Make the OBR boring again
The OBR should be independent, trusted and uncontroversial – so it needs a rules-based framework in which to operate, otherwise it will continue to come under attack, says
David Aikman
The Office for Budget Responsibility (OBR) is preparing to cut its estimate of trend productivity growth. On the face of it, this seems sensible. Productivity has flatlined since the financial crisis and the OBR has been repeatedly – and somewhat heroically – optimistic about a recovery that never came. This would not be the first such downgrade: a major reassessment came in 2017, after Brexit, when It lowered the long-term productivity growth assumption by half a percentage point.
But this revision raises a familiar institutional problem. Trend growth is the single most important assumption in the OBR’s forecasts. It drives projections for tax revenues, welfare costs and ultimately the deficit and debt ratios. The IFS’ recent Green Budget estimated that each 0.1 percentage point reduction in annual trend growth increases borrowing by roughly £7bn by the end of the parliament. When such a powerful lever rests on expert judgement rather than an agreed method, even a defensible decision risks looking political.
That criticism would be unfair. The OBR’s track record is no worse than that of the Bank of England, IMF or OECD – all have been serially surprised by Britain’s lost productivity decade. But the OBR has tended to sit towards the top of the pack. It currently assumes that over the medium-term, productivity grows at 1.25 per cent; combined with labour supply growth, that implies medium-term GDP growth of roughly 1.8 per cent – higher than many others. If it now moves closer to the consensus, it will be right on the economics but vulnerable on the optics. Why change now? On what new evidence? These are difficult questions to answer when the process itself is discretionary.
Finger in the air
Like other institutions, the OBR estimates potential output through a production function approach, decomposing growth into labour, capital and total factor productivity. It adjusts for demographics, labour participation and investment, then layers on a judgement about future potential, informed by past averages and international comparisons. But as OBR committee member David Miles put it, much of this remains “a finger-in-the-air exercise”.
Judgement will always matter – it brings in expert knowledge on issues like post-pandemic supply shifts or advances in AI. But the more judgment dominates, the more exposed the OBR becomes to accusations of bias, especially when revisions affect fiscal space at sensitive political moments. To preserve its independence, the big calls should rely less on discretion and more on rules. Two approaches could achieve that.
First, adopt a backward-looking, data-driven rule for estimating trend productivity – and publish the method. This could take the form of a moving average over the past five to seven years, adjusted for the economic cycle and capital utilisation. The precise filter matters less than the principle: revisions should follow a method outsiders can replicate and predict. Such a rule would update automatically as new data arrive, avoiding large discretionary shifts.
Second, anchor the OBR’s structural assumption about trend growth to the median of external forecasts from established institutions. The logic here is the “wisdom of crowds”. Estimates of trend growth vary widely between the Bank, IMF, OECD, academic studies and market participants. In that world of radical uncertainty, the most defensible position for the OBR is to sit at the centre of the consensus. Using the median – not the mean – avoids outliers and speculative optimism. Implementing this would be straightforward: the OBR could collect the data itself or piggy-back on HM Treasury’s existing monthly survey of independent forecasters.
On balance, I favour the second approach. It would provide a simpler benchmark and will adjust more readily to structural breaks such as the pandemic, which would otherwise leave a mechanical backward-looking filter stuck in the past.
This would not mean doing away with the OBR or the judgement of its staff. Their role would still be to assess policy interventions and the effects of shocks, and map how those developments affect key fiscal metrics. But those judgements would be anchored to an externally visible benchmark, making them more transparent and more robust to political criticism. This would lower the temperature of debates over whether the OBR is “helping” or “hindering” this or that Chancellor.
The OBR was created to instil trust in fiscal projections. Its credibility rests not just on the integrity of its staff but on the transparency of its methods. If its most consequential assumptions are determined by opaque judgement, that credibility could erode. We need an OBR that is boring, trusted and uncontroversial. The best way to secure that is by giving it a more rule-based framework in which to operate.