The good news is that Rachel Reeves and Torsten Bell in the Treasury have found an extra £2bn of fiscal headroom, as they write the Budget, thanks to a previously unrecognised error in the amount of tax the government is collecting. This implies some less good news, however, which is that our government is making multibillion-pound errors in the amount of tax it is collecting.
The error was found in the data the tax office (HMRC) sends to the Office for National Statistics (ONS), which uses that data to build up a picture of government borrowing. With the more accurate data included, borrowing in the second quarter of this year is now thought to have been £81.8bn rather than £83.8bn. A billion here, a billion there, as the saying goes, and before long it starts to look like real money. Reeves and Bell can certainly use every billion available to them in order to meet their fiscal rules. This is especially true given that the new, more accurate borrowing figure is still almost £10bn higher than the Office for Budget Responsibility (OBR) forecast earlier this year.
However, HMRC’s error is not an isolated incident. In May, the head of the ONS, Ian Diamond, resigned abruptly, citing health issues, but this came after a long series of complaints about the quality of key economic data. Bank of England officials complained that they were “flying blind” when setting interest rates. It is hard for a government to make good decisions on, for example, benefits and unemployment if it doesn’t have confidence in the Labour Force Survey.
For some, the original sin is the Blair government’s decision to move the ONS head office to Newport, in south Wales, in 2007; most of its London-based statisticians simply left. The pandemic certainly didn’t help, however, as the response rates to ONS surveys plummeted and many ONS staff went – and remained – remote. Anecdotally, one civil servant told me last year that the Newport office was still largely deserted. This is becoming a more urgent issue, because the room for mistakes in both monetary and fiscal policy has effectively disappeared.
The last time I asked a Treasury official how the fiscal headroom was looking, I was given a stern lecture on the fact that such figures obviously move, sometimes by quite a lot, in a given day, and that a sensible government just gets on with making good economic policy within a set of varying parameters. This was a good point, which recognised that the nice clean billions talked about in a Budget speech are in reality a constantly shifting mass of estimates and aspirations. This mattered less, however, when Budgets were written with about £30bn of fiscal headroom, as most Budgets were from 2010 to 2022. Jeremy Hunt, the previous chancellor, and Rachel Reeves have written Budgets of different kinds: wafer-thin headroom, welded to OBR forecasts, begging for market confidence.
But market confidence is running out, not just in Britain but around the world, as governments sell more debt to the market (the US has already sold $22.3trn in debt this year) and investors take a more sceptical view of the path of interest rates and inflation. Borrowing costs rise and fall with economic data, and if that data is not fit for purpose, there is a premium to pay. A spare £2bn apparently found down the back of the national sofa is not something to celebrate; it should not have been lost at all.
[Further reading: The truth about the small-boats crisis]
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