It has been described as a millstone around the chancellor’s neck and the reason Conservative MPs could be disappointed by Jeremy Hunt’s budget on Wednesday if he spurns their demands for large pre-election tax cuts.
After coming under intense criticism during Liz Truss’s premiership, the Office for Budget Responsibility (OBR), the Treasury’s tax and spending watchdog, is once again under fire.
What is the OBR and why is it so powerful?
Created by George Osborne in 2010 to “remove the temptation [from politicians] to fiddle the figures”, the OBR’s role is to provide analysis of the UK economy and public finances independent of the Treasury. It is tasked with producing five-year forecasts twice a year, normally alongside a spring budget or autumn statement.
At first the OBR was used by Osborne to signal the Tories’ ironclad commitment to balancing the books, aiming to portray his party as the most trusted stewards of the economy, in opposition to Labour.
However, it is increasingly seen within Tory circles as a roadblock to transformative tax and spending policies, a view also held by some on the left of politics. Truss sidelining the OBR for her mini-budget was one of the reasons cited for the ensuing financial market meltdown, inadvertently strengthening its position further.
Charlie Bean, an ex-member of the independent watchdog and a former Bank of England deputy governor, says: “It’s shooting the messenger. Because the UK’s fiscal context is really very challenging at the moment, which neither party is really recognising.”
So what are these ‘fiscal rules’?
The main constraints on the chancellor are in fact self-imposed, through fiscal rules the government has set. The OBR is tasked with assessing whether these rules are being met, but Hunt could choose to ignore them, or decide a new set of fiscal rules instead.
The primary target is for government debt to be falling as a percentage of GDP in the final year of a five-year forecast. There are also rules for borrowing – the annual budget deficit – not to exceed 3% of GDP over the same time period, and a welfare cap limiting the amount spent on certain benefits.
However, economists say the rules are harder to meet while the UK’s economic growth outlook remains weak; alongside higher borrowing costs, and rising demands on public services from an ageing population. Government debt as a share of the economy is already high, at 96.5% of GDP, having risen sharply after the 2008 financial crisis and Covid pandemic.
