Liz Truss should ask for a new OBR forecast before announcing major tax cuts

In recent days the IfG has had a stream of phone calls and emails from political journalists asking exactly what a ‘budget’ is and what the protocols are around having one. This was prompted by Liz Truss having initially said she would hold an ‘emergency budget’ in late September if she becomes prime minister – and then saying she would not. According to reports in the media, this change of heart was prompted by a desire to avoid having to ask the Office for Budget Responsibility (OBR) to produce a new set of forecasts, which would be likely to show a worse outlook for the economy and public borrowing and therefore less scope for the permanent tax cuts Truss wants to announce. ^[1]  

Too many words have since been expended on trying to delineate the difference between a ‘budget’ and a ‘fiscal statement’ – Truss’s new term for what she plans to do. There are some protocols that apply specifically to budgets – predominantly around the parliamentary procedures that accompany one. The interested reader can refer to our explainer on this subject. But these semantics are a waste of time and miss the point. Whether or not Liz Truss and her chancellor should ask the OBR for updated forecasts depends not on what the statement is called but rather on what it contains.  

The economic outlook has deteriorated since March’s OBR forecast 

Liz Truss’s pledge to abolish the health and social care levy (a 1.25 percentage point increase in rates of National Insurance contributions) and to cancel planned increases in corporation tax, which could cost nearly £30bn a year, were predicated on the £30bn of headroom against the fiscal rules that existed in the last set of official economic and fiscal forecasts from the OBR back in March. But since then, the outlook for the economy has worsened considerably and forecasts for energy prices (and thus inflation) have risen ever higher. 

While higher inflation will provide a boost to cash tax receipts, it will also create extra public spending pressure and squeeze household incomes and spending, and higher energy prices will further hinder economic growth. All these developments mean the outlook for the public finances is likely to be markedly different now from what it was in March. As a result, making any major decisions about the permanent stance of tax and spending policies without new forecasts would be unnecessarily foolhardy. 

The content, not the title, of Truss’s fiscal announcements is what matters 

The OBR has publicly stated that it would be able to produce an updated forecast in time for a new government to announce new tax and spending plans on 21 September, as Truss has indicated is her preference.  

If the new government simply wanted to announce further temporary support for households with the cost of living, it might not be necessary to ask for a new forecast. Time-limited support would increase public borrowing but only temporarily and there is no reason to believe the UK government could not afford to borrow somewhat more for these kinds of measures. The new government could then give the OBR more time to produce a forecast for a full fiscal event later in the year. 

But the picture is very different if the new government wants to announce permanent tax cuts or spending increases immediately. Such changes would affect the longer-term fiscal sustainability of the UK. Understanding the updated picture for fiscal sustainability, and how Truss’s new policies would affect this, is a prerequisite for good policymaking. The new chancellor may decide that they are happy to go ahead with tax cuts even if it would mean breaching the old fiscal rules or even if the OBR does not think the tax cuts will have the transformative effect on economic growth for which Truss hopes. Either would be a legitimate political choice. But a forecast would ensure the government had to think about – and explain – its new fiscal and economic approach at the same time, rather than tying itself into a course of action with its head stuck in the sand.  

Failing to commission a new forecast now would just delay, and not avoid, the difficult news

The politics perhaps dictate that it would be preferable to announce the good news of tax cuts quickly, without the bad news of worse forecasts – if that is what they show. But even that seems very short-sighted. At some point the new chancellor will have to ask the OBR to produce a new forecast. He or she is required to commission two sets of forecasts each financial year. The OBR has not produced one at all this year so it will have to publish two between now and the end of March.  

Those forecasts will eventually provide the government and the public with an up-to-date picture of the fiscal outlook and how the new government’s tax cutting plans fit with that. Delaying the inevitable will just lead to worse policymaking for little obvious gain – and could even result in a future backlash if Truss is perceived to have acted recklessly when she could have been armed with better information. 

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1. https://inews.co.uk/news/politics/liz-truss-u-turn-on-cost-of-living-budget-plans-amid-warnings-new-forecast-will-derail-tax-cut-promises-1809497?ico…;