Shadow chancellor Rachel Reeves prepares to set out her own alternative tax and spending plans. She is going to struggle with this fiscally, even with the more optimistic economic outlook provided by the Office for Budget Responsibility (OBR). In a recent evidence session to the Treasury Select Committee, professor David Miles, an OBR bigwig, directly rebutted Reeves’s concerns over the fiscal landscape. He underscored that her experiences do reflect the noisy, imperfect reality that she lives in.
Reeves’s proposed fiscal buffer is £4.2 billion. This figure is very significantly below the £9.9 billion cushion she faced at the last Budget. Miles labelled the government’s £4.2 billion commitment a “daunting” test for the government to prove itself. He pointed out that, despite being a good number, this is just a “minuscule margin” for any financial flexibility.
“I don’t think it was misleading, for my own view, for the chancellor to say that the fiscal position was very challenging at the beginning of that week.” – Prof David Miles
The Chancellor’s remarks have drawn criticism from Conservative party members, who argue that she has painted an overly bleak picture of the country’s financial health as a pretext for raising taxes. They argue this narrative works as a “smokescreen” to obscure a push for more welfare spending.
Miles spoke at the committee meeting to make clear what the OBR intends. He warned against interpreting the buffer of £4.2 billion as the “very, very good news” or as evidence that “there is no black hole to fill.” This was in direct contradiction to assertions that Reeves had misled the public on the country’s fiscal state. Secondly, he highlighted that the headroom figure is unchanged from Reeves’s November Autumn budget. This figure is much reduced from the high of around £80 billion in 2014.
In response to questions about whether the OBR’s forecasts represented a shift in financial outlook, Miles indicated that while improvements existed, they were not sufficient to negate the substantial challenges facing the government.
To be clear, the OBR’s recent economic forecast points to positive developments, but at the same time it exposes some significant vulnerabilities. Most notable have been recent policy reversals on welfare and winter fuel payments. This meant that the £4.2 billion buffer could be reduced to a £3 billion deficit. This major change, probably the biggest single change in Scoring Means Faster Accountability, underscores how tenuous the government’s financial plan really is.
“This is very, very good news, there is no hole to fill – as people were saying.” – Prof David Miles
Alongside Miles, fellow OBR official Tom Josephs addressed the committee and apologized for an early release of the OBR’s forecast document, which had led to confusion regarding its implications. His replacement on the OBR, Richard Hughes, announced his resignation three weeks after taking up office. He accepted “full responsibility” for problems exposed in a recent internal investigation.
As Reeves prepares her Budget, she has emphasized the necessity of making difficult choices in light of these financial constraints. The budget may include a jaw dropping £26 billion worth of tax rises. This must include at least £8 billion earned by extending the freezes on income tax and National Insurance threshold three years further.