The OBR:

Working at the UK’s fiscal watchdog

Presentation to the Adam Smith Business School

University of Glasgow

Andy King

Chief of Staff

Office for Budget Responsibility

6 November 2015

Background

The Office for Budget Responsibility

• Created in 2010 to provide independent and

authoritative analysis of the public finances

• Produces the UK’s Budget and Autumn Statement

forecasts of the economy and public finances

• Assesses UK Government progress against fiscal targets

• Reports on the sustainability of the public finances and

the health of the public sector balance sheet

• Scrutinises UK Government’s costing of policy measures

• Objective to make fiscal forecasts and costings unbiased

and clear, but we have no role in making or commenting

on Government policy

Core outputs of the OBR

Core outputs of the OBR

Core outputs of the OBR

Core outputs of the OBR

Structure of the OBR

• Budget Responsibility Committee: responsible for all judgments underpinning the forecast

Robert Chote Graham Parker Sir Stephen Nickell

OBR staff (currently 21): economists, public finance analysts, plus a small communications and management unit

Advisory panel of 9 technical experts

Non-executive members: Lord Burns and Dame Kate Barker

The Chief of Staff

Journey to the OBR

Journey to the OBR

Journey to the OBR

Journey to the OBR

Journey to the OBR

Journey to the OBR

Journey to the OBR

The National Living Wage

and the July 2015 OBR forecast

The policy

• Living wage premium (LWP) on top of National Minimum Wage (NMW) for employees aged 25 and over from April 2016

– NLW initially set at £7.20 (extra 50p)

• Aim to reach 60% of the median earnings of the affected group in 2020

– around £9.35 an hour on our July forecast

• Increases effective minimum wage by 13% by 2020 for the affected group

Analytical steps in estimating the effect on the economy

Estimating the baseline

Change in labour demand

Change in labour inputs

Change in firm costs

Hours

Heads

Profits

Prices

(Productivity)

Baseline data and assumptions

• April 2014 ASHE data projected forward

– Assume the underlying distribution remains the same

• Spillover effects up to the 25th percentile

• Counterfactual NMW is unaffected

• No changes in compliance rates

• ’Pre-behaviour’ effect

– ¾m people move from NMW to NLW

– 2m people move from above NMW to NLW

– 3¼m people above NLW affected

– Wage bill up £4 billion

Effect on the earnings distribution

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8 9 10 11 12

Pro

port

ion

of

work

forc

e (

per

cen

t)

Hourly pay (£)

Excluding estimated effects of LWP

Including estimated effects of LWP

25th percentile

‘Indirect’ effects

• Assume a labour demand elasticity of 0.4

– Implies total hours are reduced by 4m a week

• Half employment and half hours-worked

– Around 60,000 rise in structural unemployment

– 0.2% fall in trend average hours

• ‘Batting average’ boost to productivity

• Remainder split evenly across profits and prices

– Profits down 0.3%; prices up 0.1%

• Potential output down 0.1%

• Nominal GDP broadly unchanged

Fiscal impact

• Positives:

– Earnings (taxes on income; welfare spending)

– Consumption (VAT receipts)

• Negatives:

– Unemployment (out-of-work benefits spending)

– Inflation (upratings and debt interest)

– Profits (corporation tax receipts)

• Fiscal impact very small boost: just £200m a year

Questions?