OBR-driven policymaking will doom Labour
Truly an absurd way to run a $3 trillion economy
“Don’t let the bastards bring you down,” our teacher exclaimed. The ‘bastards’ in question were not the Eurosceptics in John Major’s cabinet1, sadly, but exam markers. What he meant was, always answer the question in the way they want you to. Follow the formula, even if you find it tedious. Don’t give them even half a chance to take a mark off you. For Rachel Reeves, the bastards in question are the number crunchers in the Office for Budget Responsibility (OBR).
Prior to 2010, the Treasury produced its own economic and fiscal forecasts. These were not always terribly accurate, in part because they were driven by what the Institute for Government dryly calls “a degree of politically motivated wishful thinking.” In other words, they could be made up to make the numbers add up.
For that reason, the OBR was established in 2010 by the podcaster and one-time chancellor George Osborne, to remove from ministers “the temptation to fiddle the figures”. From then on, an independent organisation would produce the forecasts, much as the Bank of England was left to set interest rates in 1997. And this has proved an unusual success story for the modern British state.
That is because the OBR is good at its job. Take its forecasts for the impact of Brexit on the UK economy. These have been pretty much spot on. Indeed, such is the esteem in which the OBR is held that Liz Truss’s decision not to request official forecasts to accompany her 2022 ‘mini-Budget’ was itself interpreted as a red flag by the financial markets. Just what was she hiding?
Of course, the OBR is not perfect. How could it be? The UK economy is large and contains multitudes. Yet all too often, its forecasts are treated as gospel, even if they change every six months as a result of new economic data. To that end, the OBR is expected to halve its 2025 growth forecast. But with every set of self-imposed fiscal rules each chancellor lays out, an unwelcome phenomenon has grown ever-sharper: OBR-driven policymaking.
This can be most clearly seen in the government’s proposed changes to welfare. Labour’s desire to get more people – in particular young people – off disability benefits and into the workforce is understandable. But it appears to be motivated to a greater extent by a need to find savings that will enable Reeves to meet her fiscal rules2.
This pretence was somewhat punctured by a report in The Times yesterday, which found that the chancellor may be forced to announce further cuts to welfare after the OBR put the value of the proposed savings at £3.4bn rather than the Treasury’s £5bn – a gap of £1.6bn. For context, this is part of the back-and-forth between the government and the fiscal watchdog, as they barter over how much any one policy will boost economic growth or reduce spending.
This makes a narrow sort of sense, but it is also a simply ludicrous way to manage a roughly $3 trillion economy. As Stephen Evans, chief executive of the Learning and Work Institute, puts it, “We’ve got ourselves into a sub-optimal place with uncertain forecasts treated as certain [and] unlikely policy treated as going to happen.” Indeed, the OBR itself knows its forecasts can be wrong, because by law they sometimes have to be.
Take my personal obsession, fuel duty. The OBR forecasts that the levy will be uprated by inflation, even though it never is. In fact, the fiscal watchdog now has to assume that fuel duty will rise by 5p in March 2026 and uprated by RPI inflation in every year from April 2026. Yet the reversal of the 5p cut has been delayed three times and fuel duty has not been uprated by RPI since 2011!
This is not a trivial sum of money. The cumulative cost of all these freezes is roughly £100bn. Which would be a useful pot to have lying around even if you didn't want to spend 3% of GDP on defence.
Some of these cuts to welfare may never happen if the economy improves. But that is one heck of an ‘if’. Reeves may be able to pass the OBR’s biannual assessments, but unless she can unlock economic growth and higher living standards, Labour will flunk the only exam question that matters in politics: the next general election.
In July 1993, Major referred to three anti-Maastricht “bastards”, widely believed to be Michael Portillo, Michael Howard and Peter Lilley.
First, that day-to day spending be paid for by revenue, not borrowing. Second, that debt be falling as a share of national income by 2028/29