Kwarteng snared in Treasury trap for Labour
George Osborne created the OBR as a rod for chancellors’ backs. Now it risks damaging the Conservatives, writes
Just days after being handed the keys to No11, George Osborne sought to remove the temptation for future chancellors to “fiddle the figures”. By setting up the Office for Budget Responsibility just as Britain emerged from the wreckage of the financial crisis, Osborne promised to “create a rod for my back and down the line for the backs” of his successors. Some speculated that the fiscal watchdog, created in 2010, was a trap to keep future Labour governments on the straight and narrow, but it has proved to be just as troublesome for Tory chancellors. Now the credibility of Kwasi Kwarteng’s fiscal plan lies in the hands of the OBR. Forecasts due in the coming weeks are likely to be the official forecaster’s most politically contentious projections yet. The lack of official OBR forecasts was partly to blame for markets taking fright at the Chancellor’s mini-budget last month. But Kwarteng has promised to deliver fresh OBR forecasts when he presents his full fiscal plan on how to stabilise the public finances at a date to be confirmed this week. The first iteration of these new forecasts were presented to the Chancellor in private last Friday, giving Kwarteng time to revise his plans depending on how grim they are. Privately some Tory MPS criticise the watchdog’s forecasts, which are unlikely to provide a stamp of approval to Truss’s radical economic plan. “The really important thing that the OBR brings is not the forecasting process or anything like that,” says Sir Charlie Bean, former Bank of England deputy governor and a former member of the OBR’S budget responsibility committee. “They emphasise the uncertainty. But what it brings is firstly unbiasedness. When forecasts were in the Treasury there was an inevitable tendency to push things in the direction that ministers want. I’d seen it in the past,” Sir Charlie says. The OBR brings transparency and exposes “what’s going on under the bonnet in sometimes excruciating detail”. Jonathan Haskel, a Bank of England rate-setter, highlighted this last Thursday when he said the Bank relies on OBR data and projections to help configure its own forecasts. Without the fiscal watchdog’s view, the Bank is partially flying blind at a time when extra government stimulus could have huge implications for inflation and thus interest rates. “A sidelined OBR generates more uncertainty by worsening everyone’s information base,” Haskel says. But tensions have mounted between the budget watchdog and two recent Tory chancellors. Some on the Right complain that the OBR leans Left-wing after senior hires from the Resolution Foundation amid growing suspicion in the Tory ranks of Britain’s institutions. Richard Hughes, the OBR’S chief, was plucked from the Left-tilting think tank after just a year there, but he was appointed by Rishi Sunak. Hughes also had a long career at the Treasury and the IMF, running the latter’s fiscal affairs department when the Washington-based institution was the architect of austerity. None the less, reports suggested earlier this year that Sunak “viscerally hates” the OBR for marking his work. The watchdog’s warnings that tax revenue would soar to its highest level since Clement Attlee’s Labour government under Sunak’s plans caused headaches for the thenchancellor – perhaps even denting his chances of winning the Conservative leadership race. Truss and Kwarteng have also had a rocky relationship with the OBR. The Prime Minister has been on a collision course with the UK’S institutions ever since the leadership race where she promised to challenge economic orthodoxy with radical policies. The OBR offered to produce forecasts for the Chancellor’s mini-budget, but he turned it down. Instead he outlined £43bn of tax cuts with little on how to fund the giveaways, fuelling investors’ fears of unfunded measures worsening Britain’s public finances. The market chaos that followed makes Kwarteng’s job of controlling borrowing even more difficult as rising bond yields boost debt servicing costs. Truss and Kwarteng were forced to row back, quickly arranging a meeting with the OBR and allowing it to make forecasts alongside a fiscal plan. James Smith, economist at the Resolution Foundation and a former Bank of England official, says: “It just straight away puts financial markets in a position where they don’t know exactly what the Government is going to do in an environment where we’ve got quantitative tightening [and] we’ve got rising interest rates. “The combination of losing your fiscal anchor and quite strong selling pressure in the market, you’re going to get rising rates, you’re going to get extra premium on gilts and that’s exactly what we saw.” He says these soaring debt costs for the Government are “incredibly counterproductive” to its efforts to boost growth. The damaging market turbulence offers a cautionary tale to Kwarteng and future chancellors over sidelining the watchdog. However, the OBR will also be treading carefully in what promises to be its most politically controversial forecasts yet. Andrew Goodwin, of Oxford Economics, says: “The most likely outcome is that the Government provides the OBR with plans that imply significant real terms cuts to spending over the next five years, but with little or no detail about how the cost savings will be achieved.” This combined with new budget guidelines to have debt falling as a share of GDP in five years means the OBR would “probably determine that the government’s plans are in line with the fiscal rules”. Goodwin adds: “But this would be a high-risk strategy – in the prevailing atmosphere of distrust, markets will be reluctant to take vague promises of future austerity at face value.” Even if the Chancellor can flatter the numbers by pencilling in restraint some years ahead, the longer term outlook for the public finances is fraught with risks. Britain’s demographics are deteriorating, putting pressure on budgets, while room for extra health and welfare spending in recent decades has been found from declining costs elsewhere. Sir Charlie says: “Over that 50 years, the thing that’s made room for it is a decline in debt interest, a decline in public investment spending and a decline in defence spending, all as a share of GDP. All three of those are now changing direction.” He says: “There’s a real crunch … It’s not to say that there isn’t waste, but the sort of reduction the Government wants to achieve, I think you’ve really got to be thinking about what are the boundaries of what the state does.” The OBR was set up to deliver hard truths to chancellors. A sober assessment by the watchdog this time could be its most damaging yet.