The new prime minister and her chancellor should stand up for the Official for Budget Responsibility instead of blocking the publication of its forecasts, writes Olly Bartrum
On Friday, in an economic environment that has radically transformed since the last forecast from the Office for Budget Responsibility (OBR), the government’s official forecaster, in March, we expect the chancellor Kwasi Kwarteng to confirm historic increases in borrowing and announce permanent tax cuts. We will hear claims about how some of these policies will drive growth, yet they won’t be accompanied by an independent assessment from the OBR, or indeed any forecast at all.
As we have argued before, this is irresponsible and undermines the credibility of the government’s fiscal and economic policy. The government should be open to public scrutiny, rather than doing everything it can to avoid it.
The OBR was set up in 2010. According to George Osborne, the Conservative chancellor who established it, the OBR was introduced to “remove [from politicians] the temptation to fiddle the figures”. Before the OBR came along, the Treasury produced its own economic forecasts under supervision of the chancellor. But these were often too optimistic about UK growth and the impact of new policies. The result was lower tax receipts than expected, higher borrowing and, ultimately, damaged fiscal credibility.
The OBR forecast tells the government whether it is on track to meet its fiscal targets and, if so, how much headroom it has against them (i.e. how much more it can increase spending / reduce taxes and still achieve its targets for borrowing and debt). This information is critical for sound economic and fiscal policy making. And this month, the OBR would likely have found, as discussed in our recent report, that the outlook for the economy and public finances is now markedly different than expected when the last forecast was produced in March. They would likely show that the permanent tax cuts promised by the new administration would lead to the government running a large deficit indefinitely unless it also significantly cuts public spending: the tax cuts certainly won’t pay for themselves.
Cutting public spending is a legitimate political choice, but would be difficult at a time when many services are facing backlogs, and the new government has not identified any spending cuts it wants to make that would come close to paying for its tax cuts. The message of a forecast would be clear: based on current plans, the government is at risk of damaging the sustainability of its public finances and possibly the credibility of its fiscal policy unless it significantly cuts public spending or increases the tax burden. This message would force the chancellor to say which route he is taking, and defend it. Instead, the chancellor will insist that he can achieve tax cuts, strong public services and fiscal responsibility simultaneously. The OBR’s evidence would likely have delivered an unwelcome message that contradicts the government’s rosy narrative, but without forecasts Kwasi Kwarteng is burying his head in the sand.
A forecast has been produced but not published, and it is the latter that matters for transparency and the government’s credibility. The forecast’s publication provides information to the UK government’s creditors (i.e. financial markets) on the sustainability of public finances, and the OBR has earned respect worldwide as an independent fiscal institution with strong leadership, high quality publications, and a strong track record on reducing bias in forecasts. Preventing it from publishing its analysis sends a clear signal to both the public and financial markets that the government isn’t confident enough in its economic and fiscal policies to subject them to scrutiny.
At a minimum, the chancellor must affirm his support for the OBR and the objective scrutiny it provides when he gives his statement on Friday, and confirm that they will deliver a full forecast and judgement on the government’s medium-term fiscal position in November, when we expect the chancellor to deliver a ‘full’ budget. In any case, the OBR has a legal obligation to produce two forecasts before April 2023.
Prioritising growth is welcome, and the government may also have full confidence that “The Growth Plan” to be announced on Friday will achieve the 2.5% GDP growth target that Kwarteng will set – but this sort of optimistic thinking is what led to Treasury’s biased forecasts and the creation of the OBR to begin with. We don’t yet know what policies will be in this document – but assessment of their impact on growth should be left to those outside of the Treasury.
Even on the most optimistic assumptions the tax cuts won’t generate enough growth to pay for themselves. The OBR would be likely to point this out – consistent with their earlier estimates of the small impact the initial tax rises announced by Sunak would have on the economy.
This is not the first time that the OBR has caused ministerial headaches. We previously defended the OBR after briefings from the Treasury about Rishi Sunak’s ‘visceral hatred’ of the institution because it was delivering bad news about the scale of the cost of living crisis to come. As we said then, the OBR is one of the best legacies of the Cameron–Osborne government; the chancellor should pledge to protect it.