When Labour was riding high in opposition, the Office for Budget Responsibility was a near sacrosanct institution. Its manifesto pledged Labour would “never sideline the OBR for political convenience”.
But emerging from a punishing spring statement, inside No 10 the former devotees have turned sceptics. The fiscal rules remain untouchable – despite Labour MPs’ grumbles – but there is intense frustration at the institution that marks the government’s homework.
That unhappiness is likely to deepen in June when MPs vote on a £4.8bn package of cuts to disability payments that were designed to make sure the OBR did not judge the chancellor, Rachel Reeves, to have missed her fiscal rules. Officials were particularly annoyed that its forecasters disagreed with Reeves’s original estimates for how much the cuts would save, forcing her to make steeper reductions than originally planned.
“The average opinion is now ‘I wish we could scrap the OBR’. And the average opinion in September was ‘we should strengthen the OBR’,” one source said. “So that shows you how far things have come. But that’s the case for lots of things. No 10 in particular is becoming generally more radical, not less.”
Reform is politically difficult – in September Reeves passed the Budget Responsibility Act, which even strengthened the watchdog.
But at the heart of the frustration is a feeling the OBR is either too cautious or cannot adequately reflect measures that No 10 believes will have a bigger impact on market confidence – changes to the state, planning change, defence spending or licensing laws.
Keir Starmer has told his closest aides repeatedly that he wants to see more radical ideas and expressed his frustration at the pace of change.
There is no prospect of abolishing the watchdog, as it would send shock waves through financial markets and risk a plunge in market confidence akin to Liz Truss’s disastrous mini-budget.
But senior figures in government are tentatively looking at cutting the number of forecasts it produces after the sting of its impact on the spring statement. Starmer criticised the OBR’s forecasts for the first time when he appeared before MPs last week.
The key irritation is that twice-yearly forecasts undermine Reeves’ intentions to have one budget a year as the only major fiscal event. Several cabinet ministers are now of the view that that should change.
Aligning the OBR with a single yearly event would upend a requirement dating back to Harold Wilson’s second term as prime minister, when the 1975 Industry Act first required the government to produce a minimum of two forecasts a year. While some economists suggested four forecasts could be appropriate – matching the timetable of the Bank of England’s forecasting – the requirement was kept when George Osborne created the OBR in 2010.
“It is clearly a challenge to have two forecasts but an intention to only respond to one of them. It’s always going to be difficult, especially in a volatile world, and especially if headroom is really, really small,” said Andy King, a former member of the OBR’s budget responsibility committee who is now a partner at the advisory firm Flint Global.
King said moving to one forecast a year would probably have little impact on financial markets, but could “look strange” politically after Reeves had only just set a tougher mandate for the OBR. Any change to the headline fiscal rules, requiring falling debt as a share of the economy within five years and balancing day-to-day spending with revenues, however, would go down badly.
“The fiscal targets, particularly on the debt side, are relatively loose, with relatively little headroom against them. The debt target is looser than the one they inherited. So having done the £10bn of headroom twice, they’ve kind of made that totemic. I think [changes] would be risky with the markets, definitely.”
The party’s most loyalist Starmerites and its most agitated leftwingers are speaking openly about their frustrations – sometimes not with the OBR as an institution, but the choreography of its forecasts, especially this spring when it meant a lower scoring of welfare changes meant a last-minute scramble for further cuts.
Labour’s £5bn of benefit cuts came in the weeks running up to the spring statement when Treasury officials were deep into a five-round back-and-forth exchange with the OBR. sharing data and policy measures used to compile its all-important economic and fiscal outlook report.
The evening before the final forecast was presented to the exchequer, on Friday the week before the spring statement, one source says the watchdog informally approached the Treasury to let the chancellor know they disagreed with the benefit policy costings.
When the report arrived the following day, they say “shit hit the fan” over the weekend as ministers rushed to make up the shortfall.
“It was completely unprecedented. I can’t think of a single example where the government have signed off on a number – and not just any number, one that was so central in the political story – only for it two days later to be privately contradicted about it, then very publicly contradicted about it the week after that.”
At the liaison committee this month, the prime minister hinted at his own frustrations. “It is significant to my mind that the ability of any policy or legislation to change any behaviour at all is not priced in. In other words, the OBR has scored nothing against any change here,” he said.
One staunchly loyal Labour MP said: “There’s got to be something done about this. We can’t have a situation where the government is entirely beholden to these forecasts.”
A party veteran said: “What no one is willing to say publicly yet is that we are at the whim of an institution which quite frankly gets stuff wrong all the time. Welfare cuts are so damaging and it’s essentially been done as an accounting exercise.”
“The [parliamentary Labour party] needs to be raising its voice about the OBR and the fiscal rules,” one 2024-intake MP said. “This is destroying faith in a Labour government [just] to make tiny numbers on a balance sheet add up.”
The public perception of the cuts are causing alarm. A recent YouGov poll found 30% of voters believed the government was making bigger spending cuts than the coalition government – twice the number who think the coalition made bigger cuts.
