Strengthening the OBR’s independence will do nothing to address its harmful short-termism
last Friday Labor Party announced They will reduce the government’s political influence on the country Office for Budget Responsibility (OBR), A welcome decision. While the move supports the OBR’s objectives as an independent fiscal regulator, it risks creating overconfidence in the methodology and objectives of its forecasts. The OBR greatly underestimated the impact of austerity policies on economic growth, ultimately leading to leading to an increase in national debt. It doesn’t properly take into account the long-term beneficial effects of investment and spending, which means we can’t even predict our way out of low prosperity. Fiscal policy should not only be about meeting fiscal rules, but also about making progress on environmental and social goals. If the OBR is strengthened without reforming the content of its assessments, it will entrench short-termism and focus solely on fiscal targets. A balanced budget means nothing in an unbalanced society.
“Fiscal policy should not only be about meeting fiscal rules, but also about making progress on environmental and social goals. “
The OBR provides economic forecasts on the impact of government policy announcements. These forecasts are then used to study the impact of policy decisions on debt and borrowing and to analyze whether we are violating limits imposed by fiscal rules. It was supposed to be an independent act but has been politically influenced lately. In 2021, then-Prime Minister Rishi Sunak asks OBR to change their forecast timetable Arguments that public services are under-invested can be made easier by using data. Recently, during the Truss-Kwarteng mini budget, OBR banned from publishing forecasts It is completely a manifestation of the policy effect. The fiscal rules against which OBR measures policy It has been changed six times since the Conservatives came to power. Failing to meet fiscal rules, they were scrapped and replaced, with goals changed to pretend their economic plans had been working.
But the OBR’s forecast itself is also questionable.Since its founding in 2010 OBR underestimates the damaging impact of austerity on UK economy. This is because the OBR does not fully consider how government spending has long-term effects. Assuming any spending cuts (or increases) only temporary impact About the economy. Yet these cuts are the reason our schools are crumbling, social housing is lacking and the NHS is in crisis. Far from having a temporary impact, austerity will put more pressure on an economy already on the verge of collapse, ultimately costing us more to fix the problem in the long run. We must repair what is broken rather than invest in preventive measures.
The U.S. leads the world in recovering from the pandemic and fighting inflation Billions of dollars in stimulus spending. However, the UK Budget Office was unable to predict such a recovery in the UK. As well as being unable to model the long-term effects of economic policy, the OBR also grossly underestimated the impact that stimulus measures could have.For example, OBR uses Number‘The fiscal multiplier (which measures the impact of government spending on GDP) is at most 1, which means that in their forecasts, government stimulus cannot grow more than it spends. Furthermore, where the fiscal multiplier is below 1, the OBR assumes that the private sector will reduce spending in response to government spending.
“Transparency and independence are important, but we also need to revisit our approach to fiscal policy. “
This goes against the evidence that fiscal multipliers can be higher and longer term, especially when focused green consumption, social progress and public infrastructure. The International Monetary Fund agrees that the multiplier for such spending is above 1, meaning economic growth exceeds government spending.Public investment is often found Encourage private actors to spend more rather than less. By not considering these impacts, the UK Budget Office has done the UK a disservice and will continue to underestimate the transformative potential of fiscal policy.
Labor should therefore be cautious in accepting the OBR. Transparency and independence are important, but we also need to revisit our approach to fiscal policy. Changing fiscal rules and missed targets, only crumbling schools and longer NHS waiting lists show that our current approach is not working. However, there are other options.At the New Energy Foundation We propose replacing fiscal rules with fiscal standardslike those Olivier Blanchard, former chief economist of the International Monetary Fund, formulated by experts, not politicians. These standards could also address asymmetries in the way fiscal policy is evaluated, where currently underfunded policies raise concerns while underfunding of public services and the fight against climate change do not. In this way, fiscal principles will help warn governments of underspending rather than just overspending.
The UK’s fiscal structure clearly needs reform, and Labor rightly believes that the OBR’s independence needs to be reaffirmed. But this should not be the end of fiscal reform. The OBR’s modeling needs to take full account of long-term effects, and fiscal rules should be scrapped in favor of principles closer to economic reality. This will allow the government to be better informed when making financial decisions. The end goal should not be a government governed by fiscal rules, but a government based on fiscal wisdom.