Welcome to the Treasury Committee, where we are continuing our inquiry into the Office for Budget Responsibility 15 years since it was created. We are delighted to have an august panel of economists and academics in front of us today, to give their views on how the OBR has performed over 15 years and whether there are any changes that should be incorporated as it goes forward. Of course, the chair resigned before Christmas and the appointment is under way of a new chair, who will be the third member of the Budget Responsibility Committee at the OBR. I am delighted to welcome Professor Ben Clift, professor of political economy at the University of Warwick, who has written a book about the Office for Budget Responsibility. Ruth Curtice is the chief executive of the Resolution Foundation and a regular visitor to this Committee. Julian Jessop is an economics fellow at the Institute for Economic Affairs, and Dr Lydia Prieg is the chief economist at the New Economics Foundation and a first-time visitor to the Treasury Committee. A warm welcome to you all. I will ask Yuan Yang MP to kick off.

Thank you, Chair. The OBR was set up 15 years ago with the purpose of providing accurate, independent and politically unbiased forecasts. I will ask each member of the panel how well they feel the OBR has achieved this aim, and if there is anything they think could be done to improve the accuracy of the forecast. I will start with Dr Prieg and then move down the panel.

The OBR has a respectable forecasting record, certainly in the short term. For example, for one to three-year time periods, it outperforms previous Treasury estimates; it also performs very well in terms of international comparisons. Where it struggles is in going further out to four or five-year forecasts; that is when it perhaps starts to underperform, although there are some reasons for that. For example, it has no choice but to take the Government’s stated policy at their word. There are also questions about the OBR’s assumptions. For example, has it been too slow to revise certain parameters in its model? I would argue that the fact that the OBR has to make the official forecast adds a level of caution and political necessity to look for very high levels of evidence and wait before making changes to the model. That has perhaps acted against the OBR when it comes to slightly longer term forecasts and is different from the situation with its counterparts in other countries, where the official forecast is made by Government or another body and they merely review it. However, it is important to note that the OBR has won plaudits on the international stage for the amount of detail in its forecast. It provides more detail than its counterparts in many other countries, and that is highly commendable. It scores very highly on various rankings produced by the likes of the IMF and the OECD. With regard to the objectivity of the OBR, I sincerely believe that everyone involved is trying to be as objective as possible. They go to a lot of effort to describe where they are looking in the literature to assess their model parameters, although in places more detail could be given to explain how exactly they have used their evidence base to get to the parameters in their model. We have to take a step back and keep in mind that economics is a literature where there is a range in the parameters around any question, a range of results in the literature; there is no simple, objective, scientifically obvious value for every parameter and every modelling choice. We have to keep in mind that every parameter, every modelling choice that the OBR makes is actually a value judgment in how it is assessing within the literature. Even the decision always to try as much as possible to take parameter values from the middle of the literature is itself a value judgment; it means the system is going to be more resistant to changing how things are done. We have to be very careful not to use words such as scientific when describing the OBR’s work, because it is inevitably going to contain value judgments.

There is a great deal that I agree with there. First, I am happy to defend the OBR’s forecasting record. It comes in an awful lot of unfair criticism. There was a recent example where the OBR was joint bottom of the Sunday Times annual forecasting poll for the past year; a lot of people said that meant the OBR was rubbish at its job. That is unfair, not least because it is not the OBR’s job to forecast the next quarter or even the next year ahead. The OBR’s job is to take a longer term view of the state of public finances, and to do things such as providing independent scrutiny of policy costings that are included in the Budget—a lot more than trying to get the next quarter or even the next year right. The OBR’s record is pretty good, considering the constraints under which it operates. It is also important to stress how difficult it is to forecast public finances. If you think about borrowing, for example, that is the relatively small difference between two very large numbers. If the Government are spending £1.5 trillion a year and taxing £1.5 trillion a year, a 1% difference in the revenue numbers is around £15 billion, and a 1% difference in the expenditure numbers is around £15 billion, so a 1% error on both of those gives you an additional deficit of about £30 billion. It is a mistake to worry about £1 billion here or £1 billion there in the context of that huge uncertainty. That said, there are problems, and nobody believes the fiscal framework is working well. Most people accept that if you have rules you need an independent referee, which is the role of the OBR; that is a reasonable position for it to be in. The bigger problems are around the behaviour of the players and the design of the rules themselves, but there are some problems with the OBR. To stretch the football analogy a little further, there is a danger that it has become the fiscal version of football’s VAR, where relatively small issues such as a striker being a toenail offside are meticulously noted. The OBR equivalent is when the five-year forecast, which even the OBR says will inevitably be wrong, is used to guide short-term policy decisions. There are problems around the framework there. So although the OBR is just doing the job it has been given—in many ways, a thankless task—there are some ways in which the interaction between the behaviour of the players, the rules and the role of the OBR is failing.

I agree with much of what has been said so I will not repeat it. Mr Jessop mentioned the Sunday Times piece; one thing to bear in mind when looking at the OBR’s forecasting record, particularly over those kinds of short-term measures, is that you are often comparing forecasts produced at different times. When the OBR publishes a forecast in November, it is effectively producing it in October and will tend to be beaten by forecasters who produce a forecast in December for Q1 of the following year. Otherwise, I agree that the OBR appears to perform reasonably well compared with other forecasters. On forecast accuracy, there are two questions worth pondering. First, the task the OBR has been set is to produce a central forecast; its record is that in the medium term, it has been too optimistic. That is partly because of questions around having to accept Government spending assumptions that in the end have tended to underestimate spending, and the issue of overestimating productivity. But there is a more general question about whether Parliament wants the OBR to aim for a central forecast. Given the task it has been set, it has done a reasonable job, but because bad news often surprises in bigger ways than good news, there is a question about whether we want to plan our fiscal policy based on a central forecast or based on a somewhat cautious forecast. That is worth thinking about. Secondly, there is a trade-off in any forecast between the latest data or latest news and stability. Compared with some commentary, the OBR is quite a nimble speedboat. It tends to take on the most recent data at quite short notice compared with when its forecast is published, and it prides itself on having done that. We tend to see swings in the forecast—one event where things get better for Government and one event where things get worse—and I wonder whether that leads to the best fiscal policy. We know that Governments tend to spend good news and not always pay for bad news; you can end up with less stable fiscal policy than you would if the OBR was less like a ferry than a tanker. Taking news in more slowly is worth thinking about in the instructions Parliament wants to give the OBR about that trade-off between most up-to-date and more stable. Just to give you a quick example, the debt interest window—the window at which the OBR measures gilt yields to inform its debt interest forecast—is 10 days. That is now an extremely sensitive part of the forecast. It is one of the biggest moves compared to all the judgments it makes on the economy between events. Since it published the spring forecast, gilt yields have already moved to undo all the good news it had in that forecast since November. So it is a choice about whether the right period over which to take a rolling average is 10 days or three months. Those are the issues that are worth thinking through.

Do you have a view about what the window should be?

I would say that 10 days has proved too volatile for something so sensitive. I would want to leave that judgment to the OBR, but 10 days is a standard in normal times rather than something you might go to when the world is changing very fast. It does not seem like the right one to me.

We have had football and speedboats; no pressure, Professor Clift.

I agree with a great deal of what has been said. I particularly want to highlight, for all the reasons already given, that forecast accuracy may not be the most helpful question or focal point. Things can change very quickly and in quite dramatic ways, so it is a fool’s errand to think that you are going to arrive with an accurate forecast. The forecast needs to be based on a set of defensible, sensible assumptions about the economy and its trajectory, and the OBR needs to clearly present the methods, assumptions and techniques that have been used to develop that forecast. The OBR has a creditable record against all those aspects in terms of its long reports that talk us through those things; that is to its credit. I agree that this is not a pure scientific judgment at any point in time; in the politics of technocratic economic governance—the name of my book—there is always a set of different, normatively informed value judgments about the economy, economic policy, the role of the state, the influence of borrowing on growth, the influence of inflation on borrowing, and so on. All these are judgments on which a respectable set of different views are at large in the economic policy debate and within academic economics. I suggest that one of the things the OBR could do better is to bring in a wider repertoire of ideas from different economics perspectives into its thinking somewhere along the line, perhaps through an advisory board, to kick the tyres of the assumptions and judgments it makes. The OBR’s approach to producing its forecast is very judgment heavy for good reason: it is a relatively small organisation that does not have enough people to do what the Bank of England does. The Budget Responsibility Committees make a series of judgments about potential growth, the output gap and where and how it will close, and so forth. That is creditable, respectable and the right thing to do, but those judgments need to be evaluated and challenged, because they are so consequential for the forecast that gets produced. If we look at one of the two places where it has not gone so well over the last 15 years, consistently there is an assumption that we will at some point get back to the productivity growth, potential output and the trajectory of the UK economy we had before the global financial crisis, when we had 2% to 2.5% growth per year. The presumption in the economic forecasting profession and with the OBR is that the past—within limits—is a relatively useful guide to the future, but We have now lived through 20 years of being substantially off that track, and still the assumptions and judgments get built in that somewhere along the line we are going to get back there. Then the OBR has to downgrade its productivity forecast and everything else that flows from that. Sometimes it is quite controversial because these forecasts are consequential in terms of how much space the Government have. The size of the fiscal envelope changes as a result of these judgments. A broader array of economic ideas might help with sense-checking and perhaps challenging them a little more. What is very positive about the OBR is its degree of transparency and intellectual honesty. It is very clear about the uncertainty that surrounds all its forecasting activities, and it does a very good job in terms of putting out things like fan charts and saying, “This is the central point estimate, but it could be anywhere from here to here or even worse, and that’s within the realms of likelihood.” However what happens is that the media say, “Well, there’s a number, boing, and that’s all we’re going to talk about.” All the caveats and uncertainties that the OBR draws attention to, saying, “Don’t get too carried away with our forecast; it’s only as good as a forecast can be,” get lost. The tail starts wagging the dog, and there is a major impact on precise policy decisions. That is unfortunate, but I do not think it is the OBR’s fault.

That was a great opening; thank you very much.

Professor Clift, you have written a book about the OBR. In particular, you talk about the organisational structure of the OBR and the fact that many macroeconomic forecasting judgments are made by one person on the Budget Responsibility Committee. I can see that Ms Curtice agrees on this point. Would you speak to the problems that creates, and expand on the point you make in your book?

The problems created are that, on the one hand, personality is very important, and the tenor of the forecast might evolve from one chief economist to the next.

Sorry Professor Clift, could you just reverse a bit and set out the problem itself for those who have not yet read your book?

What!

Most of the Committee.

You have shattered Professor Clift’s confidence.

For those listening at home who have not yet read your book.

What Ms Yang is saying is that there is a very wide audience, not all of whom may have focused on everyone’s academic work.

Apologies. The important issue that arises when one or two people—often it is only one—on the Budget Responsibility Committee become the central deliverer of the key assumptions is that their long track record of being a policy economist plus their training, their instincts, intuitions and gut feelings about where the economy is going significantly drive the assumptions that are made. It looks a lot less scientific and technical and, up to a point, more a matter of judgment and contingency. That contingency will play out when we move from one chief economist or lead economist to another, and some aspects of the judgment and the forecasting practice and process may change. That is inevitable; it is a human process so that is kind of okay, but it is problematic to apply a technocratic scientific veneer to what is being created here when it involves a set of normative judgments. Particular kinds of economists with particular kinds of training will take a particular view on fiscal multipliers, public investment and so on, and that will inevitably feed into the way those judgments get made. To come back to the earlier example of the constant anticipation of returning to the strong growth we used to have, that is quite familiar in the economics profession. Outside the economics profession, among political economists, economic geographers, economic sociologists and many others, no one thinks we are going to get anywhere close to those halcyon days of 2.5% growth, because the world has changed and the British model of capitalism has changed. But that is not the mode of thought that they proceed with.

I agree with Professor Clift that there is an issue here, but it will never be possible to have a group of people who express all possible views; some normative judgments will always be involved. None the less, that does not mean we should shrug our shoulders and think that three people is definitely the optimal number. It would be a significant improvement to move from three to five, for example, so that a larger range of views can be collected on these judgments that are now proving to be extremely important for public policy. That would mitigate the issue of changing from one person to another because within those five you could have more overlapping terms.

Is five your optimal number, Ms Curtice?

It depends a little on how you structure it; putting together a forecast is hard to do with a large number of people. If you wanted to keep close to the current structure, it would be hard to go to more than five. We had a look at other fiscal councils that operate with a committee-type structure and the average number is six, so three certainly seems very small. You could have a slightly different structure where you have an executive and then a broader committee that is consulted only on key judgments; that might allow you to go bigger than five.

Professor Clift, even though we have three members on the committee, they do not make decisions collectively; different parts of the forecast are delegated. Is that the right interpretation?

That is fair. The fiscal expert does the nitty-gritty work on spending receipts and so on; the economic expert takes the overall macro view, and then the director feeds in, but up to a point they all have similar training and similar expertise, so it is to some extent a shared judgment. The one point I want to make in relation to what Ruth just said is that if the committee had more than three people on it, you might get to a situation where they are not all white males. Fifteen years, on they are all white men, and they always have been white men; that is not hugely representative of our society, and it seems unjustifiable.

I want to build on Ruth’s point because she correctly noted that the average committee size overseas is six people. Another important lesson to take from overseas is that the UK is very unusual in the way it does an official forecast. If our goal is to have a world where—provided there is an evidence base—a broader range of economic parameters can potentially be considered, the only way to really achieve that is to get away from the idea that the OBR is producing one single official forecast. We should give that back to the Government and instead make the OBR the body that scrutinises it, which is what happens in most other countries. You could then expand the body; you could even mimic the Monetary Policy Committee and maybe have nine people and call it the fiscal policy committee; it can scrutinise the Government’s forecast and the members can disagree with one another. In Germany, for example, the Council of Economic Experts has a specific legal mechanism where people on the council are allowed to express different views; that is fine and it is encouraged. That is what we need if we are to move away from a policy inertia where it is very difficult to have things in your model that are not right in the centre of the literature. If what we have been doing for the past few years and the past decade has not been working and we need to try something new, then we need to vary the parameters in our model to be able to explore that space. You need this set-up to be able to do that. It also deals with the democratic deficit problem that has recently been raised with regard to the OBR: should the OBR have a veto-type role over what a democratically elected Chancellor wants to implement? We need a system where, if what the Chancellor wants to do is not backed by the majority of the people on the fiscal policy committee but is backed by some, and there is a reasonable literature and evidence base—I stress that term—then she has freedom to act. A technocratic body is not vetoing her decisions, but at the same time there are checks and balances in place, so that if she wants to do something that has no evidence base and that no member of the fiscal policy committee wants her to do, there will be pressure on her not to go down that path. Such a system could tick a number of those boxes.

The panel has already mentioned other countries; for example, we know that the Parliamentary Budget Office in Australia, which is an IFI, provides the costings for opposition party policies. Is this something the OBR should be doing? I am thinking of the day after the Brexit referendum, when it appeared that we were rather unprepared. This is a different situation but to protect citizens, and given the volatility of the democratic picture, is there a role for the OBR to be looking at such suggestions?

That is a really interesting question. We should look at the role of the OBR around election time. The obvious trade-off is whether, and if so to what extent, that would further politicise the OBR. On the question of costings, I could see an advantage to the OBR playing a role, if political parties wanted that, in providing not only public costings but information for parties preparing for Government as to what the first costing of their policies might look like. Of course the OBR’s key role is to produce forecasts rather than costings; there is also a question about whether it would be helpful for the public to have a sense of the OBR’s most up-to-date forecast—on which all political parties would have to base their first fiscal event—ahead of an election. Otherwise there is the potential for the forecast to change a lot just before and just after.

On a practical note, how do you think that could be policed?

The biggest practical challenge is timing; we do not know when an election is going to be, and they can be called quite quickly. We would need to work out whether the OBR can produce one early enough to be useful for parties.

There are also manifesto processes; in some parties, where the democratic system is wider, they can take longer than in other parties so it would be challenging.

I can definitely see the practical challenge.

I have a brief question. Paul Johnson at the IFS had a very prominent role in our national life and still does. He was pretty direct about all the manifestos going into the 2024 election; he thought they made very little difference either to voting intentions or appreciation of the factors involved. Does that suggest that this scrutiny is superseded by other factors in the political process?

We have excellent institutions in the UK, such as the IFS, that have a role to play here. When we look at other countries therefore, we should bear in mind that there may be less of a need. As much as I love Paul Johnson, he does not produce the first forecast for the Government when it is in power, so I think there would be a different flavour to understanding what the official forecaster makes of each of the parties.

Do you think that if the OBR did this work it would have more authority in terms of its impact on people who commentate?

Potentially, yes.

Dr Preig, the New Economics Foundation said in its written evidence that we should shift away from numerical fiscal rules, citing Australia and New Zealand as examples of countries that have done this. Bearing in mind that Australia has elections every three years—usually with a centrist outcome due to proportional representation— what are the key differences between the UK and Australia when it comes to the fiscal position?

First, I will explain the rationale behind the system. This is something that Olivier Blanchard, the former chief economist at the IMF, has done a lot of work on and strongly advocates. He makes the case that the question of how much a Government can sustainably borrow is actually an incredibly complicated, multifaceted problem that depends on all sorts of variables and all sorts of specifics about the situation. Because of that, he says, it is impossible ever to create a set of numerical rules that precisely give you good decisions about that question; they will always vary too much and you will always end up accidentally targeting the wrong thing. He argues that what is needed are more general fiscal principles, which could be general statements. In the case of Australia and New Zealand, for example, they make statements such as, “We aim to keep debt at a prudent level. We aim to make sure, to the greatest extent, that there is a reasonable level of policy stability around things such as taxation for people and businesses.” I am paraphrasing, but that is the qualitative gist of those statements; they obviously allow a more nuanced analysis. The fiscal principles in Australia and New Zealand were laid out many years ago in legislation, and they basically stay the same for every Government, although new ones are sometimes added. It is then the job of the Government to lay out a fiscal strategy for how they plan to meet those fiscal principles, and perhaps to lay out some indicators they can track to monitor progress across the various principles. Australia and New Zealand both have lower levels of debt to GDP than the UK currently does, and they have had this system in place for a long time so that clearly shows that it can work. You do not need to have furiously precise numerical fiscal rules in order to have fiscal discipline and prevent Government spending running out of control. Their system relies on very credible institutions and a very credible set-up for being able to scrutinise government plans. That is why this would need to happen alongside reform of the OBR, so that it was in a critiquing role rather than doing official forecasting. It would be able to really probe government statements instead of having to take them at face value. You would need to expand the number of voices on the committee so that you were getting a range of opinions, and to make sure that there was a mechanism for locking in consideration of longer term fiscal risks. At the moment, the OBR does some very good work on longer term fiscal risks, and it even gets good media coverage when those reports are published; the problem is that it does not seem to impact Budget decisions in any way. On Budget day, there is a complete disconnect from all the wonderful work the OBR has done previously, and it is all forgotten about. We need a mechanism to operate as part of the Budget process—and part of the debate in Parliament—such as the Government making a statement about how their decisions tie in with the long-term fiscal strategy. Something like that is needed to make sure that credible long-term risks are priced in.

My final question is whether the OBR is under-resourced, or has similar resources, compared with international comparators. Does it have the bandwidth and the number of posts required to do the work?

It often receives much less funding and has a smaller staff body than in other countries, including those with a smaller population, and that shows up in its work in a couple of ways. First, it does less bespoke analysis of policies than some other countries. At the moment, the OBR primarily does bespoke analysis around traditional supply-side reforms that may have an effect on growth, but it does not look at things that fall outside that category: for example, the effects on growth of preventative spending and long-term preventative spending. I am slightly confused about why that is; maybe it does not have the resources or feels it is too difficult, but it is different in other countries. For example, the US equivalent, the CBO, does a lot of bespoke analysis on things like that. It would be good to have more bespoke analysis so that we have fewer broad approximations and do not have to overlook so much. Secondly, at the moment the OBR is very dependent on Government Departments for information. A system where it was better funded and not doing the official forecast would mean that it could be more robust in scrutinising information from Government Departments.

I would respectfully disagree on that point. If we compare the level of resourcing internationally, ours is a lot lower than many other countries’, but because the OBR produces the official forecast, there is an interdependent relationship between Government Departments and the OBR. The OBR needs the HMRC and Government Departments to do a lot of the grunt work to deliver the materials it needs for its forecast, and all those Departments need the official forecast to be developed. They therefore need to play nicely together over many months. If you ask fiscal council members from around the world about this, you will find that nearly all of those who do not produce the official forecast do not enjoy the same level of power, leverage and command of information as the OBR.

That is very helpful. It is good to have some tension on the panel, and you are a long way apart from each other as well.

I would like to talk about how the OBR treat supply-side measures, and the dynamic between the Treasury and the OBR. I was briefly Chief Secretary; in that year, I had the impression that there was a cat and mouse dynamic between the OBR and the Treasury. Jeremy Hunt, who was Chancellor at the time, wanted the OBR to positively score the childcare measures he was bringing in, and there appeared to be a conversation going on to validate that. Subsequently, the OBR has said it will only score 0.1% measures over five years. Dr Prieg, do you have any reflections on that dynamic, and whether we have landed in the right place? The OBR said it would publish a list of areas of research interest by the end of last year; I do not think it has done that, but it has clarified the criteria for scoring. How do we get the OBR to a better place, and is it the place of the OBR to evaluate these areas of interest? Similarly, is there a role for it to say, “What are the supply-side constraints that actually have a negative effect?”

I am sympathetic to the feeling that there has to be some threshold for consideration, because obviously you cannot model everything. Where the asymmetries mostly arise at the moment are to do with the fact that it is only those traditional supply-side effects that are bespoke modelled and not, say, more demand-side multipliers being in more nuanced buckets as they are overseas, for example; or it does not look at things like preventative spending. That would be my issue in terms of what it is prepared to model. The other problem that is implicit in your question is the fact that probably a lot of people would disagree with the analysis it has carried out on supply-side modelling, and whether it comes above or below that threshold. This goes back to my point that there is a broad literature in economics, and there will always be people who disagree. That is why we have to get away from the OBR producing only one official forecast, and why we need to move it back to the Treasury. To be clear, when I say move it back to the Treasury, I do not mean return to the exact previous system, which was heavily criticised for being opaque and a bit of a black box. We want to preserve the level of transparency, data sharing, data availability, and so on that we have in the current forecasting system, but to give that to the Treasury, then allow an expanded fiscal policy committee to give its views on what the Treasury has done. For example, if the Treasury marks a supply-side effect that everybody on the panel disagrees with and says, “No, you have been very optimistic here. This is not grounded in evidence,” that looks weak, whereas if a third of them agree and two-thirds do not, that paints an accurate picture of the diverse economic literature.

How do you avoid a situation such as occurred last week, when the Chancellor came before us and said that there had been no negative scoring of the Employment Act? Now the OBR would say that it had not finished all the consultations on how the Act would play out but essentially, because of the way it is configured at this point, there is a massive incentive not to review things that will score above that threshold. Similarly, it will not be proactive in looking at things that are not stated government policy but are just happening by default, even if those things will have an enduring negative effect.

There is also a problem with the fixation on, “Will we get that tick in the box from the OBR for a certain point in time?” That obviously leads to all sorts of problems such as, “What if those policies are going to pay off 20 years down the line?” If they are a form of preventative spending, that takes decades to have an effect. Our current system has strong disincentives for the Chancellor to pursue such spending even if, for example, you are interested in tackling problems associated with an ageing population. We know that will come with really big fiscal costs down the line; you need to create a situation where Chancellors can care about more than whether benefits will immediately appear.

It is exactly that short-term/long-term focus that Mr Jessop might like to comment on in terms of a refined role for the OBR in this area.

One of the problems with the current fiscal framework is that the OBR has introduced a new form of bias, which is excessive caution when it comes to assessing the potential benefits of supply-side reforms, or maybe even things such as increased public investment in infrastructure. I understand why that has arisen. It is partly because it is inherently difficult to do; it is notoriously hard, for example, to gauge the supply-side benefits of a trade deal. There is also a problem when there are many small changes that might individually come under the threshold but together are all pointing in the same direction. Increased taxes on wealth would be an example: individually they might not make much difference, but as a whole they might have a chilling effect on business investment and entrepreneurship. So there is an inherent bias in there that the OBR—

How do you fix this, Mr Jessop?

To go back to my football analogy—

You are keeping it nice and simple for the Committee, and we appreciate it.

I agree with Lydia about giving forecasting back to the Treasury, but I still think there is a role for an independent organisation—perhaps a parliamentary budget office—with a role limited to saying, “Here is a clear and obvious error.” It would not be doing the forecast itself; the Treasury would come up with the forecast, and then the PBO or the equivalent would say, “That’s reasonable. Those aren’t necessarily the numbers we’d come up with, but you’ve made a reasonable decision or reasonable judgment.” It would be subtle, but it would shift the burden of proof and bring things back to the Treasury. Even without an OBR looking over your shoulder, the Treasury is still subject to an enormous amount of discipline; most obviously the discipline of the markets—the bond vigilantes—but other independent commentators as well, such as parliamentary committees, the IFS and the IEA. The independence of the Bank of England is also a very important constraint that I would definitely protect. My recommendation would be to bring the forecasting role back into the Treasury but to have a body such as the parliamentary budget office that could sometimes say, “This is completely wrong.”

It is worth taking a step back and checking what problem we are diagnosing. Has the OBR been too optimistic or too pessimistic? It has been too optimistic. Have our fiscal rules and our fiscal framework been too constraining or not constraining enough? I suggest that they are not constraining enough, given where the public finances are. That is why I disagree with some of the suggestions that have been made, such as bringing the forecast back in to the Treasury, or having a looser, more principles-based fiscal framework, as in the end these are about loosening the constraint when in fact the constraint has been too weak. Questions about whether we have scored enough supply side suggest that we think the OBR has been too pessimistic about those effects, whereas on average it has been too optimistic about the economy. The diagnosis and the solutions need to go together. On the football analogy there is one bit that does not quite work; it is not correct to talk of vetoes. The OBR does not veto government policy. This is a game of football where, if the Chancellor disagrees with the referee, she can take the penalty anyway.

In reality, that does not happen though; if the Chancellor cannot get through the OBR and meet the rules, she knows that politically it is pretty damaging. In effect therefore, even though we like to say that the Chancellor has a choice, she knows that, given what happened in 2022, the OBR is essentially a sovereign arbiter of short-term outcomes. That is the effective reality in our society.

In any system, we have to decide whether we want a binding constraint or not. Whether we are talking about traffic lights, who produces the forecast, or whether we have a committee with a diversity of views, at the end of the day, do we want a binding constraint that bites, or do we want something that does not bite? I do not think there is a way out of that construction.

Just to come back to the dynamic scoring that underpins much of this. The solution is more resourcing and hiring a slightly broader array of economists who could bring into the conversation within the OBR a broader set of views of the kind that were being talked about over there; for example, dynamic scoring. Some policies ought to get more credit than they do. There seems to be a chilling effect where the OBR’s anticipated negative reaction to possible plans means that those plans do not make it out of the Treasury.

The critical element is that this includes plans with a medium or long-term gain.

Exactly; we have a problem with long-term and short-term plans that needs addressing, but it is not easy. There was one other point I wanted to make, but it eludes me right now.

We will come back to that. One thing I would observe is that the OBR gave us quite robust evidence that the reason it did not score some things was because promised legislation does not always go smoothly; it can then say, “See, we were right because we didn’t score it until it passed through Parliament.” So there is a judgment on the political side as well.

I want to slightly extend this conversation. First, are we not asking the OBR to do the impossible in giving precise estimates on how government policies are going to deliver over five, 10, 15 years? Is that not an almost impossible exercise? Secondly, I would like to ask Dr Prieg which particular policies she has in mind that are constrained by this process? One of the challenges—as Mr Jessop highlighted—is that different people have different views on what would deliver growth: it might be tax cuts for some, it could be public investment for others.

The degree of precision we have in this debate is spurious and unhelpful. I would describe the changes that we are proposing not as loosening the constraints but trying to find the right constraints, and constraints that are meaningful. At the moment we are chasing levels of headroom that are small in comparison with the forecast errors; inherently that makes no sense. I do not think it is particularly straightforward to hugely increase the headroom; a series of very serious crises have increased debt, interest rates have risen, the pressures of an ageing population are slowly biting and so on, which means that over time the underlying economic situation has become more and more difficult.

Is that not Ms Curtice’s point? The reason for focusing on the headroom is that we are in a very precarious position: if a bus is tilting on a cliff, you have to focus on millimetres.

The headroom has become a controversial key point because the system has become tighter. If we were in a system where debt was much lower, the shortcomings of our system would be less apparent. The shortcomings of the system are very apparent because we are in a constrained position; that is undoubtedly true, but we are going to be in a constrained position for the immediate future. I do not think we are magically going to go down to having a 40% debt to GDP ratio. That is the reality we are navigating. We need to have a system that is going to encourage or at least permit policies to be taken that could help get us out of this rut. That means having a framework that is not just pinned to a very precise point in time with a spurious level of precision that is quite short term, when the challenges we are up against are often longer term. The changes we have been discussing would help address that. In terms of the policies that I personally believe are constrained by the current system, we still have a rule that says that debt to GDP has to be falling by a very certain time between a certain year of the forecast. Obviously, we have had changes to how debt is measured, which has given it a bit more flexibility, specifically with regards to financial assets. However, there is a lot of vital investment that does not necessarily produce financial assets but is still being very constrained, even though the benefits of that investment, I would argue, would materialise much further down the line. I appreciate that there are other people on the panel who would probably point to different policies.

I want to quickly make an important point. I agree with Dr Prieg that around the world we see principles-based systems that work really well; they are in countries with much lower debt. One reason why it would be better for the UK to move to a position of lower debt is that we would then be further from the cliff edge and we could have more principles-based rules. The fact that we are close to the cliff edge means that it is much riskier to move to more flexible systems.

I want to come back to something Ms Curtice said earlier: the overall problem was the over-optimistic projections made by the OBR because it keeps thinking we are going to get back to the pre-GFC golden age. There needs to be a sequential approach; we need to iron that out of its forecasting and judgment process, and at that point we can have an intelligent informed conversation about what supply-side measures have been missed out of the conversation that might be beneficial to growth. There is a good reason not to go gung-ho on growth measures in the supply-side forecast now because it is gung-ho on growth in the overall judgment, and that is not helpful. But we must get rid of the misjudgments about growth in the broad judgment, because we are never getting back to pre-GFC levels of productivity. What we have at the minute is an overly frozen situation where potential supply-side measures that might be good for growth cannot be part of the conversation because of the debt context that has just been described.

I have a very short follow up question for Dr Prieg and any others who want to answer. Just focusing on policies that are maybe not scored in terms of their long term impact, the counter-argument—I am not saying I agree with it—would be that, if there was a problem with the scoring, you would have expected policies implemented five or 10 years ago to have delivered more growth than was estimated at the time.

For a long time we have had chronic levels of underinvestment, particularly when you compare us with other G7 countries, so I would say that, certainly for most of the last 20 years, we have had the opposite problem. It is not that there has been tonnes of public investment, there has not been enough. You are absolutely correct that we have more recently seen very welcome increases in public investment, and it will take time for the benefits of that to materialise.

I will briefly challenge you on the point that we are close to the cliff edge, because during the austerity years, a lot was influenced by Reinhart and Rogoff saying, “When debt hits 100% of GDP,” blah blah blah, which has been discredited now due to a forecasting error. We have the second-lowest debt in the G7. It is true that debt overall is high, but if you strike out the risk-free rate, our gilt yields are in the middle of the G7, so surely it depends on what the debt is funding. If it is an NPV-positive project or investment, that debt is sustainable. If it is funding salaries or current consumption that contributes nothing to economic growth, it is not sustainable.

On investment specifically, in the fiscal framework the binding constraint facing the Chancellor is this current Budget rule, so it is about day-to-day spending versus taxation. If we were in a world where investment spending appeared to be bindingly constrained, this would be an important discussion, but we are not in that world, and that has to be borne in mind. Are we close to the cliff edge? I would argue that in the end it is the bond market that decides where the—

Are you saying we are not close to the cliff edge?

We have seen the gilt market be quite responsive in the UK—in the big picture—to quite small changes in fiscal policy, which signals that we are closer to the cliff edge than we would like to be. If the interest rate completely shifts again, that may change.

That is a good question. It is really important that Governments pursue growth policy because they have a diagnosis of what they think is wrong with the economy and they want to treat those problems, and that we move away from what became a bit of a game of what will the OBR score and what will it not score. The higher threshold that the OBR has set will help with that. As we have talked about, the trade-off between the short term and the long term is real. It is not really a feature of the OBR; it is the case that a Government who want to move the growth rate of a medium-sized economy will probably take some time to do that and the benefits will come in longer than the political cycle. That is the reality. I am not sure if it means that we should change anything about the OBR. There are great questions about whether there are other institutional set-ups or analyses that could help reward and reset the incentives of the Government to do that.

I would frame this as the contingent construction of fiscal rectitude, if you like.

The football analogies are working better.

All right, I will let that one slide then. In the early years of the OBR when borrowing costs were very low, inflation was very stable and low, debt was much lower, levels of general crisis hitting the economy again and again were much lower, and we had not had a Liz Truss moment, it would have been great if Chancellors had said, “Well, the OBR says this but we have good reason to disagree so we are going to pursue it anyway.” It was a viable political alternative and probably how the system was meant to work but it never really did. In the current context, we have had a Liz Truss moment, we do not have low borrowing costs or low inflation, we are having crises all over the place; and the structure and maturity of the UK debt, which used to be really long, making it really safe, is much shorter following quantitative easing. I would love to be in a world where we could do what you suggested at the beginning, but I do not think we are in that world right now.

The last Budget was beset by leaks, speculation, public comment about what might be in the Budget and what the OBR might be saying about what the parameters were. Everyone agrees that was not good practice and led to volatility externally, which was not good for the UK economy or the Government. What would be the problem with simply publishing the pre-measures estimates well before the Budget, so everyone could see them? It would reduce the speculation and comment and the Government would know where they stand on what they need to do with the Budget. Some other countries do it. Professor Clift, do you think that would be a good idea?

It has potential merit: it would desensitise some of this leak and counter-leak, and brief and counter-brief, which is hugely problematic. That problem was so problematic it may be that it has solved itself now and everyone has learned how to behave and play nicely and we will not get that again, I hope. There is probably no immediate problem with publishing the pre-measures forecast, although it takes quite a lot of building, so you might have to change the calendar on which all this plays out in order to get that in the public domain in advance. It would change the tenor and the nature of the economic policy discussion; it would probably make it a bit better informed. There may be negative side effects that I cannot currently envisage because that often happens with these things but on balance it is probably an interesting proposition.

Does anyone else have a view?

Yes. I am against that for two reasons. First, publishing another forecast creates another fiscal event, so it is another point of speculation. Secondly, to the extent this is due to the bad behaviour of officials, Ministers or special advisers, they will find some other way in which to behave badly. Even if the OBR publishes its pre-measures forecast, there will be leaks and briefings in other directions in other ways, so I do not actually think it would help.

It would be a good innovation. We risk learning the wrong lesson from the last Budget; there was definitely too much speculation, which was damaging, but it is not realistic to think that it would be a good idea politically or economically for the OBR to produce a forecast that was wildly different from market expectations and for a Chancellor to then take measures that are completely unexpected. I do not think surprise Budgets are a good idea. I heard Robert Chote give evidence to this inquiry and he explained that, as he understood it, there was always some sort of management of expectations to try to avoid that. Given that reality, is it not better that at some point, say a month before the day, everyone has the same access to the same information about what the forecast is?

I agree with Julian: I would be very nervous about creating anything that could be another fiscal event. The Government need to have a credible growth plan and communication strategy to be able to communicate what they want to do in their Budget.

Chair, it looks like we have a two-all draw on that.

Is it going to penalties?

There has been a lot of discussion about the fiscal rules and the degree to which they impede Government policy. Dr Prieg, how does the current conflict in the Middle East affect the fiscal rules? What challenges might it bring to our current fiscal framework?

Very recently, I was enjoying the quietness of the spring statement and the fact that the Chancellor had successfully managed to achieve her goal of having only one fiscal event per year. But I was aware that that was not really because of any major changes and revisions to the system to help reduce policy volatility; it was purely because she had found a way at the previous Budget to increase the headroom. Given what is emerging in the Middle East, it is too early to say exactly what the impact will be, but depending on how things play out and the extent to which Government assistance will be required, such as Government support for households, we could conceivably be in a world where headroom gets significantly reduced again. Then in, say, next year’s spring statement, the Chancellor may not be able to avoid doing something because at the moment we do not officially announce whether the fiscal rules will be met at the spring statement. In reality that can very easily be backed out. In a world where the headroom is tighter, we would be back to potentially having two major fiscal events a year, so it might undo the temporary reprieve that the headroom increase in the previous Budget gave us.

Actually, the fiscal rules may not be a binding constraint for two reasons. First, there has always been flexibility built into the system: if a major shock comes along, such as an energy crisis or like covid, then I do not think anybody would have a problem with the fiscal rules being temporarily suspended. Secondly, the fiscal rules’ time horizon is five years, so in principle the Government can go ahead and spend and borrow an enormous amount of money in the short term, as long as they promise to balance the current Budget in five years.

Of course Governments never do that.

Exactly. The debt rule is almost completely useless; it simply specifies that debt should be falling between two points but in the meantime you could add 10% to the debt-to-GDP ratio and it would not breach that rule. In a sense, this is an example where the focus on the fiscal rules is not actually a binding constraint on the Government doing something, which might be a good thing in a crisis but it reflects the underlying weakness of having rules that are not really that effective.

They are four years now, and are moving to three. That shortening of the horizon is quite an important improvement on the framework that the Government have made. But I agree that in terms of the effect of a crisis such as the one in the Middle East, the fiscal framework is rightly not preventing the Government from responding to that this year or next year. The more important question about what the economic effect of that might be is that, in terms of the impact on households, the price cap is falling and fixed until July. About one in four households is now on a fixed-price energy deal, which is very different from the situation in 2022. I hope that will give the Government time to also develop measures that are much better targeted than we saw in 2022.

On that point of suffering a major crisis as we are now: another of the OBR’s very useful interventions in the public policy debate about economic policy in the context of covid and so on was to present a series of scenarios to engage with the uncertainties, to present the crisis parameters in various ways, and to help us imagine and think through how this might play out, which added a richness and texture to the economic policy debate and how we can think about the crisis and its implications that was not there previously. That is very welcome and can be done whether or not the fiscal rules constrain them. I agree with what was just said: I do not think the fiscal rules are constraining them in that way.

We have been talking about levels of debt but what is your view of how we measure debt in this country? Countries such as Germany measure it differently and if it were measured in the same way there, debt-to-GDP ratio would look a lot higher. Do you have a view on how we measure debt and whether that measurement blocks investment?

Other countries, such as Germany, ensure that their independent financial institutions such as KfW and national investment banks do not in any way contribute to the national debt, which frees up those institutions to do a lot of lending that would otherwise not be the case. It is important that we have that system in place in the UK. But with regard to things such as whether we should move to public sector net worth and the like, I understand there are pros and cons to that, so I do not have a strong view on it per se.

Ms Curtice, how would you reflect on that possible change to the way the Germans do it?

I agree that the key difference between the UK and Germany is the boundaries. Whether we are looking at the whole public sector or at something narrower, it is considered in general an advantage of the UK that we take that broader view, but it has a specific effect on how we treat national investment banks. The shift to recognise financial assets helps. Looking at whether we can do more to boost those national investment banks as part of a growth plan is very worthwhile. As I understand it, it is not the case that the fiscal rules are constraining such a move; if they were,it would be an important question.

Do you think there would be a negative reaction from the bond markets if such a change were to be made?

Germany’s equivalent is KfW, which does its own borrowing, which provides a constraint. It costs a bit more than the German Government, and so I am not convinced that it is an optimal system, but the important thing is whether you have a good system for checking that the investments that these banks are making are valued correctly. If you do, I see no reason why it should have a negative reaction.

Mr Jessop, on your point about the five-year time horizon, is there a related issue that policies the Government can do to improve productivity generally have a longer than five-year pay-off?

There are a number of issues here. First, there are lots of things the Government might or might not do that would have a much longer horizon than five years. Secondly, a lot of the problems we have in the public finances will only show up over a longer horizon. For example, if you look at the OBR’s excellent longer-term projections for the public finances, with only slightly more pessimistic forecasts for productivity, we are going to have a debt-to-GDP ratio not of 100% of GDP, but maybe over 700% of GDP. Simply focusing on the five-year horizon would tend to miss that. Against that, there is of course the problem that the parliamentary cycle is no more than five years, so there is only so much the Government can credibly say about the longer horizon anyway. One of the changes that I would look to make is to have a longer horizon of maybe 10 years rather than five, particularly for debt as a share of GDP. Ideally I would have an explicit ceiling on that to keep debt below where it is now.

The United States has a 10-year horizon; the CBO’s short-term forecast is 10 years. It would involve the Government having to set out plans beyond the five-year time horizon.

Is that realistic with a four or five-year electoral cycle?

We already have a five-year forecast that spills over into the next Parliament and I actually think it would be highly desirable. Anyone who wants to run the country should be able to articulate a 10-year plan for what they want to do because that is a reasonable timescale on which to bring about change in the country.

I think a lot of us would agree with that but it does not often materialise.

On this long-term and short-term, I have reservations about trying to shift to a 10-year forecast. It is impractical to hold the Government to plans made now in 10 years’ time. It seems problematic; a large amount of work would need to go into constructing it, and it would not be very realistic or based on anything very real. I strongly agree with the point made about the quality of the longer-term in the 50-year forecast fiscal risks and sustainability report that the OBR has been constructing over the years. It is hugely valuable, giving us insights into the fiscal implications of demographic change, climate change, the changing structure and maturity of our debt, which the Treasury is nominally supposed to respond to, but it is a cursory five-page document that probably did not take anyone very long to write and does not seem to get debated in Parliament. You good people talk about it, but not everyone else talks about it nearly enough. That is where there should be more investment in what the OBR does, because it is probably its most valuable contribution to the economic policy debate about debt sustainability in this country. Let us give more power and resource to it to do more on that. Everyone should take it more seriously.

We have touched on the principles of this already: the Institute for Fiscal Studies has advocated a fiscal traffic light system to get away from having a single-point indicator on the five-year horizon. What are the panel’s views on that?

It is very similar to what I have been talking about in terms of fiscal principles. The New Economics Foundation definitely welcomes it and it is really nice to see other think-tanks starting to do work in this space. It would be a huge improvement but it is important that we reform the underlying fiscal framework and the OBR so that fiscal framework gets assessed correctly. If you were making that change, there would still need to be the sorts of changes to the OBR that we have been talking about in this session accompanying it; it would not be good enough to just do what the IFS propose.

I do not agree with the IFS proposal. The advantage of fiscal rules is that they act as a constraint, and the disadvantage is that they act as a constraint. On that basis, we can have a debate about whether fiscal rules are helpful or not. The problem with constraints is that sometimes you disagree with the marginal decision; the advantage of constraints is that they tend to deal with the time consistency problem, some of which we have talked about. At the end of the day, a useful traffic light tells me whether to stop or to go. Either we construct a complicated system that tells me whether to stop or go, in which case we are constructing a binding fiscal rule by having a more complicated system, or we are not, in which case I worry about the lack of constraint. It is not the only way you could move away from some of the issues such as targeting a specific year only. We have had fiscal rules that look across the forecast horizon at averages or cyclical measures; there are other ways within a fiscal rule that you could move away from the spot-year issue.

I basically agree with what has just been said. There is some merit to the specificity. There is inevitably a degree of spurious precision in these situations, but there is a benefit to the specificity and the binding character of our current fiscal rules, although they might not be perfect. The greatest caution should be exercised in changing anyone’s fiscal rules again. They do not really last more than two years, which completely undermines the whole point of having fiscal rules in the first place. So let us not go changing them again, please; it would be a concern. The traffic light thing has already been there in the OBR’s evaluation and adjudication on policies and fiscal rules to date. It is not completely absent from the way it talks about what it does now. Whatever system you bring in, people will find ways to game it; they will just game it differently, so I am not sure going from here to there is necessarily as attractive an option as some might suggest.

I like it as a presentational tool. In lots of other contexts, there are traffic lights to gauge progress against targets. I would certainly rather have a traffic light system than obsessing about whether the five-year headroom is £9.8 billion or £12 billion, so I can see it is an improvement in that respect. However the problem is if there are lots of different traffic lights. The Government can pick and choose which ones to emphasise, which is where it becomes problematic.

We hear a lot that that is how the Blue Book is interpreted, which is one of the challenges going forward.

Ms Curtice, I want to briefly come back on what you said about better targeting than the last time we did some sort of energy support. My recollection is that there were some significant constraints around data points. What do you perceive has been enhanced over the last four years? I do not think any of us would want the Government to spend money unnecessarily, so could you just address that point so we are clear about what you are saying?

I do not know how much work has been done on data since 2022. My point is that we have some months before we need to think about a new energy support scheme. We know prices are protected until July, that one in four households is on a fixed tariff, and that energy—gas prices in particular—especially matter in the summer. My plea is that we use those six months to not miss the chance again to think that having data that allows us to target both high energy use and high income is important. My understanding is that some progress has been made, but I am not an expert on that.

The Chancellor hinted at that. The mechanics of the state in delivering a politician's intention is quite an important point but it does not get much airing. Understandably, all politicians are rightly accountable but how to deliver it efficiently does not get much scrutiny. Where do we go to scrutinise this meaningfully in order to get to the bottom line? You said you hope some work is being done, but who is doing it? There was a massive imperative from four years ago to improve it.

It is actually a good example of the sorts of ways in which Parliament could engage with a fiscal risk report. Post 2022, I am pretty sure one of those reports said that one lesson we should learn is that we need better data in a crisis. I think that, unfortunately, Governments are busy and those sorts of things need continued scrutiny to make them happen.

Could you be brief, Professor Clift?

The 2023 fiscal risk and sustainability report discussed the last gas price hike amid the Ukrainian war and the high costs of the support mechanisms put in place. It pointed out that if there were three more gas price hikes of similar magnitude between now and 2050, they would cost the state more than twice the cost of all the investment needed to decarbonise the economy, and if that had been done it would then have addressed the energy security concerns and no more gas crises would be faced. I am just saying that.

That is an interesting observation but where we are now, it is not a real choice, is it? It is an historical and academic analysis, but it does not help us make choices at this point.

It does in terms of prioritising what is the most important framework for the next three years.

Do you mean against the OBR framework for the next three years?

I think you are referring to long-term thinking.

I am talking about long-term thinking. The additional resource I want is the OBR to try to connect its shorter-term to its longer-term projections to improve the quality of the economic policy discussion around how we tackle climate change.

Many of you have mentioned scenario planning and scenario-based forecasts or bespoke forecasts in your opening remarks. I want to single out a particular paper that was published by Dr Sousa at the University of Strathclyde. He has written about the fact that the long-term public finance forecasts that the OBR uses assume that tax thresholds rise in line with average wages, ie that there is fiscally neutral change over time with inflation. A more realistic assumption might be that they rise in line with inflation, ie there is tightening over time. You have also mentioned the political difficulties of selecting scenarios to plan. Do you think that there should be some scenarios done for fiscal tightening rather than fiscal neutrality? How would you handle the political difficulties of selecting those scenarios?

It is a really interesting paper and I am glad you have asked about it. As you say, when you look at these very long-run forecasts, they are very sensitive to the assumptions that you make. It is important to understand what the OBR projection is telling us. It is telling us what happens if the tax-to-GDP ratio stays constant; therefore, within that, thresholds rise in line with earnings, creating an explosive picture for the debt path. It tells you that this is a consequence of keeping tax largely constant and the spending pressures that arise. It is important to understand what a different sort of scenario would give you. For example, if you assume that thresholds rise in line with inflation, it means the tax ratio starts to rise very strongly. We had a look at the paper: sometime in the 2050s in that scenario, someone on the minimum wage working full time would start to pay the higher rate of tax. I do not think that necessarily gives a realistic assumption of the future, but there would be value in illustrating some scenarios to demonstrate those trade-offs.

I strongly agree with that. The example that came to my mind straight away was the pensions triple lock; to model alternatives would be a double lock or whatever. There is also a problem about how the OBR would choose which scenarios to model: we would all come up with 10 different policy scenarios. There is an additional role that it is already starting to do pretty well: providing, for example, a model that other people can use to vary the assumptions and find out what the answers are. Not everything has to be done by the OBR. The OBR can provide resources others can use, so people can then say, “Well, using the OBR’s model, if you continue with the triple lock or do not update thresholds in line with inflation, these are the consequences.” So the OBR can also play a role in providing tools for others to use, as well as in coming up with the answers itself.

Is there a way that other comparable agencies in other countries have dealt with the political issue of scenario selection that the OBR could learn from? It seems that the assumptions of taking Government policy as stated and so on do not produce accurate forecasts, as you pointed out, Mr Jessop, in the four to five-year period.

Yes. Having said there is a danger of the OBR being told to do too many things, I would like to see it come up with alternative scenarios. Its alternative scenarios tend to be based on obvious shocks, for example, energy prices or what might happen if the Government do not uprate fuel duty. I would quite like some more generic scenarios and upside scenarios such as what would happen if growth were 0.25% higher than the Government are currently anticipating. What would the numbers be? The advantage of that scenario is that a more bullish Chancellor could then say, “Well, that’s what we’re going to deliver. On your central forecast, we missed the fiscal targets but we just need to get growth 0.25% higher and we are fine,” which could be an opportunity for the Chancellor to essentially say, “I disagree with the OBR. My optimistic scenario delivers a better outcome.” There would then be a downside scenario. The obvious one would be around spending: if spending is 1% or 2% higher—whatever the number might be—by the final year of the forecast rise, what would the outcome then be? So there is a central scenario, a more bullish scenario that the Chancellor would focus on, and maybe a more realistic scenario where spending—as it usually is—is higher than the Government had been promising.

I have a more zoomed-out question for the panel: you have all criticised the current fiscal settlement that we have in various ways. You may have different views whether that is an issue with the OBR and its functioning, an issue with the fiscal rules themselves, or not an issue of either of those two but an issue of politicians’ decisions around tax and spending: the actual fiscal policy that has been enacted. Some of you have criticised all three of those. To get a sense of those three different options, what are you most concerned about? What do you attach the most weight to? The question is for each of you to answer very briefly.

The underlying fiscal rules are the most important thing, because they set the baseline for everything. The question of how they are assessed is also very important and should not be ignored. We have had so many different fiscal rules over the past few years. The reason all those rules have been torn up is that the rules and the spurious precision they provide do not actually help to guide the country in making decisions that will put us on a different track. We should not assume that continuing with the current ones will do anything different.

Dr Prieg is going with the second option.

The OBR is the least of the problems. The OBR is just doing the job it has been asked to do to the best of its abilities. I am afraid to say that the big problem is the politicians, who are the players of the game, and dare I say, to some extent, the people who elect them; I am not going to run for public office ever. We have fallen into a position under successive Governments where the assumption is that if there is any problem, it is the state’s job to fix it regardless of the cost. So debt is constantly ratcheting up and we are getting more state interventions layered on top of more state interventions. The politicians are the big problem and the rules come somewhere between that.

Mr Jessop is going with the second option.

I like your zooming out. I am glad Julian Jessop went before me because I was going to hesitate to blame the players but here goes: if our big picture problems are low growth, high debt, and persistent inequality it is about how we have played the game more than it is about the referee.

I am not sure if I can still remember what the three options are. The rules are not necessarily the right rules but I do not think there is any merit in trying to change them. However, you could expand the principles in the charter—not the specific rules—to bring a more sensible set of principles into the fiscal conversation. The OBR used to do quite an interesting thing: it would hold the Government to account for the previous set of rules that had just been abandoned, which was quite a healthy exercise in revealing what was really going on. I largely agree with the OBR just doing its job and what it is mandated to do and if you mandate it to do something else, it will do something else. It then becomes your problem; it is the politicians who are at fault. The OBR quite often says, “Well, you can do what you want, you just need to raise enough taxation to do it.” If you have a situation where shadow Chancellors point out they are not going to raise any taxes on anything if they get into power then that constrains the option and leaves us with these very tight, binding, tiny amounts of fiscal headroom, which is also not the OBR’s problem, or necessarily the fiscal rules’ problem.

I want to take us back to where the OBR is now. Last week it said to us that a 4.4% real-terms cut to unprotected Departments would be needed. It mentioned a £13 billion gap by 2029-30. As we have discussed, the Government are obliged to put all that in there, per Government policy. In truth that is not reality, because there will be other choices made at subsequent fiscal events. We go through a process where we put all these numbers in, but I cannot see a Labour Government allowing 4.4% real-terms cuts to unprotected Departments such as the Home Office, Justice, and so on, given the wider narrative. Yet that is what is in there. I am asking really about the fiction of “the end of the period” because it is just on a rolling basis. For a moment we can say that fixed all the rules but how do we avoid this false reality?

It comes back to changing the rules too often and changing them in unhelpful ways. The rolling targets make it a fictional, imaginary conversation, so there is probably not much use in Treasury and the OBR spending a huge amount of time worrying about it because everyone knows that for three years, the forecast is pretty sensible. As you get further out, it gets a little less sensible and less defensible, which is problematic. Once again, I had another point but I have forgotten what it is, so I will allow Ms Curtice to speak.

The ultimate best solution for DEL spending is to have fiscal rules and spending reviews that coincide. It does not mean I believe the fourth and fifth year of the forecast when we get to three-year fiscal rules and regular spending reviews, but it matters a lot less, so I might have some scepticism about it. Whether the OBR should take a different view of DEL from the one the Government give is quite a politically charged question. I am familiar with the OBR analysis that says that at each spending review the amounts tend to go up. But there have not been so many spending reviews that I am convinced that it is a law of nature. For example, they did not actually go up at the last spending review. It was interesting the way you put the question: “I don’t believe that of a Labour Government.” I do not think it is for the OBR to say whether a Government of a particular party will deliver a particular spending path. I could imagine challenges if it said of a Government that wanted to cut spending and were very explicit about it, that it did not believe they would do it.

This problem could be partly dealt with by the two-scenario approach I was talking about earlier: the upside scenario being growth and the downside scenario being spending higher than might otherwise be in the plans. It might be that there is an obvious assumption that spending is assumed to continue growing so that spending is flat as a share of GDP—or whatever would be the appropriate number—which would at least draw attention to the problem a bit more closely than it is now.

The biggest problem is that it has to do the official forecast so it cannot openly just say this is obviously not plausible. If the system is switched so that it could give much more frank, objective assessments of plausibility it would be quite a powerful signal. Having the OBR come out and say the spending plans in year five do not look plausible given historical trends would be a strong message.

That is my clear and obvious error analogy where the VAR system, or TMO in rugby, would step in and say that is obviously wrong.

Our last two leaders of the OBR, who you have talked to, were very adept at pointing out what they really thought about the plausibility of whatever projections they were talking about while they were not allowed to have a view, express an opinion, or be sceptical about the official Government-stated position on X, Y, or Z. So when you evaluate their successor, you need to look out for someone with a similar kind of silver-tongued ability to convey a very healthy scepticism while being dutifully respectful; they both did that rather well.

We are moving on to how the OBR manages impartiality.

Impartiality and independence seem to me to be the value of the organisation. Ms Curtice, you used to be a Treasury official, so do you think the steps taken to strengthen the independence of the Office for Budget Responsibility to do an extra assessment when there is a significant fiscal event have strengthened its independence?

Are you referring to the principle in the fiscal lock?

Yes.

Broadly, the principle in the fiscal lock that a forecast can be triggered by those announcements is a good one. In our obsession with a single fiscal event, we may have somewhat lost sight of the idea that the important thing is to make announcements alongside a forecast rather than to deliberately make them the week before and the week after a forecast; it is an important reminder of what a good principle is. The resource question is really crucial on independence, for me. Partly from my Treasury experience, I do not think the OBR needs more resource in order to produce more pages or to improve the quality of its forecast, but the dependence it has on analysts within Government is so extensive that tipping the balance slightly would strengthen its independence further.

The resources it has are not locked either, are they? The Chancellor could choose to reduce those resources.

Absolutely. It is not just that it is subject to the same rigour as other Departments; it is actually part of the Treasury’s budget. When I was in the Treasury negotiating the OBR’s budget each year, I obviously took a very different view about whether they needed more resources or not. Every extra pound I gave them was a pound less for the Department that I worked for, not just a pound less for the public finances, and that is a particular tension.

Professor Clift, could there be efficiency savings for the Office for Budget Responsibility if it took a market consensus and a market consensus of interest rates instead of developing its own forecast and then focused its edge and independence on the rigorous extra resources needed to evaluate—independent of Treasury—the impact of the measures that the Chancellor might propose?

There is some merit in that and the OBR does that to some degree. It does not see it as its job to forecast for everything, given there are lots and lots of forecasters in the banking sector generating regular forecasts that sometimes already align with what the OBR needs. Unfortunately for the OBR, it is only in a quite extensive range of circumstances that what it has to do to fulfil its mandate is different from what all the other forecasters would be doing in the market, because it is about actual and nominal prices and so on. When it can, the OBR does that to a significant degree but the precise nature of its mandate and tasks means it has to do a lot more than you would think it should have to do because it is looking for something slightly different in terms of the way the process works.

The Committee received evidence from the Wine and Spirit Trade Association that it can actually monitor what is happening to sales of wine and spirits. Should the OBR use more of this microdata in its ongoing evaluation of the measures that the Chancellor might implement?

There are two different things going on. There is the fiscal side receipts-type work and there is the bigger macro forecast. The macro forecast is more consequential for economic policy. I would be happier with more movement in that direction on the fiscal receipts side of the operation than on the macro forecasting side, because that is really driving a lot of important things. On the previous point about independence and funding, this Committee said some interesting things about how the National Audit Office is funded; it is a different model that would avoid the kinds of things that we were just hearing about the wrangle in the Treasury.

The OBR is actually very good at listening to a wide range of outside views. I have been in twice to talk to the OBR about the economic impact of Brexit, for example, so it does listen to people with different opinions. It would be wrong to assume that it has to do all the analysis in-house for every single problem. There are lots of people who can help out. I am a great believer in competition, free markets, and so on. There is a danger in elevating one forecasting body above all others. We need competition of ideas. The OBR might have some special role to play, but there are lots of organisations doing this analysis—the IFS, the IEA, and trade bodies—that obviously have a vested interest but still have something useful to say. I do not think you need a massively bigger OBR to do this if lots of other places are doing the work as well.

On its budget and its resources to do these things and listen to a wide range of views, should this Committee be given any kind of supervision of its budget and whether it has enough resources in addition to what it already has?

The National Audit Office has the Public Accounts Commission, which agrees the budget.

In the model I am leaning towards, where a lot of the forecasting goes back into the Treasury but the OBR is reconstructed as a parliamentary budget office, obviously there is a far bigger role for Parliament to decide what the resources in that office are. As it happens, I looked at the resources available to the OBR, and they are similar to those of a medium-sized economics consultancy. I used to work for a firm called Capital Economics, and its staffing numbers and budget were pretty similar to those of the OBR.

Was it enough? The OBR said it was but I thought it would be interesting to hear your opinion.

I personally think it is provided they continue to do what they are doing now, which is to be open to a wide range of outside views rather than trying to specialise in everything.

Could I have a quick yes or no from all four panellists on this: if there were to be a significant reduction in the OBR’s resources, would you want that to be something this Committee is required to be told about?

Yes.

Yes.

Yes.

Yes.

Having criticised politicians, you are all suddenly in favour of us again.

You have your uses.

It is good to know that.

I do not think you can change it because it is inherent in economic policy evaluation and discussion forecasting to build a set of assumptions and choose one set over another for a set of reasons that relate to how you think the markets, economic policy, and state intervention work. The key thing is to wear those assumptions on your sleeve and not pretend that you are not making those choices. That is why I want a broader array of different economic policy views in the conversation, a bit like what was just being referred to, you have kicked the tyres of ideas from a range of different perspectives. You have made this choice, which is a normative position you have taken. There are reasons why you have done it but it is not a scientific, pure, technical choice; it has to be a political choice. It might be justifiable and you can set out that justification.

You are probably aware of the old joke: if you ask two economists you will get three opinions, so we even disagree with ourselves.

I always say five on this Committee.

Looking at the OBR, there are some people who say it has a bias towards what some people describe as Treasury orthodoxy: a belief in markets, a focus on the supply side rather than managing demand, and various other points. Of course for me that is not a problem, because I was a Treasury official. I worked for a pre-market economics think-tank, so I do not have a problem with that. But I recognise that sometimes you will be missing out on different perspectives by simply looking at things through that lens. My solution would be to give politicians a bit more discretion in making those decisions, to recognise that they are the people who have been elected and can make these judgments in areas that are pretty subjective. Bringing the forecasting back within the Treasury, and therefore within the political sphere, will be a solution to that. But you would continue to have outside organisations criticising this, including, of course, the markets and the Bank of England, which has a role in setting interest rates, so if the Government do something stupid, they get punished through higher interest rates or whatever the outcome might be. There also needs to be some role for the OBR. You need an OBR because of the information problem, which we have not really touched on. Markets only work properly if everyone has good information, but there are inevitably some things that the Government want to keep in-house, such as the commercially confidential or personal information about tax revenue. There is a role for a body that has special access to Government information. Beyond that, I would not elevate any one organisation significantly above any other.

I thank our panellists very much indeed. It has been a really interesting discussion. I will not try to pick up on the football analogies, but it has been fascinating. This is obviously part of an ongoing inquiry into the future of the OBR. The appointment of the chair is under way; the advert has gone out. We hope that we can report at a useful time when whoever is appointed takes over and we hope that the Government will listen to our views. You have given us a lot of food for thought today. Thank you, Professor Ben Clift, Ruth Curtice, Julian Jessop, and Dr Lydia Prieg, for your time. The transcript of this session will be available on the website, uncorrected, in the next couple of days. Thank you to our colleagues at Hansard and to our colleagues at Bow Tie for the broadcasting.