The Office for Budget Responsibility (OBR)’s chair Richard Hughes said Chancellor Rachel Reeves’s small headroom means the Treasury has left itself exposed to “inevitable” economic shocks.
The role of the fiscal watchdog has come under greater scrutiny since Reeves made cuts totalling £14bn in order to meet her fiscal rules at last week’s Spring Statement.
But the OBR stood by its analysis of the state of the UK economy during a hearing at the Treasury Committee.
Hughes said the result of Reeves’ buffer of £9.9bn was that government policy was at the mercy of “very small changes” in the OBR’s scorecard.
“It’s sort of inevitable that small forecast changes may warrant policy [changes].
“In a world where shocks are inevitable, how policy responds to those shcoks matters for the accuracy of the forecast and the likelihood of a government meeting its fiscal rules, which is the thing we ultimately have to assess.”
Among the changes the OBR made to its forecast in October included higher interest rates and one per cent growth in 2025, thereby wiping Reeves’ previous headroom left at the Autumn Budget.
Hughes also defended the OBR’s decision not to make a full assessment of the Labour government’s flagship Employment Rights Bill, despite comments that it would be a “net negative” for the economy.
“We took the judgment at this state that the bill was too fluid for us and the details were too up in the air for us to reflect on our forecast,” he said, pointing out that over 100 amendments are being presented in Parliament.
“It’s for us to decide when a policy gets scored up,” he added.
The OBR’s fiscal analysis has come amid problems emerging with official data from the Office for National Statistics (ONS) and growing uncertainty around the effect of taxes and Trump tariffs.
OBR committee member Professor David Miles admitted that forecasters ought to have “much less confidence” in employment statistics published by the ONS.
He also said that problems in gathering respondents for the Labour Force Survey left productivity statistics in a more precarious state, with the OBR’s downgrading of productivity levels partially eroding Reeves’ headroom in forecasts.
“It seems to be that the fall off in the survey response rate may be unusually large in the UK,” he told the Treasury Committee.
“A better Labour Force Survey would be most important [for measuring productivity].”
The OBR committee members also emphasised that the effect of Trump’s tariffs could have “very different” negative impacts depending on how they are imposed on ‘Liberation Day’.
But Miles suggested that in the best case scenario where the UK avoids Trump’s taxes that there could be “mildly positive” benefit as trade may be diverted to Britain.
The watchdog said after the Spring Statement that the worst case scenario of a trade war could knock one per cent off UK GDP.