How the OBR can help people understand the implications of government’s stated spending plans

Jeremy Hunt used his Autumn Statement to announce the largest tax cuts since the 1980s. That came on top of a big fiscal giveaway in March. This meant that 2023 saw two of the four largest giveaway fiscal events since 2010, with the other two announced during the pandemic.

But, as has been much discussed, this fiscal largesse rests on figures for spending on public services that IFS director Paul Johnson has variously described as “questionable, if not plain implausible”, and at material risk of proving undeliverable.

Why? As the Office for Budget Responsibility (OBR) pointed out, the favourable fiscal news since their March forecast was “mainly a reflection of a £19.1 billion erosion in the real value of departmental spending”. And let’s not forget that back in March they reckoned public services budgets had already taken a hit of “between £13 billion and £29 billion depending on the measure of inflation used”.

The OBR is required to assume the government delivers its public service spending plans – however implausible

The OBR publishes forecasts that include amounts for public services – over a third of all public spending – that look clearly inadequate because Parliament has decreed that they must. Specifically, that they must “have regard to” government policies and must not consider “what the effect of alternative policies would be”.

So, when the chancellor says that the overall budget for day-to-day spending by departments will be £439.9 billion in 2025-26, and will rise to £477.6 billionn by 2028-29 (as he did in November), the OBR is legally required to say “OK” and type that into its spreadsheet. Even if those figures represent four years of 1% a year real growth from a 2024-25 baseline that has been severely eroded by unexpectedly high inflation. (The only wriggle room they have is in the assumptions they make about the extent to which departments’ budgets will actually be spent.)

But the law also requires the OBR to set out the main risks to its forecasts. That allows it to arch an eyebrow by drawing attention to the scale of the inflationary squeeze on budgets, or noting that “recent history points to governments topping up day-to-day spending envelopes by more than £30 billion a year” when the time comes to set detailed plans in a spending review. But it can’t say “those numbers are implausibly low; we’re going to use our own”.

Building official forecasts on implausible spending ‘plans’ undermines fiscal policy debate  

The problem with all this is not just that there is an entirely predictable reason for the OBR’s latest forecasts to prove wrong –whoever is holding the purse strings after the next election will have to find more money for public services. (And perhaps for public investment too, though history suggests governments are more adept at sustaining low investment when budgets are tight.) More importantly, the election itself is going to be fought on the basis of these implausible numbers. No protagonist that hopes to win can say “we’re going to have to spend more” without opening the door to their opponent’s “tax bombshell” campaign response.

So, short of amending the primary legislation, or Britain’s electoral politics, can anything be done? Can we at least make this ‘fiscal fiction’ tactic more difficult?

The OBR could do more to help the public understand the implications of government’s stated spending ‘plans’

The amount spent on public services is genuinely a choice for government, so the OBR can’t be expected to say what the right number is – it simply depends on the quality and quantity of public services a government wants to deliver.

But right now, departmental spending across the four years that span most of the next Parliament are, to quote OBR chair Richard Hughes, “just four numbers”. The OBR has nothing to scrutinise.

Forecasts are often decried for the fact that they usually turn out to be wrong – cue references to making astrologers look good. But forecasts require the forecaster to make assumptions about how things will evolve. That allows you to look into why they prove wrong: that is one of their most useful qualities. When we start from “just four numbers” that everyone expects to be raised at some point, all we will be able to say at that point is that, yes, the new numbers are indeed higher.  

How could the OBR provide more information without being drawn into normative judgements about how much should be spent on public services? So far it has spelt out implications for spending cuts for ‘unprotected’ departments given the government’s input targets for things like health, defence, and overseas aid. So, when detailed plans are set, we will be able to say “look, unprotected departments grow by x rather than being cut by y”.

The OBR could also break down those “four numbers” in a different way, via an ‘economic’ rather than a ‘functional’ breakdown. That would spell out what they imply for the public sector workforce – in jobs and average pay – and the amounts available for procurement and other things. That would have some value too.

The OBR could set out ‘neutral’ assumptions for each. For example:

• that the workforce grows in line with the population (neutral in the sense of each public sector worker providing services to the same number of people);
• that average pay rises in line with the private sector (neutral in the sense of maintaining the ability to recruit and retain public sector workers);
• that non-pay budgets rise in line with pay budgets (neutral in the sense that these costs, largely the procurement of goods and services, are influenced by the same factors as the public sector pay budget and that swings in the ratio of non-pay to pay budgets would have implications for public services).

A government that wanted to set out material cuts relative to these neutral assumptions would face a choice. It could explain how and where the axe would fall – for example, by setting out plans for boosting public sector productivity or stepping back from certain activities, as it did after the pandemic when Test and Trace and the vaccine programme wound down. Alternatively, it could leave it to the OBR to show what would happen if the axe fell proportionately across workforce numbers, average pay, and non-pay budgets.

The OBR’s documents could then analyse the future relative to the past – e.g. how might the next Parliament compare with Osborne-era austerity? – and relative to its neutral baseline. The UK’s fiscal-watching think-tanks would then have official numbers to dig into as they guide the media through what a chancellor’s latest fiscal statement really means. Everyone would have something to look back to and compare against what actually happens. As a result, we’d all have more useful information with which to hold governments to account.

That would surely be a better place than we’ve arrived at today. 

Andy King is a specialist partner at Flint Global and a former member of the OBR's Budget Responsibility Committee.