Ben Clift examines the role and position of the OBR in light of the March 2023 Spring Budget, highlighting its role in shaping the economic policy space.
The Office for Budget Responsibility (OBR), the UK’s independent fiscal watchdog, exemplifies the technocratic economic governance (expert oversight of and input into often rules-based economic policy) that has become pervasive in advanced democracies.
The OBR is supposedly a purely technical body, its independence attested to by a range of expert reviews. Nevertheless, despite the technocratic self-image, the OBR – whilst not partisan – is not wholly apolitical. In carrying out its remit, the body is deeply involved in the politics of UK economic policy. Technocratic fiscal oversight is, it turns out, a deeply political process.
The OBR provides evidenced-based evaluation of the government’s economic plans. Its March 2023 budget report revealed how ensuring the Chancellor’s adherence to UK fiscal rules entails extensive OBR discretion in judging elusive but consequential concepts such as potential growth rates.
Chancellor Jeremy Hunt claims his is a ‘budget for growth’, incentivising investment and work to provide a decisive rebuttal to ‘declinists’. The OBR, by contrast, is doubtful how far Britain’s long-standing growth problems are effectively addressed.
These assumptions about the UK’s growth prospects that are fed into the OBR’s fiscal assessment are highly politically salient. They affect the anticipated size of the economy, and with that the future tax take. Although these are apparently technical points, judgements by the OBR are hugely consequential for economic policy, profoundly shaping policy ‘space’.
Whilst the OBR’s assessment of short term economic prospects are a little improved compared to those it made in November 2022, it underlined how ‘persistent supply-side challenges’ such as sluggish productivity, stagnating business investment, and high inactivity levels amongst the workforce ‘continue to weigh on future growth prospects’ for the UK. In doing so, the OBR joins a chorus of analysts identifying significant structural weaknesses of the UK economy.
The budget report reiterates perennial concerns about three long-standing major structural growth problems:
- Firstly, maintaining the participation of an aging and ailing labour force. Already high levels of inactivity were compounded further by a dramatic collapse in participation since the pandemic.
- Secondly, business investment has ‘stagnated since 2016’, hampering UK economic performance and productivity. Crucial here have been the uncertainties ramped up by Brexit referendum. These adverse effects were subsequently compounded by the pandemic, higher energy prices, and higher interest rates.
- Thirdly, problems of weak UK productivity growth since the global financial crisis (GFC) has seriously dragged down UK economic performance. UK productivity per hour is notably weak by international comparative standards.
The measures in the Spring Budget do seek to address some of these deep-seated structural problems. The financial support for childcare, alongside new measures on disability support and pensions are designed to remove impediments to working. Higher migration is also good news for addressing skills gaps and labour shortages.
There are also temporary measures to incentivise business investment through tax breaks. The budget includes investment zones where the tax and regulatory environment will encourage investment and entrepreneurialism, especially in the realms of creative industries, life sciences, and technology.
However, in the OBR’s view, these measures are insufficient to offset the UK economy’s endemic labour participation, investment or productivity problems. Changes to capital allowances will not, the OBR anticipates, generate any additional investment, and therefore ‘will not alter the path of the capital stock or potential output in the long run’.
The OBR has raised its potential output assessment, partly due to budget measures to boost labour supply – but by a meagre 0.5% of GDP by end of the forecast. The modesty of this increase reveals considerable scepticism that the budget’s measures will be effective or consequential enough to make a material difference to the grim growth picture. The OBR underlines the ongoing ‘weak underlying momentum’ and ‘subdued medium-term growth prospects’, assuming medium-term potential growth will only be 1.75% of GDP.
The pre-global financial crisis path of UK healthy growth is, the OBR predicts, unlikely to be recovered. This is politically important because perceptions of the UK’s fiscal sustainability depend in part on the OBR’s evaluation of its growth trajectory.
One justification for technocratic institutions such as the OBR is that they strengthen links between economic policy-making and fact and evidence. The OBR sets a high priority on evidence-based assessment. Wishful-thinking governments and Chancellors tend to assume strong positive effects (e.g. on growth) of their policies.
The OBR, on the other hand, waits until there is evidence in the data of any mooted policy effects. It only incorporates policy effects into its projections if ‘there is clear empirical support for the effectiveness of a policy in raising or reducing potential output in the UK or similar countries’.
The ‘apolitical’ fiscal overseer’s reports often make evidence-based, critical interventions in the economic policy debate, shining a light where the Chancellor would sooner they did not.
In March 2023, for example, the OBR highlighted historically significant falls in ‘real living standards’, by ‘a cumulative 5.7% over the two financial years 2022-23 and 2023-24’. Whilst the scale of the drop is slightly lower than the OBR forecasted in November 2022, it will ‘still be the largest two-year fall since records began in 1956-57’.
Furthermore, these lower real living standards will be ongoing through the 5 year forecast period, such that ‘real living standards are still 0.4% lower than their pre-pandemic levels in 2027-28’.
The UK tax burden is set to reach a ‘a post-war high’ of 37.7 per cent of GDP by 2027-28, with public spending expected to ‘settle at 43.4 per cent [of GDP], its highest sustained level since the 1970s’.
The OBR’s narrative of the UK economy is a significant political intervention, especially when its downbeat assessment of growth prospects contrasts with the Chancellor’s optimism. Its scepticism about the Budget’s capacity to tackle endemic growth problems will limit future government policy possibilities.
The OBR is a significant political actor in UK economic policy, and its interpretation of the UK economy’s trajectory is inevitably a political process.
By Ben Clift, Professor of Political Economy, University of Warwick.