Independence is crucial

There are longstanding examples in the United States and Netherlands, but fiscal councils have recently been established in Canada, Sweden and Hungary.

Their growing popularity reflects a belief that fiscal rules, of the kind imposed in the Euro area and by Gordon Brown, have been ineffective in stemming the trend rise in government debt.

Organisation for Economic Co-operation and Development (OECD) area government debt roughly doubled in the 30 years before the recent recession, for no justifiable economic reason.

A key to the effectiveness of fiscal councils is their independence from government.

Yet, when David Cameron appeared to claim in parliament that figures, conveniently just released by the OBR, showed that the measures announced in the Budget would not reduce public employment, the independence of the OBR was called into question.

Alistair Darling, shadow and previous Chancellor, is quoted as saying: “Right from the start the Tories used the OBR not just as part of the government but as part of the Conservative Party. They have succeeded in strangling what could have been a good idea at its birth.”

Whatever the details of this particular episode, they reveal a basic problem with the OBR.

In most countries fiscal councils are public watchdogs who comment on the forecasts and fiscal plans of government.

In the UK the OBR goes further, and actually replaces an activity previously done by the Treasury: producing the pre- and post-Budget forecasts.

To do this it has to work closely with Treasury officials. As a result, people are bound to ask whether the OBR is really independent of government. Lars Calmfors, director of the Swedish fiscal council, said that “the OBR cannot be both an independent watchdog and an in-house provider of input into the Treasury's work.”

My own view is less pessimistic. I think the current structure could be made to work, but only if particular care is taken to ensure independence. This involves five areas: n Active transparency The perception of the OBR’s independence has to be actively managed.

So when anyone, and especially the Prime Minister, uses OBR figures in a potentially misleading way then the OBR needs to quickly and publicly say so. Such intervention will be seen as a political act, one that a civil servant would never contemplate, but silence is also a political act that compromises independence, as we saw clearly in the recent episode described above.

n Financial security If the budget of the OBR was constantly at the mercy of the Treasury, it would be reasonable to conclude that it might not want to upset its paymaster. Independence requires secure funding for a reasonable length of time.

n Political plurality Among fiscal councils, the Central Planning Bureau (CPB) in the Netherlands has some similarities with the OBR in providing official forecasts. However the CPB also offers to cost the budget proposals of opposition parties before an election. The OBR should also do this. It would not only improve the level of the public debate, but it would open a dialogue with the opposition.

n Professional accountability At present the OBR has a Budget Responsibility Committee, but this just consists of the three senior members of the OBR. The independence of the OBR would be enhanced if this committee also had non-executive members: people with expertise and experience in forecasting and policy who could periodically advise the executive.

This addition would help ensure the OBR's product met the highest international standards, and would complement the political accountability that reporting to the Treasury Select Committee can provide.

n Analytical authority The Dutch Central Planning Bureau's website states: “In the end, our independence is guaranteed best by the scientific quality of the work we accomplish.”

One of the dangers of the OBR providing the short-term budget forecasts is that forecasts are always wrong, and half of them will typically be wrong in a direction that could be seen as helpful to the Government. It is therefore important the OBR also provides information which is both less vulnerable to critique and otherwise absent from the public domain.

The obvious area here is analysis of long-term sustainability. While the OBR does have this in its remit, it is important that it has the resources to do it well.

A good model is the long-term budget outlook produced by the Congressional Budget Office in the United States. Not only does this present projections up to 2080, but it also looks at the arithmetic of alternative paths of deficit reduction, and the longer term damage to the capital stock that could result from high government debt.

Rising government debt over the long term not only redistributes income away from future generations, but as we have recently seen, it seriously compromises the ability of governments to counteract severe negative economic shocks.

That is why it is crucial to get the details of the OBR right, so it becomes an independent and effective public watchdog.

o This feature first appeared on the website www.publicservice.co.uk