Forecasts on the outlook for the public finances last year were beyond “a work of fiction”, the head of the Treasury’s independent forecasting unit has suggested, after the government failed to provide details of its spending plans.
In an unusually scathing intervention, Richard Hughes, the head of the Office for Budget Responsibility (OBR), criticised the support he gets from the government to help him forecast public spending.
Addressing the economic affairs committee of the House of Lords, he said the OBR’s forecasts were based on “questionable assumptions” that lead people to call his efforts a work of fiction.
“Some people call [the projections] a work of fiction, but that is probably being generous when someone has bothered to write a work of fiction and the government hasn’t even bothered to write down what its departmental spending plans are underpinning the plans for public services,” he said.
Hughes was disappointed last November when he was asked to provide a forecast to be published alongside Jeremy Hunt’s autumn statement without being given any detail from the chancellor about Whitehall departmental budgets, apart from a headline figure that showed them falling over the five-year period.
Hunt was expected to hold a comprehensive spending review (CSR) to show how departments might cut costs and reduce spending, but departments were told to base their spending assumptions on existing budgets.
In 2022 Hughes famously provided Kwasi Kwarteng with a five-year forecast of the public finances even though the then chancellor had refused to ask the OBR to carry out the work for the first time since it was founded in 2010.
The fact that Hughes had made an intervention emerged last summer following a freedom of information request by Stuart McDonald, an SNP MP.
Kwarteng’s disastrous mini-budget, which cut taxes as part of a package of measures designed to stimulate the economy, spooked the financial markets and led to his owndeparture and ultimately that of the prime minister Liz Truss.
Official figures on Tuesday showed Hunt may have as much as £20bn spare to cut taxes in his March budget based on higher-than-expected tax receipts and lower inflation and reductions in interest rates.
Data from the Office for National Statistics showed that higher VAT and income-tax receipts coupled with lower spending resulted in a deficit of £7.8bn in December 2023 – the lowest for the month since the pre-pandemic year of 2019.
With lower debt-interest payments also contributing to the improvement in the government’s financial position, analysts said the prospects for a giveaway package had brightened.
The December deficit was more than £6bn lower than the £14bn predicted by the OBR.
Hunt could use any windfall to cut taxes, increase public spending or pay down debt – or a combination of all three – but the chancellor dropped a broad hint at last week’s World Economic Forum in Davos that he was planning a package of tax cuts in his 6 March budget.
With opinion polls suggesting the Conservatives are on course for a landslide defeat, the budget is seen as one of the government’s last hopes.
Hunt’s scope to cut taxes is constrained by his rule that debt should be falling as a share of national income in five years’ time, but Ruth Gregory, the deputy chief UK economist at the analysts Capital, said the latest data showed the chancellor would meet this target with about £20bn to spare.
Gregory said: “That will probably allow him to unveil a freeze in fuel duty in April 2024 (costing about £6bn a year) but perhaps also to announce more crowd-pleasing measures, such as a 1p cut to income tax (costing £6.9bn a year), while still maintaining fiscally prudent appearances.”
Hughes told the Lords committee the outlook for the public finances remains “clouded” by a lack of information.
A Treasury spokesperson said the government was planning to limit the growth in public spending.
“We are focused on creating a more productive public sector, not a larger one, by reducing admin workloads, introducing early interventions and safely bringing in new tech like AI. This will stop the state growing ever larger and ensure taxpayers’ money is spent on the public’s priorities,” they said.
Departmental spending is expected to grow at 1% a year in real terms over the next spending review, though ministers in charge of spending departments have yet to formulate their budgets to show how they will achieve expected savings.
