Arrangements for fiscal policymaking ultimately come down to a set of choices around: who should take fiscal decisions and how? Who should carry out the projections of revenue and spending on which those decisions are based? In the UK, fiscal policymaking has traditionally been highly centralised and discretionary, with all fiscal projections and decisions emanating from HM Treasury. The self-imposed fiscal rules of the 1997 Labour government represented an important experiment in the evolution of fiscal policy institutions. The rules sought to articulate formal standards by which fiscal policymaking could be judged thereby increasing political accountability, even if the rules themselves amounted to nothing more than statements of intent. However, the fiscal crisis that confronted the UK in 2009 showed that even if the government's fiscal framework was an improvement on what went before, it clearly wasn't good enough.
The experiences of the past decade, both in fiscal policy and other areas of government, have demonstrated the power of institutional arrangements to improve public policymaking. This has been achieved by separating different functions according to the need for analytical independence, political accountability. Good examples of this include the granting of operational independence to the Bank of England, the establishment of an independent UK Statistics Authority and the setting up of an independent Low Pay Commission to advise on the level of the minimum wage. By learning the lessons from these experiences, the UK has the tools to improve fiscal policymaking for the future.
This paper argues that the most appropriate reform to the institutions of fiscal policymaking would be the creation of an independent Office for Fiscal Analysis (OFA), separated from fiscal decision-makers in government, that would undertake all official fiscal projections. The OFA's independence, which would reflect the independence of the UK Statistics Authority, would ensure that it was entirely free from the risk or perception of organisational bias. Its modelling assumptions and inputs would, as far as possible, be open to public scrutiny and its outputs would be freely available to external bodies, in particular, the opposition parties. These reforms would increase the accountability of government both from the perspective of the markets and the electorate, thus lowering the cost of borrowing and ensuring the pursuit of sustainable fiscal policy in the medium-term.
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