By strengthening the OBR, Reeves has created severe difficulties for herself. Vital decisions about our economic future should be made by politicians, not unelected quangocrats, says Paul Ormerod
Later today we will know for certain what is in Rachel Reeves’ Spring statement, a budget to all intents and purposes. But as is usually the case these days, substantial parts of it have been widely trailed in the media.
A key theme in the commentaries on the topic is that the Chancellor has boxed herself into a corner.
Following the massive rise in the overall tax burden in the autumn measures last year, she has ruled out further increases. On the spending side, welfare benefits are to be reduced. The civil service is being asked for efficiency savings and jobs will be lost.
Certainly there is huge scope for improvements in the performance of our public services. As is by now well known, productivity in the public sector as a whole has shown no increase since 1997, a period of almost 30 years.
We might well applaud these proposals as being perhaps the most sensible step which Labour has taken since obtaining office in the July 2024 general election.
But Reeves has created serious political difficulties for herself. The civil service unions are girding up for a fight. Substantial numbers of Labour MPs are expressing serious concerns.
Reeves in a corner
The proximate cause of all her troubles seems to be the forecasts which will be published by the Office for Budget Responsibility (OBR). According to numerous leaks, the OBR has reduced the rate of growth of GDP which it is projecting. And the consequence of less economic activity is lower tax receipts for the government, which in turn puts pressure on the public finances.
The OBR was set up shortly after the 2010 election by the then Chancellor George Osborne. Its purpose is to provide independent forecasts for the economy, replacing those which were previously carried out by the Treasury.
Reeves doubled down on the importance of the OBR by, for example, legislating that no government can announce fiscally significant measures without being subject to an independent assessment by the OBR.
It is both amusing and ironic to see that Reeves’ ability to act is being seriously constrained by the very body whose powers she herself enhanced
It is both amusing and ironic to see that her ability to act is being seriously constrained by the very body whose powers she herself enhanced.
The members of the OBR, both past and present, are all distinguished economists and independent thinkers. But they have no special knowledge which means that their forecasts will be any more accurate over time than those of other forecasting groups.
The OBR exists because of the myth that if forecasts and decisions are removed from the political arena and assigned to independent experts, they will be automatically superior.
Gordon Brown made the Bank of England independent in 1997. But it can scarcely be claimed that the performance of its Monetary Policy Committee in setting interest rates to meet inflation targets is better than it was before it became independent.
We have only to look at its forecasts and decisions since the energy price rises in 2021/22 to see how groupthink can penetrate even the most august and independent of bodies and lead them to perform badly.
Rachel Reeves’ Cabinet colleague Wes Streeting is the first major politician to debunk the fantasy of the superior performance of the independent expert.
Streeting has scrapped completely the huge NHS England quango, which was created in 2012 with the explicit aim of reducing political interference in the NHS. Since then of course It has become a byword for inefficiency and waste.
Decisions on how to run the health service and the economy should be left to politicians rather than independent experts. The track record suggests they are unlikely to do a worse job. And, unlike the unelected members of quangos, they can be kicked out by the electorate.
Rather than boosting the powers of the OBR, Reeves should follow Streeting’s example and abolish it.
Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester, an economist at Volterra Partners LLP, and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in conjunction with City AM