Rachel Reeves v the OBR: chancellor aims to loosen the watchdog’s grip | Economics
For a team of 50-odd geeks sharing an uninspiring concrete block with the Ministry of Justice in Westminster, the Office for Budget Responsibility has begun to wield extraordinary power.
It was OBR predictions about Rachel Reeves’ evaporating cap that left the chancellor scrambling for benefit cuts in March. And it is the watchdog’s rethinking of productivity growth that means the Chancellor will deliver a second tax rise budget on November 26.
The Treasury is determined to avoid being dragged by the OBR in 2026. And so, as he prepares a revenue-raising package, the chancellor aims to pile more loopholes into his fiscal rules so that each £1bn shift results in fewer failures; and downgrading the status of the OBR’s spring forecast.
The aim of the independent forecaster, established during the Tory-Lib Democrat coalition, was to prevent politicians from changing economic forecasts to suit their own ends.
When Labor came to power, it adopted the new system, which was now 15 years old; even Reeves making laws To prevent future financial events from happening without the OBR forecast, while trying to remind voters of Liz Truss’s disastrous tenure.
Labor saw complying with the watchdog’s restrictions as a crucial signal to investors in the government bond market that the new administration had a clear plan to fix the public finances.
The OBR, led by former Treasury and International Monetary Fund (IMF) official Richard Hughes, who was recently reappointed for a second five-year term, produces two forecasts a year as required by law, measuring the chancellor’s tax and spending plans in breach of its fiscal rules.
As Reeves’ tough second budget approaches, the OBR’s decision to reconsider its long-term assumptions on productivity growth is causing alarm in No 11. The OBR’s view on this key determinant of economic growth has long appeared optimistic by consensus. The resulting reassessment is expected to put forecasts for public finances in 2030 between £10bn and £30bn off where they appeared in March.
Reeves and his ministerial colleagues have privately complained that the OBR could and should have reviewed productivity forecasts sooner. If he had done so while the Conservatives were still in power, Jeremy Hunt’s pre-election cuts to national insurance contributions might have appeared unaffordable.
Instead, with Labor already struggling in the polls, it will be Reeves who will have to publicly declare that the economy is weaker than previously thought and impose tax increases to plug the deficit.
Tensions between the OBR and the Treasury have been on display in recent weeks, with Reeves calling in an interview for the forecaster to “give points”, meaning to include pro-growth government policies in its forecasts.
Reeves is also considering ensuring the OBR assesses him under its own rules only once a year to avoid another savings battle in the spring.
As the IMF recommended in May, the spring forecast will be indicative rather than binding; perhaps the focus will be on economic growth rather than the financial picture.
“The IMF has said we should only move to one major fiscal event a year, and I agree with their advice,” Reeves told Times Radio last week. “To do this we need to change the way the OBR makes forecasts. Two full forecasts a year make it harder for a single financial event to happen.”
But Hughes voiced an apparent lack of excitement about the plan, telling MPs at a recent Treasury select committee hearing: “The UK has been making two economic forecasts and fiscal forecasts a year since 1975… If we cut the number of forecasts to one, that would make us one of the least fiscally transparent countries in Europe and of any major developed economy.”
Adding that his reading of the IMF’s advice was that the government could “let itself loose and make more policy decisions in the autumn” if it appeared determined to miss its fiscal rules in the spring, Hughes insisted: “The government now has that option, and they always had that option.”
With Labor losing support at the polls, some supporters of the party have expressed concern about what they see as the malevolent influence of the OBR; Louise Haigh described it as an “unelected body” that “sets the limits of the government’s ambitions”.
Jo Michell, professor of economics at the University of the West of England, said: “The real issue is how you stop this silly dance where the government adjusts long-term plans to short-term movements in bond markets. Forecasts in themselves are not a bad thing, but the tail is wagging.”
Left think tank called by the New Economics Foundation It is expected to be taken back to the treasuryAn external Fiscal Transparency Office acts more as a quality control, with the chancellor making the final decision. He argues that this would be a more democratic framework.
James Meadway, John McDonnell’s former economic adviser and host of the Macrodose podcast, argues that it is impossible to strip policy of predictions. “These are by no means neutral facts; just like everything else in economics, they are hotly debated,” he said.
He advocates for the OBR to act like the US Congressional Budget Office, with a broader role in analyzing economic policies, including, for example, costing opposition plans.
But Jonathan Portes, a former government economist and now professor of economics and public policy at King’s College London, said it was a mistake to blame the government’s plight on the OBR.
“Are the current rules and current horizons correct? There’s no right answer. But the big picture is that that’s not the constraint at the moment. The constraint at the moment is the markets’ view of whether the UK’s position is fiscally sustainable.”
