter, the OBR’s duties of forecasting, and of assessing whether the government has a more than 50% chance of meeting its (new) fiscal rules, remain unchanged. But its duties in relation to identifying a significant negative shock have disappeared.

In the words of the OBR itself, in its EFO:

5.7    The draft Charter maintains an escape clause set in terms of a ‘significant negative shock’, but has shifted the responsibility for assessing that to the Treasury and no longer specifies what such a shock would look like in terms of 4-quarter-on-4-quarter real GDP growth. This aligns the escape clause with the approach that the Government took after the referendum …

So the OBR will no longer be the ones to identify a “significant negative shock”: instead that will be done by the Treasury, in other words by the government itself, rather than by an independent body. That means the government will be the ones to trigger their own “escape clause”, though they are of course already able to propose new fiscal rules to replace ones which are doomed to failure.

Scrutiny by Parliament

The legislation underpinning the OBR – the Budget Responsibility and National Audit Act 2011 – allows the Treasury to modify the charter, but the new one does not come into force until it has been approved by a resolution of the House of Commons (s.1(7) of the Act). It remains to be seen whether MPs will subject it to detailed scrutiny or, for example, question the changes flagged here.

Points to ponder

The final sentence of the extract I’ve quoted above from the EFO refers to aligning the escape clause “with the approach the government took after the referendum”. It is unclear to me what this refers to, or what it might mean for the way in which the Treasury will police itself in future. But it does seem to point to a connection with Brexit.

It is worth noting that, in relation to Brexit, wider concerns have been expressed at the extent (or rather lack) of information made available to the OBR. Two aspects of the EFO stand out in this respect. Firstly, having asked for a formal statement of the government’s policy, and being directed to two statements by the Prime Minister (one at the Conservative party conference and one in a radio interview in the US), the OBR was left “little the wiser as regards the choices and trade-offs the government might make” (paragraphs 3.3 and 4.5). Secondly, the Foreword to the EFO reports that the Budget Responsibility Committee asked the Treasury specifically about any new contingent liabilities in relation to assurances given to Nissan, but the Treasury “declined to say”. More details are given in paragraph 4.17 of the EFO: “Unfortunately, the Treasury declined to address the substance of our question”, referring instead to the “standard process” for departments to report contingent liabilities to Parliament.

So a final question must be whether the shift in responsibility for assessing a negative shock, from the independent OBR to the government itself, is part of a wider attempt by the government to minimise independent scrutiny of the Brexit process.

[Updated version with minor amendments, 27 November at 1pm]


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