The Conservative chair of the Treasury Select Committee, Mel Stride MP, has told the New Statesman that the Treasury is withholding an Office for Budget Responsibility (OBR) report that would give MPs and financial markets crucial insights into the fiscal interventions announced in the government’s “mini-Budget” tomorrow, and which could affect the cost of government borrowing.
Stride said his understanding is that the OBR approached the Treasury in late July (during Nadhim Zahawi’s brief period as chancellor) and was asked to prepare forecasts for a fiscal event in September. Letters to Stride from Zahawi and the OBR’s chair, Richard Hughes, later confirmed that this work started on 29 July. However, the government has said it has no plans to release an economic and fiscal forecast to accompany tomorrow’s announcement of tax cuts and further expenditure.
“The Treasury, I’m sure, is sitting on a forecast that it would be valuable to have made public,” said Stride.
The government’s refusal to release an independent forecast could have an immediate cost. These forecasts are not only used by MPs to scrutinise policy, but also by financial institutions to make investment decisions that can affect the government’s borrowing costs and the value of the pound. For a government planning to spend huge sums on permanent tax cuts and fiscal interventions such as the Energy Price Guarantee, giving investors the ability to price its debt accurately could hardly be more important.
“What markets want,” said Stride, “is reassurance that what governments are doing is fiscally responsible… primarily, that means that sensible fiscal targets are being pursued, and they are likely to be met.”
In a report released yesterday, the Institute for Fiscal Studies gave little such reassurance. Ballooning debt and deficits, it predicted, would mean that the UK’s “two main fiscal targets legislated only in January would be missed and that debt would be left on an ever-increasing path”.
It’s possible that the OBR shared this conclusion, and that the government has dismissed the report as the Project Fear to its own Project Growth. But to bury the report entirely sends a worse message to investors than releasing it, said Stride, who warned that if the government is “perceived by the market as not being transparent about what could be very uncomfortable reading, then I would have thought that would be an unhelpful thing, in terms of… the pricing of our debt”.
“Markets like transparency,” he explained. “So when it comes to major fiscal intervention, which is what we’re going to learn about tomorrow – both in terms of a lot of extra expenditure, but also some very significant, permanent tax cuts – they will want to know how the independent OBR feels that will play out to in terms of growth and the fiscal targets and inflation.
“To the extent that markets get unhappy about those things not happening, then it normally comes through in what economists call a ‘risk premium’ on the servicing costs of our debt. I think that’s something that we really need to avoid.”
The OBR has not produced a forecast since Rishi Sunak’s Spring Statement on 23 March, when inflation was almost 3 percentage points lower and before Sunak’s £21bn fiscal intervention in May. The government has said that the OBR is only required to produce two forecasts per year and that the “immense speed” at which policy is being developed at present leaves little time for such analysis.
But Stride says that the OBR has confirmed that it was “standing by” to provide analysis on top of the report it had already supplied to the government, and that some of the work, such as unwinding tax increases, was “a relatively simple exercise, because they’ve already factored [the increases] in, and factoring it out is not a hugely complicated matter”.
While the OBR’s charter does set a minimum of two forecasts per year, it does not set any limit on the number of forecasts the organisation can produce. Stride said that the “deterioration in the economy since the last forecast”, added to the “sheer magnitude” of the government’s planned measures, as they have been outlined so far, made independent analysis “very important”.
“All of the arguments would lead you to believe there should be OBR forecasts of Budgets, should lead you to feel there should be an OBR forecast at this fiscal event.”