For a crew of 50-odd nerds sharing an uninspiring concrete block in Westminster with the Ministry of Justice, the Office for Budget Responsibility has come to wield extraordinary power.
It was the OBR projections of Rachel Reeves’s evaporating headroom that left the chancellor scrambling for welfare cuts in March. And it is the watchdog’s rethink about productivity growth that means the chancellor is sure to deliver a second tax-raising budget on 26 November.
The Treasury is determined to avoid being dragged around by the OBR in 2026. And so, as she draws up a revenue-raising package, the chancellor is aiming to accumulate more headroom against her fiscal rules, so that every £1bn shift is less make-or-break; and to downgrade the status of the OBR’s spring forecast.
Set up during the Tory-Lib Dem coalition, the independent forecaster was meant to prevent politicians from tweaking economic forecasts to suit their own ends.
As Labour came to power it embraced the new system, now 15 years old, with Reeves even legislating to prevent future fiscal events taking place without an OBR forecast, as she sought to remind voters of Liz Truss’s catastrophic tenure.
Labour saw complying with the the watchdog’s strictures as a crucial signal to investors in government bond markets that the incoming administration had a clear plan for fixing the public finances.
Led by the former Treasury and International Monetary Fund (IMF) official Richard Hughes, recently reappointed for a second five-year term, the OBR produces two forecasts a year by law, measuring the chancellor’s tax and spending plans against her fiscal rules.
With Reeves’s tricky second budget approaching, it is the OBR’s decision to revisit its long-term assumptions about productivity growth that is causing alarm in No 11. The OBR’s view of this key determinant of economic growth has long looked optimistic relative to the consensus. The resulting reassessment is expected to put forecasts for the public finances in 2030 between £10bn and £30bn adrift of where they appeared to be in March.
Reeves and her ministerial colleagues privately grumble that the OBR could and should have reviewed its productivity forecasts earlier. If it had done so while the Conservatives were still in power, Jeremy Hunt’s pre-election cuts to national insurance contributions might have looked unaffordable.
Instead, with Labour already struggling in the polls, it will be Reeves who has to explain to the public that the economy is weaker than previously thought – and impose tax increases to make up for the shortfall.
Tensions between the OBR and the Treasury have spilled into the open in recent weeks, with Reeves using an interview to call on the forecaster to “score”, that is to say include in its projections, pro-growth government policies.
To avoid another spring scramble for savings, Reeves is also considering having the OBR assess her against her rules only once a year.
As recommended by the IMF in May, the spring forecast would be indicative rather than binding – perhaps focusing on economic growth rather than the fiscal picture.
“The IMF have said that we should move to just one major fiscal event a year, and I agree with their recommendations,” Reeves told Times Radio last week. “To be able to do that, we do need to change the way that the OBR do their forecasting. Two full forecasts a year make it harder to have that one fiscal event.”
Hughes has expressed a distinct lack of enthusiasm for that plan, however – telling MPs at a recent Treasury select committee hearing: “The UK has been doing two economic forecasts and fiscal forecasts a year since 1975 … Were we to reduce the number of forecasts to one, that would make us one of the least fiscally transparent countries in Europe and of any major advanced economy.”
Adding that his reading of the IMF’s recommendation was that if the government looked set to miss its fiscal rules in the spring it could “let it ride, and make more policy decisions in the autumn”, Hughes insisted: “The government have that option now, and they always had that option.”
With Labour losing support in the polls, some of the party’s backbenchers have expressed concern about what they see as the OBR’s malign influence, with Louise Haigh calling it an “unelected institution” that “dictates the limits of government ambition”.
Jo Michell, a professor of economics at the University of the West of England, said: “It’s really about how do you stop this silly dance where the government adjusts long-run plans to short-run moves in bond markets. Forecasts are not a bad thing per se, but it’s the tail wagging the dog.”
The leftwing thinktank the New Economics Foundation has called for forecasting to be taken back into the Treasury, with an external Office for Fiscal Transparency acting more as a quality check and the chancellor making the final decision. It argues this would be a more democratic framework.
James Meadway, a former economic adviser to John McDonnell and host of the podcast Macrodose, argues that it is impossible to drain the politics out of forecasting. “These aren’t neutral facts at all – they’re hotly contested, just like everything else in economics,” he said.
He argues for the OBR to act more like the US Congressional Budget Office, which has a wider role in analysing economic policies, including costing opposition plans, for example.
However, 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 lay the blame for the government’s predicament with the OBR.
“Are the current rules and the current horizons the right ones? There is no right answer. But the big picture is, 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.”
