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| Treasury ‘putting the squeeze’ on OBR over Labour growth plans amid tensions over downgrade | Treasury ‘putting the squeeze’ on OBR over Labour growth plans amid tensions over downgrade |
| (32 minutes later) | |
| Rachel Reeves may have to find up to £30bn in tax rises or spending cuts if forecaster revisits expectations | Rachel Reeves may have to find up to £30bn in tax rises or spending cuts if forecaster revisits expectations |
| Treasury policymakers frustrated by the politically damaging timing of a downgrade to UK productivity forecasts by the Office for Budget Responsibility (OBR) are pressing the watchdog to score the benefits of Labour’s pro-growth plans. | Treasury policymakers frustrated by the politically damaging timing of a downgrade to UK productivity forecasts by the Office for Budget Responsibility (OBR) are pressing the watchdog to score the benefits of Labour’s pro-growth plans. |
| Rachel Reeves faces the prospect of having to find up to £30bn in tax rises or spending cuts in her 26 November budget if, as expected, the OBR cuts its forecast for future productivity growth to match the consensus of other experts. | Rachel Reeves faces the prospect of having to find up to £30bn in tax rises or spending cuts in her 26 November budget if, as expected, the OBR cuts its forecast for future productivity growth to match the consensus of other experts. |
| The timing of the OBR’s decision to revisit its expectations for future productivity – which will shape the forecasts Reeves must use to set her tax and spending plans – has caused consternation within the government. | The timing of the OBR’s decision to revisit its expectations for future productivity – which will shape the forecasts Reeves must use to set her tax and spending plans – has caused consternation within the government. |
| One irked Labour insider pointed out that had the OBR cut its productivity forecast earlier – in 2023, for example – then the former chancellor Jeremy Hunt’s pre-election cuts to national insurance contributions (NICs) might have been ruled out as unaffordable. A former senior Labour adviser said: “Rachel has every right to be livid.” | One irked Labour insider pointed out that had the OBR cut its productivity forecast earlier – in 2023, for example – then the former chancellor Jeremy Hunt’s pre-election cuts to national insurance contributions (NICs) might have been ruled out as unaffordable. A former senior Labour adviser said: “Rachel has every right to be livid.” |
| For some years, the OBR has been more optimistic about productivity – a key determinant of economic growth – than many other independent forecasters. After a carefully choreographed “summer stocktake” of its forecasting model, it is expected to cut future growth forecasts by up to 0.2% – putting Reeves £20bn off course without any change in policy. | For some years, the OBR has been more optimistic about productivity – a key determinant of economic growth – than many other independent forecasters. After a carefully choreographed “summer stocktake” of its forecasting model, it is expected to cut future growth forecasts by up to 0.2% – putting Reeves £20bn off course without any change in policy. |
| That comes in addition to up to £10bn from a combination of recent policy U-turns – on welfare cuts and the winter fuel allowance – and the rising cost of government borrowing. | That comes in addition to up to £10bn from a combination of recent policy U-turns – on welfare cuts and the winter fuel allowance – and the rising cost of government borrowing. |
| With the first iteration of the forecast already delivered to the Treasury, ministers and officials are focused on trying to persuade the OBR that recent planning legislation and trade deals with India and the EU merit a modest rethink in the government’s favour. One person with knowledge of the discussions suggested the Treasury was trying to “put the squeeze on” the independent forecaster. | With the first iteration of the forecast already delivered to the Treasury, ministers and officials are focused on trying to persuade the OBR that recent planning legislation and trade deals with India and the EU merit a modest rethink in the government’s favour. One person with knowledge of the discussions suggested the Treasury was trying to “put the squeeze on” the independent forecaster. |
| In its March forecast, the OBR did lift its GDP forecast for 2029-30 by 0.2% as a result of Labour’s planning changes, at the urging of Reeves’ then chief economic adviser, John Van Reenen. | In its March forecast, the OBR did lift its GDP forecast for 2029-30 by 0.2% as a result of Labour’s planning changes, at the urging of Reeves’ then chief economic adviser, John Van Reenen. |
| But some economists expressed scepticism that the OBR was now likely to go further. “I think of these as measures needed to achieve the productivity growth expected by the consensus and IMF (ie below the OBR current base case),” said Michael Saunders, a former member of the Bank of England’s monetary policy committee , now at the consultancy Oxford Economics. | |
| Ministers are also understood to be considering announcing that only the autumn OBR forecast will measure the chancellor’s tax and spending plans against her fiscal rules, with the spring forecast focused on economic growth. This plan was recently mooted by the IMF, and would be aimed at damping constant market speculation about Reeves’ next move. | Ministers are also understood to be considering announcing that only the autumn OBR forecast will measure the chancellor’s tax and spending plans against her fiscal rules, with the spring forecast focused on economic growth. This plan was recently mooted by the IMF, and would be aimed at damping constant market speculation about Reeves’ next move. |
| However, the OBR’s director, Richard Hughes, has publicly played down the need for a change, saying the chancellor could already have chosen not to respond to bad news in its March forecast with tax and spending changes – as she did this year by announcing botched welfare cuts. | However, the OBR’s director, Richard Hughes, has publicly played down the need for a change, saying the chancellor could already have chosen not to respond to bad news in its March forecast with tax and spending changes – as she did this year by announcing botched welfare cuts. |
| “The government have that option now, and they always had that option,” Hughes told MPs in July. He is understood to be firmly opposed to the idea of reducing the number of OBR forecasts, which he told MPs would make the UK “one of the least fiscally transparent countries in Europe and of any major advanced economy”. | “The government have that option now, and they always had that option,” Hughes told MPs in July. He is understood to be firmly opposed to the idea of reducing the number of OBR forecasts, which he told MPs would make the UK “one of the least fiscally transparent countries in Europe and of any major advanced economy”. |
| Some economists echoed the Treasury’s concern that the OBR’s productivity rethink could have happened earlier. Saunders said: “I have quite a lot of sympathy with the view that this is a revision which could have been done at any one of the last few years, and it’s not a reflection of the current government’s policies or the policies of the last year.” | Some economists echoed the Treasury’s concern that the OBR’s productivity rethink could have happened earlier. Saunders said: “I have quite a lot of sympathy with the view that this is a revision which could have been done at any one of the last few years, and it’s not a reflection of the current government’s policies or the policies of the last year.” |
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| Andy King, a former member of the OBR’s budget responsibility committee, now at the consultancy Flint Global, said the underlying message of the forecast would have been a tough one to deliver at any time. “It would have been very difficult for the OBR to have done it in the last forecast before the election or the first one after it.” | Andy King, a former member of the OBR’s budget responsibility committee, now at the consultancy Flint Global, said the underlying message of the forecast would have been a tough one to deliver at any time. “It would have been very difficult for the OBR to have done it in the last forecast before the election or the first one after it.” |
| But he added that the downgrade was needed, as the OBR had become an outlier, with a rosier forecast than its peers that was “not tenable in the long term”. | But he added that the downgrade was needed, as the OBR had become an outlier, with a rosier forecast than its peers that was “not tenable in the long term”. |
| He added: “If they’d correctly predicted this economic weakness five years ago, would this all have been easy? No, because the forecast would have said: ‘There’s not going to be enough tax revenue to pay for the public services that people want.’” | He added: “If they’d correctly predicted this economic weakness five years ago, would this all have been easy? No, because the forecast would have said: ‘There’s not going to be enough tax revenue to pay for the public services that people want.’” |
| The former Bank of England deputy governor Charlie Bean blamed the way the chancellor had made tax and spending decisions, including the slim £10bn of “headroom” she left herself against her fiscal rules, for her current predicament. | The former Bank of England deputy governor Charlie Bean blamed the way the chancellor had made tax and spending decisions, including the slim £10bn of “headroom” she left herself against her fiscal rules, for her current predicament. |
| “Because of the way she’s chosen to operate policy, and adopted a ludicrously small headroom, she’s made herself a prisoner of the OBR’s judgment, which is a bonkers way to operate fiscal policy, but it’s not really a criticism of the OBR,” he said. | “Because of the way she’s chosen to operate policy, and adopted a ludicrously small headroom, she’s made herself a prisoner of the OBR’s judgment, which is a bonkers way to operate fiscal policy, but it’s not really a criticism of the OBR,” he said. |
| A Treasury source rejected the idea of tension with the OBR. “Rachel has defended the OBR, including in response to people in her own party. She’s strengthened the OBR. She respects institutions because she knows they’re integral to our economic credibility,” they said. | A Treasury source rejected the idea of tension with the OBR. “Rachel has defended the OBR, including in response to people in her own party. She’s strengthened the OBR. She respects institutions because she knows they’re integral to our economic credibility,” they said. |
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