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Can we make a difference?

This lecture explores the role and impact of fiscal watchdogs in improving fiscal governance and accountability. It discusses the rationale for their establishment, the remit of the Office for Budget Responsibility (OBR) in an international context, and the importance of transparency and independence. The lecture also highlights the potential benefits of fiscal watchdogs in addressing deficit bias and pro-cyclicality in public finance management.

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Can we make a difference?

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  1. Can we make a difference? Robert Chote Chairman Ken Dixon Lecture University of York 13 June 2011

  2. Can we make a difference? “Some argue that we would have established greater credibility and legitimacy if we had gone further in institutional reform – by getting independent experts, if not to set the fiscal policy stance, at least to give a public view or to date the economic cycle. I am not sure myself, whether in practice such changes would have made any difference.” Ed Balls, Ken Dixon Lecture, 2004 Outline of the lecture: How and why have fiscal watchdogs become more numerous? The remit of the OBR in international context Demonstrating independence: governance and accountability Demonstrating independence: transparency Conclusion

  3. The spread of fiscal watchdogs • Countries with independent fiscal watchdogs • Longstanding: Netherlands, Denmark, US, Belgium • Recent: Sweden, Hungary, Canada, Slovenia, UK • Forthcoming: Ireland, Portugal, Slovakia • What qualifies? • “clear fiscal watchdog function” • “macroeconomic competence” • “high degree of independence from the political system”

  4. The rationale for fiscal watchdogs Democratic governments prone to ‘deficit bias’ and ‘pro-cyclicality’ in management of the public finances Possible sources of deficit bias Differential access to information Impatience Electoral competition ‘Common pool’ problems Use for macroeconomic management Exploiting future generations But does this require an official fiscal watchdog?

  5. The remit of the OBR “to examine and report on the sustainability of the public finances” (Budget Responsibility and National Audit Act) Four main tasks: Produce two five-year forecasts for economy and public finances Judge progress towards the government’s fiscal targets Scrutinise Treasury costing of tax and spending measures Assess long-term sustainability and public sector balance sheet Other supporting material: Briefing papers, discussion papers etc. Monthly commentary on Treasury/ONS public finance statistics

  6. Our remit in international perspective Advisory body rather than policymaking body Relatively narrow remit focused on fiscal analysis Macroeconomic forecasting Positive analysis rather than normative policy recommendations Focus on existing policy rather than policy options Official forecasts ‘contracted out’

  7. Rights and responsibilities Formally set out in: Budget Responsibility and National Audit Act Charter of Budget Responsibility Memorandum of Understanding with HMT, HMRC and DWP Important features: Right to information and assistance from within government Multi-year budget made public Accountable to TSC which has appointment/dismissal veto Need to be accountable to but independent from politicians Non-executives can help in this relationship

  8. Transparency Process: Substantive contacts with Chancellor and his office logged Forecast timetable published Treatment of post-deadline measures published Analysis: Diagnostics Simpler presentation of spending forecasts More variables and assumptions Additional information post-publication More methodological information Policy costings documents

  9. Conclusion We can make a difference All medium and long term projections need to be treated with caution because of huge uncertainties But ‘contracting out’ can increase public trust Forecasting not the only thing that is important Can broaden public debate on long term fiscal challenges Fiscal sustainability report a challenge and an opportunity

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