Interesting times Robert Chote Chairman David Hume Institute Royal Society of Edinburgh 21 September...

Interesting timesRobert Chote

Chairman

David Hume InstituteRoyal Society of Edinburgh

21 September 2011

Public sector net borrowingHM Treasury Budget 2005: outturns and forecasts

-4

-2

0

2

4

6

8

10

12 1971-7

2

1973-7

4

1975-7

6

1977-7

8

1979-8

0

1981-8

2

1983-8

4

1985-8

6

1987-8

8

1989-9

0

1991-9

2

1993-9

4

1995-9

6

1997-9

8

1999-0

0

2001-0

2

2003-0

4

2005-0

6

2007-0

8

2009-1

0

2011-1

2

2013-1

4

2015-1

6%

of G

DP

Public sector net borrowingOBR Economic and fiscal outlook March 2011: outturns and forecasts

-4

-2

0

2

4

6

8

10

12 1971-7

2

1973-7

4

1975-7

6

1977-7

8

1979-8

0

1981-8

2

1983-8

4

1985-8

6

1987-8

8

1989-9

0

1991-9

2

1993-9

4

1995-9

6

1997-9

8

1999-0

0

2001-0

2

2003-0

4

2005-0

6

2007-0

8

2009-1

0

2011-1

2

2013-1

4

2015-1

6%

of G

DP

The creation of the OBR

• Created in interim form shortly after 2010 election

• After legislation, became statutory body on 4 April 2011

• One of a growing number of official independent fiscal watchdogs

• General rationale: combating ‘deficit bias’ and ‘pro-cyclicality’

• UK rationale: fiscal forecasts without political wishful thinking

• So Government has ‘contracted out’ official forecasting to the OBR and given it access to data and analysis from within Whitehall

The remit of the OBR

• “to examine and report on the sustainability of the public finances” (Budget Responsibility and National Audit Act)

• Four main tasks:

– Produce two five-year forecasts for economy and public finances– Judge progress towards the government’s fiscal targets– Scrutinise Treasury costing of tax and spending measures– Assess long-term sustainability and public sector balance sheet

• Other supporting material:

– Briefing papers, discussion papers etc. – Monthly commentary on Treasury/ONS public finance statistics

Governance and accountability

• Rights and responsibilities set out in:

– Budget Responsibility and National Audit Act– Charter of Budget Responsibility

• Important features:

– “Complete discretion in the performance of our duty”…– … if we behave “objectively, transparently and impartially”– Look only at current government policy, not policy options– Cannot comment on the merits of particular policy measures– Fixed multi-year budget published, so squeeze would be visible– Accountable to Chancellor and to Treasury Select Committee– Non-execs can help balance accountability and independence

Transparency

• Process:

– Substantive contacts with Chancellor and his office logged– Forecast timetable published– Treatment of post-deadline measures published

• Analysis:

– Diagnostics– Simpler presentation of spending forecasts– More variables and assumptions– Additional information post-publication– More methodological information– Policy costings documents

Forecasting Scottish tax receipts

• From Budget 2012

• Relevant taxes

– Income tax– Stamp duty land tax– Landfill levy– Aggregates levy

• Not straightforward – e.g. is there a reliable relationship between Scottish income tax receipts and total UK receipts?

Quarterly growth in GDP

-0.5

0

0.5

1

1.5

2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2

Per ce

nt

UKUSEurozone

Public sector net borrowing in 2010-11

136.7

142.7142.1143.2

139.4141.1

130

140

150

March April May June July August

Month of ONS outturn estimate

£ bi

llion

s

March EFO forecast = £145.9bn

Cumulative public sector net borrowing

0

20

40

60

80

100

120

140

160

£ bi

llion

s

2010-11

2011-12

March EFO forecast = £122bn

Longer term prospects for public finances • Need to assess many factors with temporary or persistent

effects on revenue and spending streams

• But medium term growth prospects crucial

• Scope for sustainable growth depends on spare capacity and outlook for productive potential

• Pace of growth depends on demand – Bank of England sets monetary policy to hit inflation target, taking into account fiscal policy and other domestic factors, plus global environment

• Mixed data on spare capacity and questions about implications for potential of recent weak productivity growth

Conclusion

• Assessing economic and fiscal outlook never easy– Blue Book may further complicate matters

• No point assuming any particular economic forecast correct

• So use sensitivity and scenario analysis to assess implications for public finances and fiscal targets of different economic outcome

• Need to set out analysis clearly and transparently

• People may disagree with assumptions or conclusions, but analysis based on professional judgement and best available information