Advising on the design, development and implementation of the UK Office for Budgetary Responsibility
Submitting InstitutionUniversity of Oxford
Unit of AssessmentEconomics and Econometrics
Summary Impact TypeEconomic
Research Subject Area(s)
Economics: Economic Theory, Applied Economics, Econometrics
Summary of the impact
In 2010, the new Conservative government established the Office for
Budgetary Responsibility (OBR) to provide independent and authoritative
analysis of the UK's public finances. The economic case for an independent
body to monitor fiscal policy was based on research by Professor Simon
Wren-Lewis and his co-authors into fiscal policy rules and optimal debt
policy. This research has provided important inputs to policymakers'
thinking about fiscal councils, both in the UK and overseas. Work by
Professor Wren-Lewis has strongly influenced and shaped the design and
subsequent development of the UK's Office for Budgetary Responsibility.
Professor Wren-Lewis' research on the interaction between fiscal and
monetary policy, fiscal policy rules, and optimal debt policy, dates back
to 2000 Since joining Oxford University in January 2007 as Professor of
Economics and Fellow of Merton College, Wren-Lewis has greatly extended
this work and undertaken fundamental research on the role of independent
fiscal monitoring bodies and the structure of such bodies.
Wren-Lewis's work on fiscal councils is underpinned by research
undertaken with his co-authors Kirsanova (Glasgow) and Leith (Glasgow) on
monetary and fiscal policy interaction and optimal debt policy. This
earlier research analyses the causes of deficit bias and demonstrates why
fiscal rules on their own may not be sufficient to combat deficit bias [R2].
Subsequent work extends and deepens this analysis to consider
countercyclical fiscal policy and optimal debt dynamics, both inside and
outside a monetary union [R3, R4, R5]. This research shows why the
application of fiscal rules on their own, are unlikely to be successful in
controlling government debt. Simple rules are seriously sub-optimal, while
better but more complex rules are much easier to fudge.
Building on this, Wren-Lewis' research then goes on to establish the case
for an independent fiscal monitoring body as a useful complement to fiscal
rules, by publically warning when those rules are being circumvented, and
also by sanctioning occasions when it makes sense to break those rules. An
independent fiscal council to monitor public finances was first proposed
specifically, in 2007, by Kirsanova, Leith and Wren-Lewis [R2]. In
subsequent work, Wren-Lewis focused on the structure and role of fiscal
councils. Some commentators have drawn parallels between the role of
fiscal councils and that of independent central banks. Wren-Lewis
demonstrates that simple analogies between inflation bias and deficit bias
can be misleading and offers two arguments for the form of delegation to
differ between monetary and fiscal policy [R6]. The first is that
informational problems play a much greater role in explaining deficit bias
than is the case for inflation bias, in which case an independent advisory
body may be sufficient to correct the problem. The second is that there
was much less consensus about the objectives of long term debt policy
compared to monetary policy. In 2011, this led to a comprehensive survey
and analysis of existing fiscal councils; an examination of the role
fiscal councils should take with respect to forecasting, policy analysis
and debt objectives; and a consideration of to what extent the
characteristics of the institutions can be related to the potential causes
of deficit bias, and what relationship they have to fiscal rules [R1].
References to the research
R1] Calmfors, L and Wren-Lewis, S (2011), "What Should Fiscal
Councils Do?", Economic Policy, 26, pp 649-695.
R2] Kirsanova, T, Leith, C and Wren-Lewis, S (2007), "Optimal Debt
Policy, and an Institutional Proposal to help in its Implementation", European
Economy Economic Papers No 275, pp.269-296 April.
R3] **Kirsanova, T, Leith, C, Wren-Lewis, S (2009), "Monetary and
Fiscal Policy Interaction: The Current Consensus Assignment in the Light
of Recent Developments", Economic Journal, 119 482-496
R4] **Kirsanova, T and Wren-Lewis, S (2012), "Optimal Fiscal
Feedback on Debt in an Economy with Nominal Rigidities", Economic
Journal, 122, , 559, pp 238-
R5] **Leith, C and Wren-Lewis, S (2011), "Discretionary Policy in
a Monetary Union with Sovereign Debt", European Economic Review,
55,1, pp 93-117
R6] Wren-Lewis, S (2013), "Comparing the Delegation of Monetary
and Fiscal Policy". In George Kopits (ed), Restoring Public Debt
Sustainability: The Role of Independent Fiscal Institutions, Oxford
University Press, Oxford. (Previously published as Oxford University
Department of Economics Discussion paper 540, March 2011)
Economic Journal is a leading general-interest journal and the
UK's top economics journal. It was rated as "4*" by the ESRC-RES review of
UK Economics and is classed as "AA" in the Combes- Linnemer (2010)
Economic Policy is a policy orientated journal focusing on current
and emerging policy topics and subjecting them to an analysis that is both
rigorous and accessibly presented. It is classed as `B' in the
Combes-Linnemer (2010) ranking,
European Economic Review is a leading general-interest journal and
is classed as "AA" in the Combes-Linnemer (2010) ranking.
** denotes publication returned as part of REF 2014
• Oct 2005-Sept 2008: ESRC Research Grant - World Economy and Finance
Programme. "Reinstating Fiscal Policy as a Stabilisation Device" (PI:
Leith; Co-I: Wren-Lewis), £147K.
• Nov 2008-Oct 2011: ESRC Research Grant: "New directions in monetary and
fiscal policy analysis at the macroeconomic level", (PI: Leith; Co-I:
Outputs from these grants have been rated as 'outstanding' by all
referees for the ESRC.
Details of the impact
In June 2008, Professor Wren Lewis presented research on optimal fiscal
policy and fiscal rules at a research workshop organised by the Centre for
Economic Policy Research, which was attended by members of George
Osborne's private office [section 5: C1]. In September 2008, a
Conservative Party economic policy document "Reconstruction - Plan for a
Strong Economy" proposed the establishment of the Office for Budget
Responsibility (OBR), citing Kirsanova, Leith and Wren-Lewis (2007) [R2]
and drawing directly from their proposals for a fiscal council to combat
`deficit bias' [C2]. Subsequently, Wren-Lewis and his co-authors
presented their research to the Cabinet Office and the Treasury and had
informal discussions with members of George Osborne's private office. When
the Conservative party came to power in May 2010, the OBR was established
on an interim basis as a non-statutory body, and in March 2011, the OBR
became a statutory body.
In July 2010, Wren-Lewis was called as an expert witness to give oral
evidence before the Treasury Select Committee for the formation of the OBR
on a statutory basis. Wren-Lewis' earlier research and proposal for a
fiscal council was noted in the minutes [C3, Formal Minutes, q84].
Drawing on his research on the role and structure of fiscal councils [R1]),
Professor Wren Lewis argued in his evidence to the Select Committee that
the board of the proposed OBR should include independent non-executive
members as well as executive members [C3, Formal Minutes, q88]. On
21 June 2011, two non-executive members were appointed to the OBR. These
were not included in the interim OBR, but were recommended by the Treasury
Committee for the statutory OBR.
In March 2011, the Budget Responsibility and National Audit Act 2011
established the OBR as a statutory body. Wren-Lewis was appointed to the
seven-member panel of the OBR comprised of outside experts "to help
develop and scrutinise its work programme and methods", a move indicative
of the influence of Wren-Lewis' research on the subject of fiscal councils
[C4]. Wren- Lewis' recent work on the comparative functions of
fiscal councils has also influenced the operation of the OBR itself. In
the Ken Dixon Lecture at the University of York on 13 June 2011, the
current director of the OBR, Robert Chote drew heavily on the analysis by
Calmfors and Wren-Lewis [R1] in setting out the justification for
fiscal councils and in comparing of the UK's OBR with fiscal councils in
other countries [C5, p.3]. Since its establishment, the OBR has had
a major impact on UK fiscal policy. For example, in November 2011, the OBR
revised down its forecast for potential output, which led the Chancellor
in his Autumn Statement to announce plans for additional future austerity
to ensure he met his fiscal targets [C6].
The impact of Wren-Lewis' work in this area has extended beyond the UK. A
conference on Independent Fiscal Institutions (Budapest, June 2010)
reviewed the experiences of fiscal councils worldwide, and Wren-Lewis'
presentation to the conference drew important distinctions between types
of fiscal council and the extent to which different designs tackle
different problems of fiscal policymaking [C7]. In April 2011, the
research on the role of fiscal councils was presented at the 3rd
Annual Meeting of OECD Parliamentary Budget Officials on 29 April 2011
[C8]. In addition, Wren-Lewis has held informal discussions
with interested political representatives in other countries, such as
Ireland and Slovakia. He has since joined the Advisory Panel of the Slovak
Council for Budget Responsibility [C9].
Wren-Lewis maintains a webpage on fiscal councils
The webpage is designed to be an easily accessible account of what fiscal
councils are trying to achieve, and, as such, it has proved a useful
source of information and analysis on fiscal councils for policymakers.
The webpage has specifically been referred to by UK policymakers while
drawing up legislation to put the OBR on a statutory basis (for example, [C3]
footnotes 11 and 12). A summary of Calmfors and Wren-Lewis (2001) [R1]
on the role of fiscal councils was made available on VoxEU (http://www.voxeu.g/index.php?q=node/6369)a
website supported by the EU to provide research- based policy advice and
commentary for economists in governments, international organisations,
academia and the private sector as well as journalists specializing in
economics, finance and business [C10].
Sources to corroborate the impact
C1] Who Will Guard the Guardians? The Case for Fiscal Councils ,
CEPR meeting 19 June 2008.
C2] The Conservative Party economic policy document Reconstruction
- our plan for a strong economy. The document can be found at
"Optimal debt policy, and an institutional proposal to help in its
implementation", Kirsanova, Leith and Wren-Lewis, 2006 is cited on page 8.
C3] The Treasury Select Committee Fourth Report on the OBR
contains the minutes of Simon Wren-Lewis' oral evidence to the Committee,
as well as citations of his fiscal councils webpage and a discussion of
his oral evidence. The website for the Report is
C4] The press release for Simon Wren-Lewis' appointment to the OBR
expert panel can be found at http://budgetresponsibility.independent.gov.uk/wordpress/docs/obr_expert_advisory_panel_pn_23032011.pdf
C5] Robert Chote's "The Office for Budget Responsiblity - can we
make a difference?" Ken Dixon lecture, University of York, June 2011 http://budgetresponsibility.independent.gov.uk/ken-dixon-lecture-at-the-university-of-york/.
C6] HM Treasury, Autumn Statement 2011 (November 2011)
C7] Webpage for the Conference on Independent Fiscal Institutions,
Fiscal Council, Budapest, Hungary, March 2010. http://blog-pfm.imf.org/pfmblog/2010/06/the-role-of-independent-fiscal-institutions-in-fiscal-management-the-perspective-from-an-internation.html
C8] Webpage for the 3rd Annual meeting of the OECD
Parliamentary Budget Officials, April 2011
The webpage's list of justifications for fiscal councils was cited by the
Treasury Committee Report on the OBR and its description of fiscal
councils in operation overseas is cited in the Annex of the Treasury
Committee Report and in Annex I of the Parliamentary Standard Note
SN/EP/5657 on 15 November 2010 regarding the interim OBR.
C9] Webpage for the Advisory Panel of the Slovak Council for
Budgetary Responsibility http://www.rozpoctovarada.sk/eng/rozpocet/173/advisory-panel)
C10] VoxEU: http://www.voxeu.g/index.php?q=node/6369