Chancellor Jeremy Hunt will be on center stage tomorrow when he delivers the autumn statement, but investors are likely to pay just as much attention to the Office for Budget Responsibility (OBR).
The independent fiscal watchdog rarely makes headlines but, in an increasingly uncertain economic environment, the OBR’s forecasts will receive more attention than ever.
But what does it actually do?
What is OBR?
The OBR was created in 2010 by George Osborne to provide an “independent and authoritative” analysis of the UK’s fiscal position.
For each ‘fiscal event’ – the Spring Budget and the Autumn Statement – the OBR produces a five-year forecast for the state of the economy and the public finances. The forecasts take into account the impact of tax and spending measures announced by the Chancellor.
In effect the fiscal watchdog marks the government’s homework by assessing whether Hunt’s plans meet the government’s self-imposed fiscal rules.
The main goal is to reduce the national debt as a percentage of GDP by the fifth year of the current forecast, but the rules also say that borrowing should also be below three percent of GDP in the same year.
The seal of approval from the OBR reassures markets that the government’s spending plans are credible.
What will happen this time?
The OBR’s forecasts are key to determining the extent to which the Chancellor can inject cash. In short, more headroom means more room for goodies.
In March, Hunt had capital of just £6.3 billion – the lowest of any chancellor since the creation of the OBR.
The situation has improved since then. The government has seen tax receipts rise in the face of inflation, fiscal pressures and growth have been stronger than expected.
Economists now think the Chancellor may have room for between £10bn and £25bn. The average since 2010 is around £25bn.
There have been rumors of cuts to inheritance and income tax, as well as an expansion of full capital investment spending, but experts have warned that Hunt should not get too excited by the extra headroom.
“Given the tightness of spending plans for public services, there is a clear risk that any net tax cuts announced on Wednesday will prove unsustainable,” said Isabelle Stockton, senior research economist at the Institute for Fiscal Studies.
How accurate are the forecasts?
The OBR’s forecasts depend on the government’s announced policy proposals.
Believe it or not, politicians aren’t always completely truthful about their spending plans. This impacts the OBR.
Last time the OBR forecast the government would increase fuel duty receipts by £4 billion in 2027-28 if it raises taxes in line with inflation, as is believed. But the watchdog noted that the policy was “rarely enforced.”
It says, “Cancelling these planned increases, as every chancellor has done since 2011… would, in itself, reduce the chancellor’s vacancy by more than half.”
Many have also suggested that the government’s spending plans are unrealistically tight.
In the spring budget the government essentially delayed spending cuts until the next election. But failure to step up spending plans in the coming years will result in steep spending cuts in real terms due to rising inflation.
The Resolution Foundation estimated that failing to increase spending on vulnerable departments would mean they would face spending cuts similar to the austerity measures of the early 2010s.