Britain's opposition Conservative Party economics spokesman Osborne addresses the Institute of Directors IOD annual convention at the Albert Hall in London
Britain's opposition Conservative Party economics spokesman George Osborne addresses the Institute of Directors IOD annual convention at the Albert Hall in London April 28, 2010.

The new Chancellor of the Exchequer, George Osborne, is to launch a new Office of Budget Responsibility that will be tasked with holding the government to account on cutting its budget deficit.

The previous Labour government massively increased spending on public services, but did so by relying on record levels of borrowing, leading to a budget deficit of around 12 per cent of GDP, only one per cent or so below that of Greece, which has just had to introduce severe austerity measures in the public sector.

During the election campaign all of the main political parties spoke of the need to cut Britain's deficit, but none were willing to give details of what this would entail, for fear of alienating the electorate.

Mr Osborne last year spoke of an "age of austerity" at the Conservative party conference, but quickly dropped such talk as it did not go down well in focus groups. Liberal Democrat leader and now Deputy Prime Minister Nick Clegg also spoke at the time of "savage cuts", but again toned down the rhetoric as the election approached.

The new coalition government, at the behest of the Liberal Democrats, is looking at hiking capital gains tax to 40 per cent to help cut the deficit. In addition the Prime Minister, David Cameron, has cut ministerial pay and indicated that top civil servants could also see their wages reduced.

Mr Osborne's new OBR is likely to be run by Alan Budd, a former member of the Bank of England's Monetary Policy Committee.

In addition Mr Osborne has said that the OBR will be giving independent advice for his emergency budget, which will be on 22 June.

The OBR will be responsible for recommending levels of net fiscal tightening or loosening and will provide fiscal forecasts around the time of the pre-budget report and the budget itself.

Mr Osborne will not be bound to follow any recommendations made by the OBR, but he will be obliged to explain his reasoning to Parliament should he decide to ignore their advice.