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The Office for Budget Responsibility and Charter for Budget Responsibility

Published Friday, July 13, 2018

This briefing investigates who the Office for Budget Responsibility are and what they do. It also discusses the Government's fiscal targets, which are included in the Charter for Budget Responsibility.

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The Office for Budget Responsibility (OBR) was established within days of the Coalition Government coming to power in May 2010 with the aim of improving the credibility of fiscal policy. 

The body was initially established on an interim basis with Sir Alan Budd as chair.  Robert Chote, a former director of the Institute for Fiscal Studies, has been chair of the OBR since October 2010.  The Treasury Committee has the power of veto over this appointment. The Budget Responsibility and National Audit Act 2011 provides for the establishment of the OBR, and sets out its functions and broad governance structure.

The Charter for Budget Responsibility

The Charter for Budget Responsibility (the Charter) sets out the OBR’s role, how it performs its duties and the required content of its key publications. The Charter also sets out the Government’s targets for the public finances – which are often referred to as its fiscal targets – and how the Government’s policy for the public finances operates.

The Charter has been changed on several occasions since its introduction in 2011. The latest version was proposed alongside Autumn Statement 2016 and came into force on Tuesday 24 January 2017 when the House of Commons approved it.

The OBR’s role

Part of the OBR’s role, as laid out in the Charter, is to produce forecasts for the economy and the public finances.  These are produced independently of the Government.  In the past, the Treasury’s forecasts have been based on the Chancellor’s judgement.  This has led to the suspicion that forecasts may be over-optimistic.  It is hoped that any perception that the forecasts could be politically motivated is removed by an independent body producing them.

The OBR also comments on whether the Government’s policies have a better than 50:50 chance of meeting the Chancellor’s targets for the public finances which are set out in the Charter. It also examines the long term sustainability of the public finances, risks surrounding the public finances, spending on welfare and devolved taxes.

The Government’s fiscal targets

The Charter includes the Government’s targets for the public finances. The targets are designed to achieve the Government’s overall objective for fiscal policy, which is to return the public finances to balance at the earliest possible date in the next Parliament. Currently government spends more than it receives from taxes and has to borrow to make up the difference. The Chancellor wants to reach a position where the budget is in balance and there is no need to borrow. At the time the objective was introduced, in autumn 2016, its wording suggested the deficit would be eliminated by 2025 at the latest. Its interpretation now is questionable, given the early General Election in 2017, but the Conservative Manifesto suggests the Government are still aiming at the ‘middle of the next decade’.

The Charter includes targets for borrowing, debt and the welfare cap.

The Government’s borrowing target – its ‘fiscal mandate’ – requires structural borrowing to be below 2% of GDP in 2020/21. Structural borrowing is the borrowing that remains once elements related to the ups and downs of the economy are removed. It is the amount of borrowing we would expect to remain if the economy was running at a normal, sustainable level of employment and activity.

Fiscal mandate

The fiscal mandate is supplemented by two further targets:

  • for the public sector’s debt-to-GDP ratio to be falling in 2020/21; and, 

Supplementary debt target

  • selected welfare spending in 2022/23 to be within a cap and margin set by the Treasury at Autumn Budget 2017.

Welfare cap

The Chancellor can review the targets if there is a significant negative shock to the UK economy.

Reviews of the OBR

Both an external review and a Treasury review reported positively on the OBR. Both have praised the OBR’s credibility and reputation, and the integrity brought to the fiscal forecasts. Both reviews made recommendations for the future of the OBR, including the need to undertake succession planning for key and long-serving members of staff. The Treasury review recommended the changes currently being made to the OBR’s role.

 

 

Commons Briefing papers SN05657

Author: Matthew Keep

Topics: Economic policy, Public expenditure

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