Forget the scandals, the resignations, the rebellions and the tumult that have characterised Sir Keir Starmer’s premiership so far. The figures on those tables carry far greater significance. Sir Jeremy Hunt, the former Tory chancellor charged with steadying the ship in the wake of Liz Truss’s disastrous premiership, remembers it well.
“You soon realise there’s only one number that really matters,” he said. “The second page, bottom right. When it goes the wrong way you remember Gordon Brown’s famous words to Tony Blair: ‘You’ve stolen my f***ing budget.'”
In the government there is mounting anger with the Office for Budget Responsibility, the tiny independent body that sits on the 14th floor of the Ministry of Justice.
The forecaster has chosen this moment to make a large downgrade to its forecasts, based on the fact that productivity has been significantly lower than previously thought over the past decade.
Reeves told The Times that the timing of the review was “challenging”, which was something of a euphemism. When the OBR first revealed that it was carrying out the review in July — an announcement that dropped out of nowhere in a report on the OBR’s website — ministers were incandescent, pointing out that it could have conducted it at any point in recent years.
On any measure it is a hard sell. One Treasury official said: “How do you say to the public that we are having to raise tax because the OBR’s supply-side review has found that long-term productivity index has been off for the last ten years?”
The answer, of course, is that they can’t — pointing the finger of blame at the OBR won’t work. So Reeves finds herself building up the budget on the same basis as her last one — blaming the economic inheritance from the Conservative Party.
The trouble is, as the polls attest, that approach did not work. Reeves is the second most unpopular politician in Britain, narrowly behind Starmer. Her poll ratings have dropped precipitously after a series of catastrophic decisions — cutting winter fuel payments, the botched attempt to overhaul welfare and of course her first budget, which included more than £40 billion worth of tax rises. It has left Reeves dancing on the head of a semantic pin.
Labour’s conference was widely viewed as a success by No 10, with Starmer defining himself against a common enemy in the form of Nigel Farage. By the end, when cabinet ministers were happily murdering Oasis and Elton John songs during late-night karaoke sessions, the atmosphere bordered on jubilation.
But for Reeves it was the start of an incredibly challenging run-in to the budget as she admitted for the first time that she was “coming back for more”, despite a promise last October that she would not do so.
Ahead of budgets language matters. Pressed on whether she would break her standout pledge not to increase the headline rates of income tax, VAT or national insurance, she repeatedly declined to do so. She instead said simply that she “stands” by the manifesto commitment. When put to her that something can stand today and fall tomorrow, she reverted to the same language time and again.
It was left to Darren Jones, the newly installed chief secretary to the prime minister, to say the quiet bit out loud: Labour’s pledge not to raise income tax or VAT stands as of “today” — but only because “decisions haven’t been taken yet”.
The challenge for Reeves is that such is the state of the public finances that she may have no choice but to go for one of the big tax levers.
Paul Johnson, the former head of the Institute for Fiscal Studies, has warned that attempting to fill such a large gap in the public finances with a series of smaller tax rises would do significant economic damage. Going for one of the big taxes, however politically unpalatable, is a far cleaner way to do things.
Reeves and her officials will do everything they can to avoid it. They will spend the run-up to the budget attempting to convince the OBR that their main policies will grow the economy.
The chancellor took the extraordinary step of taking this debate public at the weekend in an attempt to increase pressure on the OBR. She said it should score the impact of an as yet unannounced youth mobility scheme between the UK and the EU, which will see up to 50,000 young Europeans a year come to the UK on time-limited visas. She argued that just as it had scored a 4 per cent hit to GDP from Brexit, so it should score the benefits of improving trade relations.
And it is not just Brexit. The chancellor is trying to convince the OBR of the merits of planning reforms, trade deals with the US, the EU and India and increased levels of capital investment. There is a problem, however — nobody in government believes that the OBR will do so.
The criticism levelled at the OBR by ministers is that it is fundamentally too gloomy in its outlook and has become increasingly antagonistic in its relationship with the government. That it is too quick to score economic downgrades but incredibly reticent when it comes to scoring potential growth measures.
Officials also say it is next to impossible to have a constructive dialogue with the organisation or explain their thinking face-to-face. Instead the process is said to be overly formal, with the Treasury making written representations on what it would like it to score — with the OBR then making its judgment without explanation or the chance of comeback.
This criticism is not new, with successive Tory chancellors left just as frustrated. Hunt is one of the few chancellors to have succeeded in convincing the OBR that his growth measures would increase productivity with his childcare reforms.
“I think that they do require an enormous amount of evidence before they will score an upgrade based on new growth policies for example,” Hunt said. “I think the trouble is that if they make it too difficult then chancellors won’t bother. We do need chancellors who favour long-term economic growth. If you are ultra-sceptical right from the outset it makes it difficult for chancellors to do the right thing.”
However, another former Treasury minister defended the OBR’s approach, arguing that government policies have an “incredibly poor record” when it comes to improving productivity — that the lofty promises rarely translate into pounds and pence.
The other complaint in the Treasury is about the volatility of the OBR’s forecasts. There are huge variations between the three forecasts in the run-up to fiscal events — often by billions — and global events can have a huge impact on the numbers. For example, future UK borrowing costs are determined by looking at yield prices over a ten-day window in the run-up to November. It means that entire budgets can be ripped up in a moment if that period coincides with a period of market volatility, something which has become increasingly frequent.
There are also long-standing concerns about the accuracy of the OBR’s forecasts. In the summer it carried out a review of its long-term performance and found that it had significantly overestimated how much the UK economy would grow in most of its long-term forecasts over the past 12 years.
As far back as 2012 it predicted that GDP growth in 2017 would be 2.8 per cent when it turned out to be 1.7 per cent. Most recently in March 2023 it forecast a 0.3 per cent decline in real GDP when it ended up falling by 0.8 per cent. It also suggested government borrowing rates would be 4.35 per cent when they were actually 5.25 per cent.
But economists point out that economic forecasts, especially over a five-year time frame, can never be more than an educated guess and it is the fault of politicians for setting a framework whereby they make decisions on tax and spending now based on assumptions about economic growth in five years’ time.
As David Miles, a former chief economist at Morgan Stanley who sits on the OBR’s budget responsibility committee puts it, the OBR is more like a sat-nav than an oracle. “It does not know the future and its best guess keeps changing,” he said. “But it is an informed guess, and because the information it bases its forecast on keeps changing so does it.”
* Watchdog’s warning increases chance of Rachel Reeves raising taxes
Robert Chote, a former head of the OBR, said that power ultimately lies with the government. “They can change policy, change the targets, or decide that they are content for the published forecast to show a breach, either because they disagree with it or simply want to wait and see if the outlook improves,” he said. “And they can then explain the choice that they have made at the budget.”
Fundamentally, the issue that successive chancellors have had with the Treasury is one of power. The OBR is, as one former Treasury official put it, a “unilateral actor”. It can make decisions about economic downgrades and the economic impact of government policies at the stroke of a pen, with no need to explain. There is no right of appeal, a fact that inevitably creates tensions.
But that is entirely the point. The OBR was set up to stop the Treasury from marking its own homework. “I think the OBR is one of the few institutions that is very good at speaking truth to power,” Hunt said. “The point of the OBR is to stop chancellors playing fast and loose with the national finances and give people assurance that the numbers presented to parliament are accurate. It’s totally wrong to say this is the OBR’s fault.”
The blame, Hunt says, ultimately lies with the chancellor — and he includes himself in this as much as Reeves. One of Hunt’s predecessors, Philip Hammond, left about £26 billion of fiscal headroom. That reduced significantly under Hunt and even more so under Reeves.
Put simply, the margin of error is too thin. Any change in forecasts or changes in global events has huge repercussions.
“Previous chancellors had much more generous headroom,” Hunt said. “If you keep the headroom at £10 billion or less then you are taking a big risk because the average swing between fiscal events is £20 billion. It nearly caught me out and it looks like it has caught out Rachel Reeves this time.”
