Reforms and Role of the Office for Budget Responsibility in UK Economic Forecasting
The Office for Budget Responsibility (OBR) plays a critical role in forecasting the economy and public finances in the UK, publishing forecasts twice a year alongside the Budget and Spring Statement. Established in 2010 by the coalition government and placed on a statutory footing in 2011, the OBR assesses the cost of government policies and helps ensure credibility and discipline in fiscal policy.
In 2024, Labour passed new legislation enhancing the OBR's powers, allowing it to initiate forecasts without government requests, question departmental spending, and access Treasury data. This reform was partly a response to the 2022 mini-Budget. Additionally, Labour strengthened the OBR by giving the Chancellor influence over the Budget Responsibility Committee members while clarifying that the OBR’s role is to forecast the economy rather than comment on policy.
The OBR’s independence is linked to market credibility, with support from international bodies like the IMF, which advises maintaining higher fiscal headroom to prevent a spiraling tax-rise speculation. Bank of England Governor Andrew Bailey also supported the OBR's independence during the 2022 economic crisis.
In October before the Budget, the OBR downgraded productivity forecasts by 0.3 percentage points. The Institute for Fiscal Studies (IFS) estimates that each 0.1 percentage point downgrade corresponds to approximately £7 billion in higher borrowing by 2029-30, implying a £21 billion impact from this downgrade alone.
A notable reform introduced from this Budget onwards is that the OBR will calculate the fiscal headroom only once a year, rather than multiple times. This change aims to reduce the frequency of Treasury-OBR negotiations and lessen the tax-rise speculation in the markets.
The OBR has historically been part of debates balancing the Treasury’s power and economic forecasting, receiving criticisms from figures like Liz Truss and involving discussions under the Johnson-Sunak administration. Critics argue the OBR is an unelected and powerful body that might constrain government ambition, while supporters see it as essential for ensuring fiscal credibility and restraint.
