Imagine you need a new car. You’ve saved up, chosen the model you want, and are ready to order it. But then you discover that your bank manager will only let you buy the car if you can prove that, five years from today, your personal debt will be falling.
How could you possibly know that? You might move house and need a bigger mortgage. Or, if your boiler breaks, you may be forced to take out an emergency loan. For a bank to impose these kinds of restrictions on its customer’s personal spending would be absurd; and yet that is exactly the kind of stranglehold the Office for Budget Responsibility (OBR) has over our national finances.
Miriam Cates has hit out at the OBR's hold on the Chancellor
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The OBR was created in 2010 by Chancellor George Osborne to provide the government with independent economic analysis and scrutiny of the public finances—a sort of economic Ofsted. Twice a year, at the time of the UK Government’s Budget and Spring Statements, the OBR sets out its forecasts in the Economic and Fiscal Outlook (EFO) publication.
In order for a Chancellor to secure the OBR’s seal of approval, he or she must demonstrate that national debt relative to GDP will be falling in five years’ time. In other words, the government cannot make any fiscal changes—whether increasing or decreasing spending and taxation—unless the economists at the OBR agree that these changes will lead to falling debt in half a decade’s time.
This is why Rachel Reeves had to extend her plans to cut disability benefits last week after feedback from the OBR; the OBR’s initial assessment concluded that her plans were insufficient to ensure debt would be falling by 2030.
I absolutely agree that we must address the soaring burden of public debt. The UK now owes £2.7 trillion, a staggering 96% of our GDP. Interest payments on that debt alone have climbed to over £100 billion a year—double our spending on defence. And unless our aging demographic picture changes—unless the birth rate increases substantially—this debt will rise to an unsustainable 280% of GDP by 2070. Over the last twenty-five years, governments of all political persuasions have borrowed and spent far more money than we can afford. We have robbed the future to pay for the present.
Nevertheless, while reducing national debt must be our aim, the arbitrary five-year target imposed by the OBR is a straitjacket that is preventing the economic growth we need. Suppose, for example, a government wanted to make substantial investments in reviving our manufacturing industries by subsidising commercial energy prices or slashing business taxes. In the long term, restoring Britain’s industrial base would significantly boost our economy, our balance of trade, and our security. However, in the short term—certainly within five years—any such interventions would be a net cost to the Treasury and would therefore fall foul of the OBR’s rules.
Or imagine that a future government decided to follow Hungary’s example by cutting taxes for families, helping young couples buy houses and cars to try to boost the birth rate. In the long term, such policies would be of huge benefit to our economy. In the 1970s, Britain had four working-age people supporting every pensioner; now, due to persistently low birth rates, we are heading for just two working-age people per pensioner, an utterly unsustainable ratio. The only way to restore growth and cut taxes is to boost the birth rate, but in the short term, this would require increased spending, meaning the OBR would block it. Far from ensuring fiscal prudence, the OBR has become an obstacle to long-term debt reduction.
The OBR also has a poor record of financial forecasting. It is perhaps unfair to expect the OBR to predict UK revenue, expenditure, and debt with complete accuracy five years in advance, given the many unpredictable national and international events that can occur. Who could have foreseen the pandemic, the war in Ukraine, or Donald Trump’s trade tariffs five years ahead? Perhaps unsurprisingly, the OBR regularly revises its deficit forecasts by tens of billions. Yet it consistently fails to learn from its mistakes. Many of the OBR’s forecasts depend on demographic projections. However, each year, the OBR predicts that falling birth rates will stabilise and then rise, and each year, birth rates continue to decline. On population, the OBR underestimated the number of workers in the economy meaning that productivity is now 1.1% lower than originally thought.
Even when economic changes are predictable, the OBR fails to include them in its forecasts. Its latest report on the UK’s financial statement, for example, does not account for the impact of Labour’s Employment Rights Bill, proposed reforms to housing and planning, or the potential imposition of trade tariffs by US President Donald Trump. The report also assumes that fuel duty will rise, even though it has been frozen for years and—due to the political costs—is unlikely to be increased anytime soon. When, inevitably, the Chancellor extends the freeze, the OBR will have to go back to the drawing board, and so will the government’s financial plans.
Why should our democratically elected government have its hands tied by the unreliable predictions of a quango?
The OBR was supposed to drive down government debt. Yet, as John Redwood points out: “Over their years of influence, state debt has grown massively, huge sums of money have been printed, we have lived through a nasty inflation, and debt interest costs, as they report them, have leapt up.”
And it’s not just those on the right calling time on the OBR. Aaron Bastani, founder of Novara Media, writes in UnHerd, “quangos determine political reality rather than a government with a historic majority…the case to abolish the OBR has never been stronger.”
Of course, governments should not be reckless with our economy and the Chancellor must take the frightening scale of public debt seriously. Yet reducing this debt and growing our economy require bold policies to revive industry, build housing and infrastructure, and increase the birth rate—interventions that will cost money in the short term. The OBR is not an enabler of these crucial measures; it is a barrier. It is just one more quango that needs to go.
