Budget Responsibility Act comes in to law

The Bill was debated in the House of Lords on Monday 9 September, where it was approved and granted Royal Assent the following day.

The Financial Secretary to the Treasury, Lord Livermore, said sustained growth is the government’s “central economic mission” and the Bill “brings transparency and independent scrutiny into law” by ensuring that every fiscal event which makes significant changes to taxation or spending will require an independent report from the OBR.

The OBR will also be able to decide to produce a report if it judges the measures in a fiscal event to be “fiscally significant”, which will be measured by exceeding a cumulative 1% of GDP. However, these rules will not be enforced for “emergency” legislation, such as that implemented during the pandemic.

“The changes introduced in this Bill are an important step in bringing much-needed stability to our economy,” the FST said. “By empowering the OBR and ensuring that an independent report will accompany all fiscally significant announcements, it will improve transparency and accountability.”

Lord Altrincham (Conservative) said public sector debt to GDP has risen from 74% in 2012 to 98% now. “This kind of budget responsibility is becoming almost unaffordable to the public exchequer, and things will have to change,” he added.

He criticised the OBR, which he said “underestimates population” and said “very significant fiscal risks” are “inherent” in forecasts.

Lord Eatwell (Labour) also questioned the accuracy of OBR forecasts when they are based on government estimates of future spending, which can be “fiddled”, and the OBR’s own charter commitments, none of which he said “makes sound economic sense”.

Baroness Noakes (Conservative) agreed that the OBR is “not particularly good at forecasting” and questioned its “weak” accountability.

Lord Frost (Conservative) said the Bill “does not actually stop the Government doing anything; it only requires the OBR to write a report if they do so”, and repeated claims by the Institute for Fiscal Studies that it is “largely performative”.

However, Viscount Chandos (Labour) pointed out that the IFS added: “It nonetheless serves as a welcome commitment to fiscal transparency”.

“The Bill increases fiscal transparency, rather than delegating decision-making to an unelected body,” he said.

Lord Bilimoria (CB) said the Bill gives the OBR “the most power it has ever had” since it was set up in 2010.

But Lord Sikka (Labour) questioned why the OBR would not be permitted to publish forecasts “at its own volition”. “The OBR’s reports are promoted as apolitical, but that does not mean that it is free from institutional biases,” he said.

Viscount Trenchard (Conservative) added: “The effect of this Bill is to transfer power away from the democratically elected Government and the Chancellor of the Exchequer to an independent body. There are too many quangos and they have too much power.”

Baroness Vere of Norbiton (Conservative) criticised the Bill, saying it “sets a rather high and woolly trigger threshold for a tax and spending change”. She also spoke of her disappointment that an amendment to include changes to fiscal rules was not in the scope of the Bill.

“If large ad hoc tax and spending changes are to be subject to OBR analysis, surely ad hoc changes to the fiscal rules should also apply,” she said. “The Bill… can be described only as a disappointment.”

Lord Macpherson of Earl’s Court (CB), a former Treasury permanent secretary, said the OBR has “transformed macroeconomic policy-making in the UK” since its creation, with economic forecasting a “thankless task”. “In an ideal world, forecasts would not be necessary,” he added. “However, Governments have to plan public spending and the taxes necessary to pay for it.”

“Allowing the OBR to publish, in effect, corrected spending plans will improve decision-making, even if it makes life more difficult for the Chancellor in the run-up to an election.”

Lord Macpherson also questioned whether the threshold of 1% for determining what constitutes a “fiscally significant event” is “a little on the high side”, but he appreciated “the problem in setting it too low and triggering an endless round of forecasts”.

Baroness Wheatcroft (CB) said while she supports the Bill as a “minor improvement”, “the time has come for a much more radical rethink of government accounting”.

“A change to a more sensible fiscal framework would make for much healthier, better management of public finances, and it would contribute to the growth that we absolutely need.”

Lord Liddle (Labour) said he “strongly supports” the Bill, despite concerns it “does not go far enough”.

He added there is a “big structural deficit” in public finances and “tax will have to be part of the solution to this”, though not by “simply taxing the top 1%”.

Baroness Kramer (Liberal Democrat) said: “It seems important that the OBR’s view does not dictate what policy or decisions will be.”

“Any politician or Chancellor with some backbone can accept or reject the conclusions that will come from the OBR, but presumably they will then have to explain in some detail why, and that process of challenge is crucially important.”

Baroness Bennett of Manor Castle (GP) called for a focus on climate change and reaching net zero, saying that the OBR itself has warned of “delayed transition to net zero raising … fiscal cost”.

“As our own independent Climate Change Committee has been making clear, if we invest now, we save ourselves very significant costs and risks in future,” she added.

Baroness Lawlor (Conservative) asked whether the financial impact of both legal and illegal migration will be taken into account by OBR forecasts.

Responding, the FST said a “revised” OBR charter will be published in the future, while also reiterating that the Bill gives the OBR the power to decide independently to produce a report. He added that the powers provided to the OBR by the Bill will “prevent the sidelining” of the body during fiscal events.

“This Bill ultimately is about transparency and scrutiny,” he added. “It does not give the OBR policy-making powers. We have seen what happens when the OBR is sidelined—higher interest rates and mortgage misery for millions.”

On concerns around the accuracy of OBR forecasting, the FST said the International Monetary Fund has called the OBR’s analysis “best-practice”, while the Organisation for Economic Co-operation and Development (OECD) said it is a “model independent fiscal institution”.

“The OBR’s forecasts for GDP and the public finances have typically been more accurate than the previous forecasts made by the Treasury,” he said.

The FST concluded: “This Bill is an important step as we fix the foundations of our economy, rebuild Britain and make every part of our country better off.”

The Bill was read a second and third time and passed, receiving Royal Assent on Tuesday 10 September.

Read the Hansard entry in full.