During the King’s Speech on July 17, the government introduced a new Budget Responsibility Bill aimed at ensuring that major fiscal events are backed by forecasts from the Office for Budget Responsibility (OBR). This initiative is intended to enhance the sustainability of public finances by having the OBR comment on government adherence to fiscal rules. However, critical questions arise: does this measure genuinely foster fiscal responsibility? Or should the provisions of the bill be more comprehensive?

To evaluate these questions, a look back to 2010 is necessary, the year the OBR was established “to examine and report on the sustainability of the public finances.” It possesses full discretion “in the performance of its duties,” granted those duties are executed independently, transparently, and objectively, considering only the sitting government’s policies. This framework typically necessitates creating forecasts to determine whether the government’s declared taxation and spending plans align with its fiscal aims. Consequently, a perception has emerged, notably expressed by Simon Wren-Lewis in his Mainly Macro blog, that fiscal policy is largely dictated by the OBR, as the government must be seen to be meeting its fiscal goals to maintain market confidence.

Beyond this perception, two significant issues plague the current system: the OBR’s obligation to accept government policy as a given, even when deemed unrealistic (for instance, when overspending is anticipated), and the fiscal rules themselves. These challenges mean that in evaluating budgets and autumn statements, the OBR does not effectively analyze the sustainability of public finances.

Expounding further, it is evident that the fiscal rules are arbitrary constructs determined by the government. Whenever there seems to be a risk of these fiscal targets being missed, adjustments have been made to the rules. Additionally, the reliance on a five-year horizon enables the government to meet targets through implausible commitments regarding future spending and taxation. Granting the OBR the authority to critique such forecasts could enhance the system significantly, potentially through allowing the agency to publish scenario analyses that consider more credible assumptions.

The National Institute for Economic and Social Research has highlighted that the reliance on a five-year plan strongly discourages long-term public investment initiatives. Since the returns from such projects frequently manifest over periods extending beyond five years, they can elevate government debt without contributing to GDP growth at the five-year mark. Nevertheless, evidence indicates that effective public investment can substantially elevate long-term GDP, thus aiding in the reduction of the debt-to-GDP ratio. Adjusting the fiscal rules—such as extending the debt target to ten years or establishing rules based on public sector net worth—could partially remedy this issue.

A more comprehensive solution would involve permitting the OBR to independently assess the sustainability of public finances based on its criteria. In this scenario, the government would present its budget, and the OBR would generate an entirely autonomous forecast. Such an independent forecast would allow financial markets to evaluate fiscal sustainability and determine bond pricing correspondingly.

The OBR could base its evaluation of sustainability on its long-term projections for the debt-to-GDP ratio, clearly articulating the assumptions underpinning this assessment (specifically regarding the impact of public investment on output, technological growth, and population growth), alongside a precise definition of what constitutes “sustainable.” It’s important to note that the OBR already performs long-term projections in its Fiscal Risks and Sustainability Report, meaning this recommendation would not impose new demands on the agency. Such an approach could also encourage the government to engage more in long-term planning in its budgeting processes.

Professor Stephen Millard is deputy director at the National Institute for Economic and Social Research.