Don’t blame the OBR for Britain’s economic woes

We can’t spend more without taxing more and we can’t tax less without spending less.

Photo by Simon Dawson / No 10 Downing Street

It is all the Office for Budget Responsibility’s fault. This, plus Rachel Reeves’ rigid fiscal rules, has become the fashionable explanation for our economic travails. Were it not for these, it is argued, the government would not be announcing painful welfare cuts and could be investing in the future.

For the most part, it is an argument advanced by the political left, but by no means exclusively. There are those on the right who are sceptical of a George Osborne-era institution and who bemoan the self-imposed constraints on government policy. Not least among those critics is Liz Truss, which should give others pause for thought.

The cause of the recent criticism of the OBR is that its judgements on economic growth, and even the fiscal impact of specific policy announcements, are having a considerable impact on the government. The OBR, for example, estimated that the planned welfare reforms would save less than hoped, forcing the Chancellor to announce some last-minute savings to fill the gap. Rather than being a watchdog that keeps the public finances sustainable, it is accused of micromanaging government policy. OBR forecasts are getting in the way of Reeves’ plan to hold just one major fiscal event a year, forcing her to tinker with her tax and spending plans in the spring rather than waiting for her autumn Budget.

There is something odd about the Chancellor having to cast around for 11th-hour savings to ensure that the OBR forecasts that she will meet her fiscal rules. But the fault lies not with the OBR, or even the fiscal rules, but with Reeves herself. Her decision to leave just £9.93bn of headroom (0.3 per cent of GDP) meant there was always a 50-50 chance that she would have to take remedial action this month. By leaving herself exactly the same headroom in her Spring Statement, she has also ensured the same chance of having to impose cuts or tax rises in her autumn Budget.

It does not have to be this way. In his post-election Budget in 2010, Osborne gave himself three times the fiscal headroom that Reeves did. As it turned out, the Eurozone crisis and the aftershock of our own banking crisis meant that even this was not enough to avoid a further fiscal tightening. The point here is that economic forecasts are inherently uncertain and one should not aim to meet the fiscal rules by the smallest possible margin. Pursuing as loose a fiscal policy as possible within the constraints of the rules will always leave a Chancellor vulnerable to the need to course correct.

Implicit in some of the criticism of the OBR is that if the forecasts were done by the Treasury, a more “flexible” approach could be taken. One only has to state this to see how flaky an argument it is. Let us not have independent forecasters looking at the public finances but officials directed by ministers who will take a more generous view. Reverting to the pre-2010 situation would deeply damage our fiscal credibility.

A more reputable argument is not about who adjudicates on the rules, but over the rules themselves. Given that these rules have changed frequently, it is hard to argue that the current ones are sacrosanct and must be left unreformed forever. But the implication of most criticism is that fiscal policy is too tight and is thwarting the boldness that we need. This latter point is sometimes combined with reference to the creation of the welfare state under Clement Attlee’s government when the country was burdened with enormous levels of debt, or to Germany’s recent loosening of fiscal policy.

These arguments are flawed. For a start, the current fiscal rules are already loose. The OBR projects that debt as a percentage of GDP will be broadly flat over the next five years (at 96.1 per cent in 2029/30). No wars, pandemics, recessions or other debt-increasing events are predicted for this period, so if we are not cutting debt now, when are we?

Those who complain about a lack of boldness usually have great confidence in the benefits of government investment (or, in the case of Truss and her supporters, unfunded tax cuts), but we should be cautious about betting the house on that. The markets certainly will be.

Nor does fiscal restraint prevent growth in the size of the state, if that is your desire. Attlee’s government consistently ran big budget surpluses and would have complied with any fiscal rule that has been in place in recent decades. The creation of the NHS was funded by taxes, not borrowing.

And for those arguing that we should follow the German example, it is worth remembering that Germany has had a smaller deficit than the UK for every year of the last 20 (with debt of just 65 per cent). Their historic commitment to fiscal discipline gives them options not available to us.

We cannot just wish away our predicament. We cannot spend more without taxing more; we cannot tax less without spending less. It is not the case that the OBR is all powerful; it is merely the institution that reminds us of our fiscal realities. You can scrap the OBR, but the realities will remain the same.