I recently submitted some written evidence (or at least some opinions!) to the Treasury Select Committee’s new inquiry reflecting on the Office for Budget Responsibility’s (OBR) first 15 years. In case of wider interest, I have pasted the text below (in the format requested by the Committee).
Written evidence to the Treasury Select Committee
Submitted by Julian Jessop, independent economist and Fellow at the Institute of Economic Affairs. The evidence is based on four decades of experience gained in the public sector, the City and consultancy, including stints at HM Treasury, HSBC, Standard Chartered Bank, and Capital Economics. I have also presented twice to the OBR on the economics of Brexit.
Record
- How accurately has the OBR (i) forecasted the fiscal and economic outlook of the UK and (ii) analysed the sustainability of the public finances?
Many people believe that the OBR’s forecasting record is poor, but this assessment is largely unjustified.
There was a good example of this recently when the OBR was ranked joint last in the league table of economic forecasts for 2025 compiled by David Smith for the Sunday Times. This fuelled another outburst of OBR bashing on social media.
However, the OBR’s main job is to assess the sustainability of the public finances and the performance against the Government’s fiscal targets, which are medium- to longer-term judgements, rather than to make short-term economic forecasts.
Indeed, the OBR is at several disadvantages here: it only publishes forecasts twice a year, it has to take government spending plans at face value, it has to assume that inflation returns to target, and some of its most sensitive assumptions (notably about interest rates) have to be based on what is priced in by the markets.
It is also important to understand that forecasting the public finances is inherently difficult, especially when it comes to the estimates for government borrowing (which is the relatively small difference between two very large numbers).
More importantly, the track record of the OBR’s medium- to longer-term forecasts is fairly good, or at least not significantly worse than its peers. (This track record is set out in the regular reviews published on the OBR website.)
The OBR has tended to be too optimistic on growth and on the public finances, but this mostly reflects over-optimist assumptions about productivity which have now been corrected downwards (as well as successive governments’ tendency to over-spend).
The OBR can still be criticised for being too slow to revise these assumptions. Ironically, though, there have recently been signs that productivity is now picking up more quickly than most had expected.
The forecasting record of the Bank of England provides a useful benchmark. Bank staff have tended to be too pessimistic on growth and too optimistic on inflation which, given that the MPC actually makes policy, has had a more direct impact on decision making.
The well-documented problems at the ONS have made economic forecasting trickier, but the new management there is now doing a good job of resolving these issues.
- How competently has the OBR communicated its forecasts and analysis?
Generally, very well. The briefings around fiscal events are admirably clear and the OBR website is a valuable resource. The OBR also deserves credit for its willingness to engage with outside experts and hear a wide range of views.
There have still been some missteps. For example, the OBR has not always been explicit that its Brexit analysis is mostly based on the results of external studies, rather than independent work undertaken “in house”. This has resulted in the OBR’s assumption of a 4% long-term hit to productivity being given more weight than it deserves.
- Has the OBR improved discussion, analysis and policymaking concerning UK productivity and the long-term sustainability of the public finances?
A split verdict here. The OBR’s persistent over-optimism about productivity has been a major error. However, the OBR has also consistently flagged productivity as a source of major risks to the sustainability of the public finances and published different scenarios (notably for the ratio of debt to GDP) to illustrate these risks.
The OBR has done a good job too in analysing other longer-term risks, including the trends in welfare spending. For example, it has persistently raised concerns about the cost of the “triple-lock” on the state pension.
- Has the OBR improved the forecasting processes previously carried out by HM Treasury, especially with reference to bias and transparency?
The OBR has undoubtedly improved the transparency of forecasting and eased any concerns about political bias. It is telling here that both Conservative and Labour ministers have now complained about the watchdog’s bark. The OBR’s thankless task is to tell politicians what they do not want to hear.
The OBR also provides independent scrutiny of tax and welfare policy costings, which is a definite improvement on what went before.
Nonetheless, there are two important caveats.
First, it is not obvious that the current system is delivering better outcomes (despite producing much more detailed forecasts and analysis than I remember at my time at the Treasury in the early 1990s).
Public debt has still increased sharply since the OBR was established in 2010, the UK government’s cost of borrowing is relatively high, the fiscal rules are constantly being broken and rewritten, and difficult decisions keep being put off.
To be clear, this is almost entirely the fault of politicians. Shocks like Covid and the energy crisis have not helped either. But it is hard to identify any tangible gains from having an independent OBR.
It could still be argued that the public finances would be in an even worse state without the constraint of the OBR. The relatively high level of gilt yields can largely be explained by factors unrelated to fiscal policy, notably the relatively high level of official interest rates. The UK is much less of an outlier on measures of sovereign credit risk.
The second caveat is that the OBR may have introduced a new bias in the form of excessive caution in scoring the potential benefits of policy measures.
There is a widespread misconception that Treasury and OBR analysis is purely static and does not take account of ‘dynamic’ or ‘behavioural effects’, especially of tax changes. This is simply not true.
Indeed, the OBR provided a long list of examples of “Dynamic scoring of policy measures in OBR forecasts” in a paper published in 2023, including changes in corporation tax and income tax. More recently, OBR analysis has explicitly included the adverse effects of the increases in employers NI on jobs and real pay and provided detailed assessments of the increases in capital taxes.
However, the burden of proof on the positive impacts of other measures may be too high. Arguably, elected politicians should have more latitude to make judgment calls about, say, the supply-side benefits of tax cuts, or of increases in infrastructure investment.
This may be a particular problem when a number of smallish policy changes are all pointing in the same direction (such as the combined effect of additional taxes on wealth creation), or in areas where the costs and benefits may be inherently difficult to observe (such as the dynamic effects of new trade deals).
- Has the OBR performed its duty objectively, transparently and impartially, especially with reference to its relationship with HM Treasury?
Some people also believe that the OBR is not sufficiently independent from the Treasury, but again I think this assessment is largely unjustified.
Indeed, there are several recent examples where the OBR has been willing to speak out strongly, including Richard Hughes’ public criticisms of the lack of detail in longer-term spending plans, and the push back against misleading Treasury briefings in the run up to last November’s Budget.
There is still a perception that there is a “revolving door” between the Treasury and the OBR (a concern sometimes also raised over appointments to the Bank’s MPC). However, it would be hard to find many senior people with relevant experience who have not also spent some time at the Treasury.
A more general concern raised by some is that the economic philosophy of the OBR is too similar to the “Treasury Orthodoxy”, which can be summarised as follows:
- that markets generally work
- that free trade is good
- that spending must be controlled
- that taxes can only be raised so far
- that fiscal policies should focus on improving the supply-side of the economy rather than managing demand
- that sound money and low inflation are important
- that credible rules and institutions are important
However, these principles can be seen as “necessary” conditions for delivering strong and sustained economic growth. For example, free-market oriented tax and welfare reforms can both save money and improve incentives. Less positively, deviations from these principles can soon backfire – as demonstrated in September 2022.
Moreover, Treasury Orthodoxy has evolved over time. For example, in the late 1980s and early 1990s there was a strong belief in the benefits of managed exchange rates as a means to control inflation. This has long been replaced with a policy of benign neglect towards the pound and increased faith in central bank independence instead.
More recently, the Treasury swung behind Rishi Sunak’s expensive interventions during the pandemic, such as the ‘job retention scheme’, and did at least attempt to implement the September 2022 mini-Budget and ‘Growth Plan’.
The Treasury has also backed – or at least failed to stop – plenty of policies that appear to run directly against the Orthodoxy, such as the large increases in minimum wages and various subsidies to first-time homebuyers. The OBR has not stood in the way of these policies either.
Nor do I believe that the current system is fundamentally undemocratic. The OBR only has as much power as politicians grant it. The fiscal targets are still set by the Chancellor, and it is still the Chancellor who makes the final decisions on the measures in the Budget.
Future
- What changes, if any, are needed to improve: the accuracy of the OBR’s forecasts and analysis; the quality of the OBR’s communications; and the effectiveness of the OBR’s processes and methodology, including its costs and resources?
- What changes, if any, should be made to the role and remit of the OBR and its relationship with HM Treasury?
I do not believe there are major problems at the OBR itself. The cost and resources are not out of line with a medium-sized economics consultancy, and the OBR has proved adept in drawing on external expertise as required.
Instead, the bigger problem is how we have allowed so much to depend on a single set of five-year forecasts. There have been several occasions when only small changes in the OBR’s numbers have forced a poor policy response. The OBR can also have an effective veto on decisions when politicians are unable to provide enough evidence about the longer-term benefits.
There are three potential ways forward. One reasonable approach would be to focus on improving the rules, rather than blaming the referee.
The Government’s main fiscal rule is that the current budget must be in surplus in 2029-30. There are two supplementary rules: to ensure debt, defined as public sector net financial liabilities (PSNFL), is falling as a share of the economy by 2029-30; and to cap spending on welfare within a limit set by the Treasury.
These rules have a decent economic logic. The main budget rule should ensure that the cost of current spending is borne by current taxpayers, rather than passed on to future generations. The debt rule should prevent the overall burden of debt, including borrowing for investment, from spiralling out of control.
But these rules are still unsatisfactory. For a start, they rely on five-year forecasts which even the OBR stresses are highly uncertain. (This problem will only partly be eased once 2029-30 becomes the third year of the forecast period and both the current budget and the debt targets will have to be met from the third year.)
More fundamentally, the main budget rule still allows the Government to spend as much as it likes, as long as day-to-day spending is expected to be covered by tax revenues. Binding limits on expenditure (not just on welfare) would be a more effective way to limit the size of the state.
The debt rule is also weak, because it only requires debt to be falling in one year in the future regardless of what happens in the meantime – or afterwards. An explicit ceiling on the level of debt would be more effective here.
These sorts of changes would not require any major changes at the OBR. However, there are a few small tweaks that could ease some of the other problems.
The Chancellor has already taken one sensible step. The OBR will now only assess performance against the fiscal rules once a year, at the time of the Autumn Budget. It will still produce two sets of forecasts and others will still be able to work out whether the public finances are on track, but this will at least reduce the formal pressure for more frequent policy changes. The Chancellor’s decision to increase the “fiscal headroom” is also helpful here.
There are other ways in which more flexibility could be built into both the fiscal rules and the OBR’s assessment of them. For example, the OBR could do more scenario analysis, including a scenario based on the views and judgements of the Chancellor.
The OBR should also be given more freedom to model alternative policy scenarios, such as alternatives to the “triple-lock” on the state pension and be allowed to express a view on which option might be best.
A second approach could make some more major reforms of the institutions themselves. Some economists have proposed new bodies that might replace or supplement the OBR, including some form of Fiscal Policy Committee (FPC) or a Budget Office reporting to Parliament.
An FPC could mirror the Bank of England’s Monetary Policy Committee (MPC), but with an advisory rather than decision-making role.
However, much as I love the idea of more jobs for economists, setting up extra layers of bureaucracy is rarely a good solution to any problem.
The third approach is the nuclear option. The Government could simply junk the OBR and bring all forecasting and analysis back within the Treasury. New Zealand manages to muddle along like this.
This option no longer seems inconceivable. The current framework means that the OBR risks becoming like football’s VAR – overly meticulous and ruining the spirit of the game. There is an obvious danger in elevating any one organisation far above any other.
Crucially, even without the OBR, policy decisions would still be subject to the discipline of the markets and of the ballot box, and to the independent scrutiny of think tanks, international organisations, parliamentary committees, and the media.
I would of course be happy to discuss further or expand on any of these points.
Julian Jessop
30th January 2026
Plain-speaking Economics 