Between 5:16am and 11:30am on the day of the Budget, as Rachel Reeves was putting the finishing touches to her House of Commons speech, 7 audacious internet users made 44 attempts to break into the servers of Britain’s fiscal watchdog to get an early glimpse of her plans.
An hour before Reeves stood up in the Commons at 12.30pm, the news agency Reuters revealed that Budget details had indeed been accessed – and leaked. The Chancellor’s statement was torpedoed and chaos erupted at the nearby headquarters of the Office of Budget Responsibility (OBR). Whitehall staff even tried to take down the whole website in a fit of panic.
It has since emerged that this year’s accidental early release was not the first.
After furious criticism from Keir Starmer over the leak, OBR chair Richard Hughes fell on his sword, once a swift investigation into the early leak found the “ultimate responsibility” of the error rested “with the leadership”.
Surviving OBR officials were not cowed by Hughes’ sacking, pointing the finger at dozens of pre-Budget media leaks that dripped out from other corners of Whitehall.
The wonkish spat between the OBR and the Treasury broke out into public view on the weekend when former chair Hughes spelt out the exact timeline of changes in its fiscal forecasts in a letter to Treasury Select Committee chair Meg Hillier.
The timeline drove a coach and horses through anonymous government officials’ running commentary of the Budget process in the long run-up to the fiscal event, which had hinted the Chancellor had been dealt a dire set of forecasts that would necessitate huge tax increases.
Headroom headache
By 31 October, the last OBR forecast round – where it does not take account of how government policies might impact measures – the watchdog suggested Reeves would be meeting her fiscal rules with a headroom of £4.2bn. The near £5bn trimming from Reeves’ £9.9bn headroom left in the Spring came courtesy of a sweeping productivity downgrade, higher debt interest payments and revisions to inflation and wage growth projections.
This figure did not include the £6bn cost of abandoned welfare savings due to a Labour backbencher rebellion, nor the £3bn in extra benefits expenditure for lifting the two-child cap. It also did not include the government’s ambition to build extra headroom or extra spending commitments on capital and renewable energy.
With a Treasury filter applied to the OBR’s numbers, the fiscal hole was indeed closer to £30bn.
From botched welfare savings to extra headroom, the decision to raise some £26bn in taxes and make cuts to day-to-day expenditure in the all-important year for Reeves’ fiscal rules were political choices. Government officials are adamant that the measures were “necessary” to keep the Chancellor on track to meet her fiscal targets.
Reeves faced intense scrutiny over the messaging in her “scene-setter” press conference on 4 November, widely interpreted as a strong hint that Labour’s manifesto commitment not to raise the rate of income tax would be breached. Tory leader Kemi Badenoch argued Reeves knew there was no shortfall, and so did not need to mislead the public by pitch-rolling a manifesto breach.
Questions still hang over the Chancellor and the Prime Minister as to why the government binned plans to raise income tax rates just over a fortnight before the Budget.
But it is clear that the remaining Budget Responsibility Committee (BRC) members, David Miles and Tom Josephs, are aggrieved by blabbermouths among Downing Street advisers and officials.
OBR’s criticism of media briefings
Media reports across Fleet Street said for weeks that the Chancellor would break manifesto promises, while Reeves told the BBC that sticking to the Labour manifesto would require “deep cuts in capital spending”. In a shock report on 13 November, the Financial Times revealed plans to raise income tax rates had been dropped.
The day after, borrowing costs surged as bond traders digested the news that Reeves would rely on smaller tax receipts to meet her targets. Then, a few hours into trading, Bloomberg reported that “improved forecasts” was the reason the plans had been dropped. The claim raised eyebrows among economists, including former OBR chief of staff Andy King, who cast doubt on the idea that numbers would have significantly changed after 31 October.
Hughes’ letter proved that forecasts had not improved at all in early November, despite government officials’ assertions to the contrary. The Treasury’s riposte was to insist against publishing changes between forecast rounds due to concerns about Budget “security”, casting doubt on the government’s commitment to transparency.
Speaking to MPs on the Treasury Select Committee on Tuesday, Miles confirmed that Hughes’ unusual letter spelling out the size of Reeves’ headroom at each stage in the forecast was to “set the record straight” on “damaging” pre-Budget leaks that appeared in the media.
“There was a view [in media reports] that OBR forecasts were wildly fluctuating in pre-measures forecasts and after that as well,” he said.
“There were no wild fluctuations.”
The letter from Hughes came because the OBR felt there were “misconceptions out there that were wrong and actually damaging to the OBR”. Someone, somewhere in Whitehall, was briefing political editors false information about the fiscal watchdog and the Budget process to cover their own backs.
Shadow Chancellor Mel Stride and the SNP’s parliamentary leader Stephen Flynn wrote to the Financial Conduct Authority (FCA) demanding an investigation into the government’s alleged market manipulation as a result of various leaks. Given journalists will protect their sources, Reeves and the rest of her team may find that they escape further scrutiny should the City regulator decide to stay out of the matter. But the leaky war has opened the floodgates to questions over the credibility of the UK’s own economic framework.
Reeves’ change of tune
Shortly after moving into Downing Street, Reeves gave the OBR extra powers that prevent governments from rolling out new fiscal announcements without the watchdog making an independent forecast. If anything, the Labour policy was a nod to Liz Truss’ mini-Budget that completely ignored the OBR when Kwasi Kwarteng rolled out unfunded energy subsidies and tax cuts worth a total of £100bn.
As it has beleaguered her predecessors, the OBR has come to frustrate the Chancellor to the point that she seems to regret honouring it with so much praise.
The run-up to this year’s Budget has featured briefings – both on and off the record – against the OBR’s decision to conduct a review of its productivity trend forecasts for the UK economy, which analysts have long argued was too optimistic. Even after Reeves delivered her Budget this week, the Prime Minister said he was “bemused” by the timing of the review.
After last year’s Budget and this year’s Spring Statement, OBR officials gave clear nudges that a review of its measures would come, with the small print in consecutive fiscal reports stating that the previous 1.3 per cent projection had a “high degree of uncertainty attached”. In the end, the OBR opted to make a 0.3 percentage point downgrade to trend forecasts at a cost of £16bn to the government.
Allies of Reeves insist the OBR productivity review should have preceded the last election given that the bulk of the data it relied upon related to the Conservatives’ time in power. But Miles points out that conducting a hands-on review amid the pandemic and the energy price shock from Russia’s full-scale invasion of Ukraine, times when the UK economy was still re-adjusting to periods of turbulence, would have proved problematic.
There are also questions over the datasets the OBR used to make its assumptions, with analysts at Pantheon Macroeconomics suggesting that recent productivity readings in the UK economy may be more positive than the Office for National Statistics (ONS) has said. Given the disintegration of the Labour Force Survey measure in recent years, economists have suggested that taxpayer data taken from HMRC in fact boosts productivity readings.
Sir Charlie Bean, a former OBR official, has argued that the Treasury – not the OBR – has created its own problems by not baking in a large enough headroom in either of Reeves’ first two fiscal statements as Chancellor. The veteran economist went as far as to urge Reeves to change her fiscal rules altogether given that fine-tuning her headroom to jumpy forecasts was a “patently absurd” way to govern the country. Former Bank of England Governor Mervyn King went further, suggesting Reeves’ fiscal rules to lower debt were “flawed” as her targets allow for higher borrowing in the short-term before consolidation after three years.
The Chancellor should pay less heed to preserving fiscal headroom against minute adjustments in forecasts, Bean argued, and instead take greater notice of the long-term economic picture provided by the OBR’s 50-year “fiscal risks and sustainability” assessments. Such a move would inevitably be extremely awkward for any government hoping to curry favour with an ageing electorate. This year’s assessments said the current course of public finances created a “daunting” conundrum for the government given the triple lock state pension, the darling welfare policy of committed voters, was on an “unsustainable path”.
A view now percolates through Westminster – among MPs, advisers and journalists – that the OBR’s letter showed public finances were on more stable ground than most expected, with Reeves not needing to pitch-roll large tax hikes at her early November press conference. One consistent demand shared by businesses, City investors and the OBR before the Budget, however, was for Reeves to increase the size of her “wafer thin” £9.9bn headroom. Most also called on the Chancellor to avoid back-loading tax rises and spending cuts. While Reeves delivered on building a £22.7bn headroom, the government will now cumulatively borrow £19.5bn more in the next four years than it had planned to in March.
Total debt interest paid to the government’s lenders is expected to be higher as a result of more borrowing, surging past entire departmental budgets for defence and education, devastatingly exposing the central problem with public finances in real time.
Schroders economist David Rees predicted that the government would likely “come back with more fiscal consolidation” as a result of choosing to raise smaller taxes, with revenues “likely to fall short of the government’s expectations”. Oxford Economics’ Andrew Goodwin said the tax load planned for later years in the forecast period “undermined the credibility” of the Budget, while the government’s favourite think tanks, the Resolution Foundation and the Institute for Fiscal Studies, sounded warnings on the government’s swerve away from lowering high public sector debt levels in the near-term.
Reforming the OBR
Backed by MPs on the soft-left wing of Labour, the government has taken the line that extra spending commitments aimed at reducing poverty and enabling infrastructure investment would boost long-term growth. There is a purpose to borrowing more in the short-term, Starmer has argued, with welfare reforms on work criteria assessments in the coming months and years aimed at improving the labour market and the wider economy.
Think tanks argue that the OBR too should contribute towards scoring the upsides of the government’s new policies. The Tony Blair Institute believes the OBR should be forced to produce a second, alternative forecast at every fiscal event – one which takes a more optimistic approach to growth and rewards novel strategies for achieving it. This new system would also encourage politicians and the public to view budgets as opportunities to generate growth rather than tax-and-spend exercises, the think tank said.
Similarly, the New Economics Foundation believes the government should be given more power to dispute the OBR’s findings, which are accused of being too hesitant to reward policies that challenge Treasury orthodoxy. Dominic Caddick, an economist at NEF, believes OBR officials have too much “power” to make final judgments on the effects of policy measures.
The other alternative – once seen as impossible but now all too plausible – is for the government to scrap the OBR and take full control of forecasting in a throwback to pre-Osborne times. Richard Tice, Reform UK’s deputy leader, has long accused the watchdog of being too soft on Labour’s fiscal policy. For instance, it angered Tice – and Tory frontbenchers – for opting not to score the Employment Rights Bill in March, which is expected to dampen growth. The Reform MP has hinted that the party would abolish the watchdog if it were elected.
Dissatisfaction with the OBR also comes from within Labour.
Former transport secretary Louise Haigh, co-leader of the soft-left Tribune faction, broke ranks in September by claiming the government showed “excessive deference” to the OBR’s “rigid orthodoxy,” attacking the “short-termism” of its five-year forecast outlook. Jeevun Sandher – a Labour MP and, until recently, Treasury Select Committee member – this week accused the OBR of locking the UK within a tax-and-spend “doom loop,” claiming the organisation favours the “austerity” of the Conservative government which founded it in 2010.
The next big decision facing Reeves involves having to pick a new OBR chair who may be a little more tech-savvy. The Chancellor will face intense scrutiny if her pick is seen as being too politically favourable to Labour. She would also inevitably receive backlash if she altered her “iron-clad” fiscal rules.
But after seemingly winning The Leaky War between Rachel Reeves and the OBR, the Chancellor may now have the chance to tear up her rules and rebuild the watchdog as she so wishes.