A familiar spectre loomed over Jeremy Hunt’s pre-election Budget that wasn’t: the Office for Budget Responsibility.
The Chancellor had hoped to buy taxpayers’ votes by handing back to them as much of their own money as he could. But his plans were drastically curtailed by the OBR shrinking its predicted ‘fiscal headroom’ from £30 billion in December to just over £12 billion. At a stroke disappeared any hope of cutting income tax, inheritance tax, and stamp duty, alongside national insurance.
Unsurprisingly, hints have abounded of government frustration at the OBR. Hunt admitted that its figures had “moved against” his plans. ‘Treasury sources’ spoke of the “agony” of scrapping policies as the forecasts got worse at each update. Their ‘senior’ equivalent has sounded off to the papers that the OBR was “killing” the Government’s plans as part of a ‘left-wing agenda’.
These complaints are familiar. For the OBR’s critics amongst Tory MPs, the watchdog has become an over-mighty straightjacket preventing much-needed tax cuts. They say its forecasts are continually inaccurate and underestimate the impact of supply-side reforms. Richard Hughes, its head, appears wedded to a high-tax orthodoxy, and is spotted popping into ‘left-leaning’ think tanks.
As our columnist, David Willetts might be surprised to discover the Resolution Foundation is on the left. But other criticisms of the OBR are harder to brush off. Excluding 2019/20, the OBR’s predictions of net migration have been exceeded 93 per cent of the time, as Karl Williams has shown. Our own Harry Phibbs has shown the watchdog’s apparent disregard for key benefits of leaving the EU.
OBR-scepticism has a familiar high priestess. To Liz Truss’s credit, she put her money – and the country’s – where her mouth was. Viewing the OBR with disdain, she refused to let it take a look at her mini-Budget. When the markets disapproved, she pinned the blame on her agenda’s unravelling on the OBR’s disproportionate influence, accusing its members of suffering from “groupthink”.
50 Conservative MPs and peers – including several former members of the Truss junta – subsequently wrote to the Chancellor to point out persistent failures in the OBR’s forecasting. They put to Hunt that the OBR has misjudged UK public sector net borrowing by £53 billion a year since 2010, and that the total sum of its growth misjudgments had been a not-inconsiderable £558 billion.
Urging Hunt to end the Treasury’s “unhealthy dependence” on the OBR, they called for “a more diverse range of perspectives to provide scrutiny of the Government’s budget and fiscal events”. After his Budget woes, the Chancellor may be a little more sympathetic to their arguments than in January. But why should he stop at simply expanding Treasury sources of advice?
George Osborne only established the OBR in 2010 – one of those seemingly permanent fixtures of our political firmament that are very recent in origin. According to its charter, the Government “retains the right to disagree with the OBR’s forecasts”. Truss proved how the market might treat that approach. But Parliament can repeal any legislation it wishes. So why not simply abolish it?
Time is of the essence. Reports suggest the Government plans another pre-election fiscal event in the autumn. The hope is that a recovering economy might allow for more OBR leeway. Without substantial tax cuts, an already hollow-looking Tory election pitch would look even more empty. Hunt is not a gambler by nature. But what if OBR repeal is his last, best hope of keeping his seat?
Labour plans to empower the watchdog by ensuring no future Chancellor could hold a fiscal event without it reporting. By abolishing it, the Tories would show the strength of their commitment to reducing the tax burden from its 70-year high. Alternatively, a mandate for abolition provided by a manifesto pledge might be easier for the markets to accept than just ignoring it.
There would be a fitting absurdity in one of the final acts of fourteen years of Conservative government being to repeal one of its first – the perfect encapsulation of almost a decade and a half of incoherent U-turns and turmoil in personnel and policy. Nonetheless, even as a final middle finger to Whitehall’s obstreperousness, OBR abolition would be a futile waste of time and effort.
Conservative criticism of the watchdog stems from a frustration at it working as intended, and an unwillingness to face the trade-offs required to finance tax cuts. Blaming the OBR is a handy get-out clause for MPs unwilling to accept that lower taxes require cutting government spending or passing serious supply-side reforms. They have learnt nothing, and forgotten nothing.
In establishing the OBR, Osborne was consciously creating a rod for both his own back and those of future Chancellors. “That is the whole point,” he said. “We need to fix the Budget to fit the figures, not the figures to fit the Budget.” Richard Hughes refusing to tweak his analysis to give Hunt the tax cuts he wants is exactly the watchdog’s raison d’etre. There should be no Magic Money Tree.
Before the OBR, forecasts were produced in-house at the Treasury. For ten long years, Gordon Brown loomed over officials. His forecasts tended to over-predict growth and under-predict borrowing. Since 2010, the OBR’s forecasts have consistently proved more accurate than the Treasury’s, winning the praise of the OECD and IMF. Labour’s embrace of the OBR is a Tory victory.
Of course, its forecasts are not perfect. But the OBR has been inaccurate in a direction for which the Government is ultimately to blame. The watchdog’s own analysis has shown it has consistently overestimated GDP growth and underestimated government borrowing, with the latter driven by a consistent underestimation of public spending. Hunt really is following in Brown’s footsteps.
If the OBR underestimates migration levels, it is because ministers have lost control of our borders and lack the will and aptitude to take the radical action required to reduce numbers. Similarly, if the OBR consistently overestimates growth and underestimates spending, it is because Conservative governments have allowed our economy to stagnate and our state to metastasize.
The OBR has two major roles. The first is producing five-year economic trend forecasts, including assessing the Chancellor’s policies. All predictions are flawed and struggle for accuracy in an environment as geopolitically and economically volatile as our own. The second is judging whether the Government hits its own fiscal rules. Osborne outsourced homework marking.
‘Fiscal rules’ were first devised by Brown, proving both highly changeable over the last three decades – we are currently on our ninth set – and impossible to hit. Nonetheless, the experience of Truss suggests the markets take them seriously, and see the OBR as a useful judge of whether they have been hit. Uninventing it to enable tax cuts might only court the same turmoil as she did.
Higher-than-expected government borrowing costs and lower-than-expected tax receipts are a reality that no Chancellor or forecaster can change. But Hunt’s fiscal rules are within his own control. His lack of headroom entirely derived from his aim to have debt falling as a percentage of GDP within the next five years. The OBR is only enforcing constraints he imposed on himself.
Those constraints are needed. Any fan of Edmund Burke should abhor how bloated our debt-to-GDP ratio has become, Covid or no Covid. But that should not rule out tax cuts. Hunt must act within the limited freedom provided by Tory MPs habitually reluctant to cut spending or pass major supply-side reforms. Our tax burden is their fault, not the OBR’s. They are conservatives in name only.
Obviously, at a time when voters are crying out for more public spending, cuts are unlikely to be unpopular. But the swingeing reductions Hunt has punted past the next election show that an encounter with reality can only be postponed, not avoided. Today’s Conservatives are asking tomorrow’s Labour government to make the hard choices they won’t. If nothing else, it’s cowardly.
Lockdowns deserve their share of the blame. So do ministers unveiling a costly new NHS Workforce Plan or 30 hours of not-so-free childcare, or proving unable to reverse the ballooning benefits crisis caused by soaring incapacity benefit claims as our workforce struggles to reach pre-Covid levels. Hunt was right to point out that public sector productivity remains down on 2019.
But if MPs want to cut taxes responsibly, simple routes to doing so have long been obvious, whatever other impediments exist. End the Triple Lock and linking pension increases to average earnings. Scrap free prescriptions and other perks for the wealthy. Pass the serious supply-side childcare or planning reforms successive governments have ducked. Tell the MoD where to get off.
None of this will happen. Grumbling about the OBR is so much easier than taking a long, hard look in the mirror. But Conservatives should be aware that it is they, not Richard Hughes, who are standing in the way of lower taxes.