SMF calls for a new fiscal framework under which forecasting of tax revenue and expenditure is made independent of HM Treasury - 7/12/09
Forecasting Independence: taking the politics out of fiscal projections
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The Social Market Foundation has today called for an independent body separate from the Treasury to undertake official fiscal projections on which government expenditure decisions are based. In the report "Forecasting Independence: taking the politics out of fiscal projections" the think tank argues that separation of fiscal policymaking and projection-making will boost the perception of credibility and independence for fiscal projections, and eliminate any scope for governments to run unsustainable fiscal policy by erring on the side of over-optimistic forecasts.
The UK has one of the worst structural budget deficits in the developed world, and the next government, regardless of party political complexion, will have to slash public spending. Many commentators have argued that unrealistic and optimistic projections of the sustainable level of economic growth and tax receipts over the last decade left the UK poorly placed to weather the recent economic storm and have contributed to the current crisis of public spending. This has focused debate on how fiscal policy is made, and how it is that the UK public finances are in such a mess.
The think tank points out that there is precedent for institutionalising analytical independence. In 2006 the government took away from departments the responsibility for producing key statistical information, and gave it to the independent Office for National Statistics (ONS). This radical change removed the temptation and opportunity for departments and ministers to manipulate statistics to make their policies look better. However one function that wasn't handed to ONS was the forecasting of tax revenue and expenditure. This remains with the Treasury and HMRC.
The Conservative Party has said that if elected it will create an Office for Budget Responsibility, a statutory body that will have an official duty to scrutinise Treasury public spending and revenue projections, with the power to issue an official sanction. However, the Social Market Foundation argues that this remit does not give it the opportunity to challenge ministers who announce a change of policy was necessitated by changed circumstances. It could therefore be easily out-flanked by ministers who cloak their spending decisions in arguments about the national interest.
Commenting, one of the authors, James Lloyd, Senior Research Fellow, said:
"Neither the old fiscal rules, nor the Conservatives' proposals for an Office for Budgetary responsibility will prevent a recurrence of the recent failure in the fiscal framework. And those who argue that bond vigilantes and voters can police prudent and sustainable public finances misunderstand the problem. It's time the fiscal projections were out-sourced to a statutorily independent Office for Fiscal Analysis, protected by the national statistics code.
"Such a move would also make it possible for opposition political parties to commission their own alternative projections of public spending, improving the quality of public debate."