CUTTING WELFARE is rarely comfortable for the Labour Party. But the scramble to trim the health-benefits bill ahead of the Spring Statement last month was particularly messy. After weeks of rows Liz Kendall, the welfare secretary, promised Parliament that her cobbled-together reforms would save £5bn ($6.5bn) a year. Unfortunately the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, reckoned she had over-egged the savings by a billion-plus. Cue a hasty rejig and even deeper cuts.
Richard Hughes, the OBR’s boss, is quietly scathing. “Agreed deadlines were missed,” he says. “It wasn’t accompanied by the usual kind of economic analysis that we would expect.” The episode underlines the OBR’s growing role. Recent chancellors, especially the incumbent, Rachel Reeves, have set rigid fiscal rules that leave little headroom. This gives even ambiguous OBR calls, such as those over savings from benefits reform, a do-or-die weight.
Frustration with the OBR is growing. That will become even more obvious at the next budget. Ms Reeves will be lucky to be only a few billion pounds off her main fiscal rule by then. Today she has only £9.9bn (0.3% of GDP) of headroom. But half of that disappears if she keeps fuel duty frozen (which is likely). If gilt yields do not fall further, that will knock off a few billion more, leaving her only just above zero.
The even bigger question is whether the OBR might also lower its medium-term growth forecasts, which have long been higher than most (see chart 1). Underlying such estimates is the concept of trend productivity: how much more efficient British workers will get in the long run. The OBR assumes that Britain will beat its shabby post-financial-crisis productivity performance (see chart 2). Fifteen years on, that view is harder to credit.
Even a small nudge down could be painful. The downside scenario that the OBR laid out at the Spring Statement, where the dire productivity growth in 2024 persists, would knock off £60bn in headroom. The fact that the OBR is raising the matter now is a worrying sign; long discussion of productivity in its reports has usually come with downgrades (see chart 3), for example, when the OBR stopped assuming a return to pre-crisis productivity growth in 2017. (The OBR argues that its numbers reflect the sweep of British economic history and do not over-focus on recent years).
Conversely, some MPs question whether the OBR may be too pessimistic. One line of criticism is that the OBR underplays the impact of the government’s borrowing-to-invest. Jeevun Sandher, a Labour MP, says “if the OBR got its multiplier wrong in the 2010s, you would have seen growth lower than expected and borrowing higher than expected. That’s what happened repeatedly—it looks like that parameter is wrong.” The OBR stresses that such borrowing also imposes wider costs by raising interest rates—as reflected in gilt-market jitters after the last budget.
A final nuisance could be the beefed-up powers that Ms Reeves gave the OBR after last summer’s £22bn “black hole”, allowing it to forecast overspending. “Instead of being quite mechanical, the OBR will be able to do investigatory work to say: ‘The government says the reserve isn’t oversubscribed but we’re sceptical. So we’re going to make a change’,” says James Nation of Forefront Advisers, a consultancy. Mr Hughes plays the changes down, saying they are merely a “codification of what was a pre-existing arrangement”.
Across the government, arm’s-length bodies are falling out of vogue. The largest, NHS England, has just been abolished. The OBR has a powerful protector in the bond market, which would object if it were sidelined. Yet soon that shield may be tested.■
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