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