One of the announcements from the Kwasi Kwarteng ill-fated Statement, which survived his political
demise, was the abolition of the Office for Tax Simplification (OTS). Judging by the increased
complexity of the tax regime, as evidenced by the growth in legislation since 2010, the OTS can
hardly be seen as having succeeded in its main aim. Although staffed by extremely able and
experienced people, the institutional pressures leading to voluminous and complex legislation never
abated. So perhaps it was right for the Government to decide that rather than simplicity being side-
lined into one department, it should become part of the objective of all departments dealing with
finance. Whether this will work is still open to question.
Should the Office for Budget Responsibility (OBR) follow the OTS into retirement? The events of the last year have strengthened the
case for this. It is not as though the OBR has a particularly successful record in terms of its one main
function which is to project how public finances will react to current fiscal and economic conditions.
The general bias has been to be over-cautious and pessimistic. Accordingly, with the exception of the
period at the start of the Covid pandemic, the OBR has consistently over-estimated the deficit and
underestimated the strength of the UK economy. This has shown most recently in the recession that
might never happen in 2023 with a confident prediction only a few months ago of a significant
contraction in the economy and a resultant blow to public finances.
According to current figures, there was an overestimate of the deficit of around £36billion. This is
not unusual, and even members of the OBR have admitted that their ability to predict the economy
and public finances are limited and their track record is patchy at best.
Before looking at why this matters, I would suggest a number of reasons why this is the case.
First of all, the public and some economists see their discipline as a science but there is always a
considerable amount of guesswork, particularly in making predictions. Whereas an economist can
almost always tell you why a particular event has happened, their powers to predict have proved
illusory at best.
You start with the fact that although they have economic models with sophisticated computer
programmes, it remains the case that the assumptions that both go into the figures that are inputted
into these models and the models themselves will contain biases that are more subjective than
objective. For example, if, as appears to be the majority view in the OBR, you view Brexit as
damaging the UK economy you will significantly downgrade growth prospects, and this has a knock-
on effect on public finances.
Whether this has proved accurate or not is a different matter and is certainly open to debate by
economists as to the extent of any damage.
The same challenge of taking a view is reflected in examining Government measures to encourage
economic growth, employment etc. The OBR has to take a view regarding whether Government
measures to make investment more attractive or encourage people back into the workforce will
actually work and to what extent they will encourage better economic performance; again, this is
challenging.
The task is made more difficult by the fact that the impact of tax measures can not necessarily be
known accurately in advance. In a budget which is trying to nudge us in certain directions, investing
more, going greener, encouraging us to work, the impact is unknown and untested.
Whether, for example, the Universal Credit changes will encourage more parents to go back to work
or whether the abolition of the lifetime allowance will encourage those who are retiring to go back
into work is not known. To take measures, the details of which are furnished to the OBR a matter of
days before the budget, and then pronounce with any form of certainty about their medium and
long term impact is a challenge too far.
Finally, the world has undoubtedly become a more unpredictable arena in the last few years. Covid
and the War in Ukraine are two examples of this but how one is supposed to make a meaningful
prediction when for example a banking crisis could be round the corner is anyone’s guess.
What damage does this do?
Given the way that the Office for Budget Responsibility was founded in 2010 and its remit in terms of fiscal responsibility, it was
perhaps inevitable that it would always err on the cautious side. But this has meant that it has
almost consistently underestimated the strength of public finances; and normally by quite a large
margin. This has had a profound effect because it is fair to argue that public services have been cut
by more than they would have been cut if the forecasting had been more accurate. It has also meant
that when the OBR hands the Government a more optimistic view of public finances, the temptation
is to spend that surplus either in the form of tax cuts or in the form of greater expenditure. This
normally happens quite suddenly and maybe not in the best considered manner.
So, abolishing the OBR might correct some of the in-built biases that arguably have necessitated
greater tax rises and more severe public spending cuts than were actually required by the state of
the economy. It would also still require elected politicians to be responsible for their actions. The
short-lived Truss administration actually showed that if a politician embarks on what seemed to be
an incautious spending spree that the markets will punish them. This, more than OBR strictures,
should be in the minds of Chancellor’s and Prime Ministers.
The other element which encourages short-termism is that if the OBR is overly cautious, particularly
in its medium-term forecast then the Government feels constrained to make measures which help
“balance the books” but which are not particularly well thought out or sensible. The delay to some
parts of HS2 will only increase costs and reduce the economic benefit of the line. One can argue that
maybe the whole project should not have been started in the first place, but having started the
project it seems odd, to say the least, that crucial parts are being postponed to satisfy Government
finance projections.
So how would a post-OBR policy be devised which might lead to more rational decisions?
It would seem sensible to divide public spending between capital expenditure and revenue. The
Government should seek to balance revenue expenditure with taxes over the economic cycle. By
contrast, it should be looking to borrow to fund capital expenditure. Capital expenditure creates
assets and therefore should not be seen as harming the national balance sheet, so long as the capital
assets will provide a return. This would allow for more rational and logical planning of the UK
investment programme rather than the short-term fixes which seem to be prevalent.
In conclusion, although the OBR was created in reaction to a perception that Governments were
manipulating financial figures to create an illusion that they were balancing the budget, the
imposition of the Office for Budget Responsibility has not made matters better. I would argue that it has probably made the quality of Government decision-making worse as it seeks short-term fixes to comply with forecasts
that are never accurate.
